<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------
For the Fiscal Year Ended June 30, 1997
Commission File Number 1-7635
TWIN DISC, INCORPORATED
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(Exact Name of Registrant as Specified in its Charter)
Wisconsin 39-0667110
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
1328 Racine Street, Racine, Wisconsin 53403
------------------------------------- --------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (414) 638-4000
--------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
Common stock, no par value New York Stock Exchange
-------------------------- ----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
At September 2, 1997, the aggregate market value of the common stock held by
non-affiliates of the registrant was $63,910,457. Determination of stock
ownership by affiliates was made solely for the purpose of responding to this
requirement and registrant is not bound by this determination for any other
purpose.
At September 2, 1997, the registrant had 2,825,174 shares of its common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The incorporated portions of such documents being specifically identified in
the applicable Items of this Report.
Portions of the Annual Report to Shareholders for the year ended June 30, 1997
are incorporated by reference into Parts I, II and IV.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held October 17, 1997 are incorporated by reference into Parts I, III and IV.
Portions of the Company's Annual Report on Form 10-K for the year ended June
30, 1988, are incorporated by reference into Part II.
<PAGE> 2
PART I
Item 1. Business
The Company is engaged in one line of business. Twin Disc designs,
manufactures and sells heavy duty off-highway power transmission equipment.
Products offered include: hydraulic torque converters; power-shift
transmissions; marine transmissions and surface drives; universal joints; gas
turbine starting drives; power take-offs and reduction gears; industrial
clutches; fluid couplings and control systems. Principal markets are:
construction equipment, industrial equipment, government, marine, energy and
natural resources and agriculture. The Company's worldwide sales to both
domestic and foreign customers are transacted through a direct sales force and
a distributor network. There have been no significant changes in products or
markets since the beginning of the fiscal year. The products described above
have accounted for more than 90% of revenues in each of the last three fiscal
years.
In August 1997, the Company purchased the inventory and equipment of Wilson
Equipment Company Limited, a distributor of Twin Disc products. The
acquisition did not require significant capital investment.
The Company's products receive direct widespread competition, including from
divisions of other larger independent manufacturers. The Company also
competes for business with parts manufacturing divisions of some of its major
customers. Ten customers accounted for approximately 48% of the Company's
consolidated net sales during the year ended June 30, 1997. One such customer
is Caterpillar Inc. which accounted for approximately 11% of consolidated net
sales in 1997.
Unfilled open orders for the next six months of $76,429,000 at June 30, 1997
compares to $65,574,000 at June 30, 1996. Since orders are subject to
cancellation and rescheduling by the customer, the six-month order backlog is
considered more representative of operating conditions than total backlog.
However, as procurement and manufacturing "lead times" change, the backlog
will increase or decrease; and thus it does not necessarily provide a valid
indicator of the shipping rate. Cancellations are generally the result of
rescheduling activity and do not represent a material change in backlog.
Additionally, unfilled orders at June 30, 1997 of $2,536,000 relate to the
major vehicle contract which should be completed by January, 1998.
Most of the Company's products are machined from cast iron, forgings, cast
aluminum and bar steel which generally are available from multiple sources and
which are believed to be in adequate supply.
The Company has pursued a policy of applying for patents in both the United
States and certain foreign countries on inventions made in the course of its
development work for which commercial applications are considered probable.
The Company regards its patents collectively as important but does not
consider its business dependent upon any one of such patents.
Engineering and development costs include research and development expenses
for new product development and major improvements to existing products, and
other charges for ongoing efforts to refine existing products. Research and
development costs charged to operations totalled $3,517,000, $2,564,000 and
$2,718,000 in 1997, 1996 and 1995, respectively. Total engineering and
development costs were $8,288,000, $6,998,000 and $7,411,000 in 1997, 1996 and
1995, respectively.
<PAGE> 3
Item 1. Business (continued)
Compliance with federal, state and local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, is not anticipated to have a material effect on capital
expenditures, earnings or the competitive position of the Company.
The number of persons employed by the Company at June 30, 1997 was 1,081.
The business is not considered to be seasonal except to the extent that
employee vacations are taken mainly in the months of July and August
curtailing production during that period.
Management recognizes that there are attendant risks that foreign governments
may place restrictions on dividend payments and other movements of money, but
these risks are considered minimal due to the political relations the United
States maintains with the countries in which the Company operates or the
relatively low investment within individual countries.
A summary of financial data by geographic area for the years ended June 30,
1997, 1996 and 1995 appears in Note I to the consolidated financial statements
on pages 30 through 31 of the 1997 Annual Report to Shareholders, which
financial statements are incorporated by reference in this Form 10-K Annual
Report in Part II.
Item 2.Properties
The Company owns two manufacturing, assembly and office facilities in Racine,
Wisconsin, U.S.A. and one in Nivelles, Belgium. The aggregate floor space of
these three plants approximates 677,000 square feet. The Racine facility
includes office space which is the location of the Company's corporate
headquarters.
The Company also has operations in the following locations, all of which are
used for sales offices, warehousing and light assembly or product service.
The following properties are leased except for the Johannesburg, South Africa
location, which is owned:
Jacksonville, Florida, U.S.A. Brisbane, Queensland, Australia
Miami, Florida, U.S.A. Perth, Western Australia, Australia
Loves Park, Illinois, U.S.A. Viareggio, Italy
Coburg, Oregon, U.S.A. Singapore
Seattle, Washington, U.S.A. Johannesburg, South Africa
Vancouver, British Columbia, Canada
Madrid, Spain
Edmonton, Alberta, Canada
The properties are generally suitable for operations and are utilized in the
manner for which they were designed. Manufacturing facilities are currently
operating at less than 77% capacity and are adequate to meet foreseeable needs
of the Company.
<PAGE> 4
Item 3. Legal Proceedings
Twin Disc is a defendant in several product liability or related claims
considered either adequately covered by appropriate liability insurance or
involving amounts not deemed material to the business or financial condition
of the Company.
The Company has joined with a group of potentially responsible parties in
signing a consent decree with the Illinois Environmental Protection Agency to
conduct a remedial investigation and feasibility study at the Interstate
Pollution Control facility in Rockford, Illinois. The consent decree was
signed on October 17, 1991, and filed with the federal court in the Northern
District of Illinois. The Company's total potential liability on the site
cannot be estimated with particularity until completion of the remedial
investigation. Based upon current assumptions, however, the Company
anticipates potential liability of approximately $600,000.
The Company has also joined with a group of potentially responsible parties in
signing a consent decree with the Illinois Environmental Protection Agency to
conduct a remedial investigation and feasibility study at the MIG\DeWane
Landfill in Rockford, Illinois. The consent decree was signed on March 29,
1991, and filed with the federal court in the Northern District of Illinois.
The Company's total potential liability on the site cannot be estimated with
particularity until completion of the remedial investigation. Based upon
current assumptions, however, the Company anticipates potential liability of
approximately $126,000.
The Company also is involved with other potentially responsible parties in
various stages of investigation and remediation relating to other hazardous
waste sites, some of which are on the United States EPA National Priorities
List (Superfund sites). While it is impossible at this time to determine with
certainty the ultimate outcome of such environmental matters, they are not
expected to materially affect the Company's financial position, operating
results or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
(Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this Report in lieu of being
included in the Proxy Statement for the Annual Meeting of Shareholders to
be held on October 17, 1997.)
<TABLE>
<CAPTION>
Principal Occupation
Name Last Five Years Age
------------------ --------------------------------------- ---
<S> <C> <C>
Michael E. Batten Chairman, Chief Executive Officer 57
Michael H. Joyce President-Chief Operating Officer 56
James O. Parrish Vice President - Finance and Treasurer 57
Philippe O. Pecriaux Vice President - Europe 59
Lance J. Melik Vice President - Corporate Development 54
since September 1995; formerly Vice
President - Marketing
James McIndoe Vice President - International Marketing 58
<PAGE> 5
Executive Officers of the Registrant (continued)
Principal Occupation
Name Last Five Years Age
------------------- -------------------------------------- ---
Paul A. Pelligrino Vice President - Engineering since 58
April 1996; formerly Chief Engineer
of Corporate Engineering
John W. Spano Vice President - Sales and Marketing 53
since September 1995;
formerly Director Mobile Market Group,
Trinova Corporation since June 1993;
formerly Director of Customer Service
since October 1991
Fred H. Timm Corporate Controller and Secretary 51
since August 1994; formerly
Controller and Secretary
</TABLE>
Officers are elected annually by the Board of Directors at the first meeting
of the Board held after each Annual Meeting of the Shareholders. Each officer
shall hold office until his successor has been duly elected, or until he shall
resign or shall have been removed from office.
PART II
Item 5.Market for the Registrant's Common Stock and Related Shareholder
Matters
The dividends per share and stock price range information set forth under the
caption "Sales and Earnings by Quarter" on page 1 of the Annual Report for the
year ended June 30, 1997 are incorporated into this Report
by reference.
As of June 30, 1997 there were 845 shareholder accounts. The Company's stock
is traded on the New York Stock Exchange. The market price of the Company's
common stock as of the close of business on September 2, 1997 was $29.44 per
share.
Pursuant to a shareholder rights plan (the "Rights Plan"), on June 17, 1988,
the Board of Directors declared a dividend distribution, payable to
shareholders of record on July 1, 1988, of one Preferred Stock Purchase Right
for each outstanding share of Common Stock ("Rights"). The Rights will expire
10 years after issuance, and will be exercisable only if a person or group
becomes the beneficial owner of 20% or more (or 30% in the case of any person
or group which currently owns 20% or more of the shares or who shall become
the Beneficial Owner of 20% or more of the shares as a result of any transfer
by reason of the death of or by gift from any other person who is an Affiliate
or an Associate of such existing holder or by succeeding such a person as
trustee of a trust existing on July 1, 1988) of the Common Stock (such person
or group, an "Acquiring Person") or commences a tender or exchange offer which
would result in the offeror beneficially owning 30% or more of the Common
Stock. A person who is not an Acquiring Person will not be deemed to have
become an Acquiring Person solely as a result of a reduction in the number of
shares of Common Stock outstanding due to a repurchase of Common Stock by the
Company until such person becomes beneficial owner of any additional shares of
Common Stock. Each Right will entitle shareholders who received the Rights to
buy one newly issued unit of one one-hundredth of a share of Series A Junior
Preferred Stock at an exercise price of $80, subject to certain antidilution
adjustments. The Company will generally be entitled to redeem the Rights at
$.05 per Right at any time prior to 10 business days after a public
announcement of the existence of an Acquiring Person.
In addition, if (i) a person or group accumulates more than 30% of the Common
Stock (except pursuant to an offer for all outstanding shares of Common Stock
which the independent directors of the Company determine to be fair to and
otherwise in the best interests of the Company and its shareholders and except
solely due to a reduction in the number of shares of Common Stock outstanding
due to the repurchase of Common Stock by the Company), (ii) a
<PAGE> 6
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters (continued)
merger takes place with an Acquiring Person where the Company is the surviving
corporation and its Common Stock is not changed or exchanged, (iii) an
Acquiring Person engages in certain self-dealing transactions, or (iv) during
such time as there is an Acquiring Person, an event occurs which results in
such Acquiring Person's ownership interest being increased by more than 1%
(e.g., a reverse stock split), each Right (other than Rights held by such
Acquiring Person and certain related parties which become void) will represent
the right to purchase, at the exercise price, Common Stock (or in certain
circumstances, a combination of securities and/or assets) having a value of
twice the exercise price. In addition, if following the public announcement
of the existence of an Acquiring Person the Company is acquired in a merger or
other business combination transaction, except a merger or other business
combination transaction that takes place after the consummation of an offer
for all outstanding shares of Common Stock that the independent directors of
the Company have determined to be fair, or a sale or transfer of 50% or more
of the Company's assets or earning power is made, each Right (unless
previously voided) will represent the right to purchase, at the exercise
price, common stock of the acquiring entity having a value of twice the
exercise price at the time.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on a substantial number of Rights being
acquired.
However, the Rights are not intended to prevent a take-over, but rather are
designed to enhance the ability of the Board of Directors to negotiate with an
acquiror on behalf of all of the shareholders. In addition, the Rights should
not interfere with a proxy contest.
The Rights should not interfere with any merger or other business combination
approved by the Board of Directors since the Rights may be redeemed by the
Company at $.05 per Right prior to 10 business days (as such period may be
extended by the Company) after the public announcement of the existence of an
Acquiring Person.
The press release announcing the declaration of the Rights dividend, dated
June 20, 1988, and a letter to the Company's shareholders, dated June 22,
1988, explaining the Rights, filed as Item 14(a)(3), Exhibits 4(a) and (b) of
Part IV of the Annual Report on Form 10-K for the year ended June 30, 1988 are
hereby incorporated by reference.
Item 6.Selected Financial Data
The information set forth under the caption "Ten-Year Financial Summary" on
pages 40 and 41 of the Annual Report to Shareholders for the year ended June
30, 1997 is incorporated into this report by reference.
Item 7.Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth under the caption "Management's Discussion and
Analysis" on pages 19 through 21 of the Annual Report to Shareholders for the
year ended June 30, 1997 is incorporated into this report by reference.
<PAGE> 7
Item 8. Financial Statements and Supplementary Data
The following Consolidated Financial Statements of Twin Disc, Incorporated and
Subsidiaries set forth on pages 22 through 39 of the Annual Report to
Shareholders for the year ended June 30, 1997 are incorporated into this
report by reference:
Consolidated Balance Sheets, June 30, 1997 and 1996
Consolidated Statements of Operations for the years ended June 30, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity for the years
ended June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
The supplementary data regarding quarterly results of operations set forth
under the caption "Sales and Earnings by Quarter" on page 1 of the Annual
Report to Shareholders for the year ended June 30, 1997 is incorporated into
this report by reference.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the executive officers of the Registrant, see
"Executive Officers of the Registrant" at the end of Part I of this report.
For information with respect to the Directors of the Registrant, see "Election
of Directors" on pages 5 through 6 of the Proxy Statement for the Annual
Meeting of Shareholders to be held October 17, 1997, which is incorporated
into this report by reference.
For information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934, see "Compliance with 16(a) of the Securities
Exchange Act of 1934" on page 13 of the Proxy Statement for the Annual
Meeting of Shareholders to be held October 17, 1997, which is incorporated
into this report by reference.
Item 11. Executive Compensation
The information set forth under the captions "Compensation of Executive
Officers", "Stock Options" and "Compensation Pursuant to Plans" on pages 8
through 10 of the Proxy Statement for the Annual Meeting of Shareholders to be
held on October 17, 1997 is incorporated into this report by reference.
Discussion in the Proxy Statement under the captions "Board Executive
Selection and Salary Committee Report on Executive Compensation" and
"Corporate Performance Graph" is not incorporated by reference and shall not
be deemed "filed" as part of this report.
<PAGE> 8
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security ownership of certain beneficial owners and management is set forth on
pages 3 and 4 of the Proxy Statement for the Annual Meeting of Shareholders to
be held on October 17, 1997 under the caption "Principal Shareholders and
Share Ownership of Directors and Executive Officers" and incorporated into
this report by reference.
There are no arrangements known to the Registrant, the operation of which may
at a subsequent date result in a change in control of the Registrant.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) The following Consolidated Financial Statements of Twin Disc,
Incorporated and Subsidiaries set forth on pages 22 through 39 of the Annual
Report to Shareholders for the year ended June 30, 1997 are incorporated by
reference into this report in Part II:
Consolidated Balance Sheets, June 30, 1997 and 1996
Consolidated Statements of Operations for the years ended June 30, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity for the years
ended June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
The supplementary data regarding quarterly results of operations under the
caption "Sales and Earnings by Quarter" on page 1 of the Annual Report to
Shareholders for the year ended June 30, 1997 is incorporated by reference
into this report in Part II hereof.
Individual financial statements of the 50% or less owned entities accounted
for by the equity method are not required because such 50% or less owned
entities do not constitute significant subsidiaries.
(a)(2) Consolidated Financial Statement Schedule (numbered in accordance with
Regulation S-X) for the three years ended June 30, 1997:
Page
----
Report of Independent Accountants 12
Schedule II-Valuation and Qualifying Accounts 13
Schedules, other than those listed, are omitted for the reason that they are
inapplicable, are not required, or the information required is shown in the
financial statements or the related notes thereto.
The Report of the Independent Accountants of the Registrant with respect to
the above-listed consolidated financial statement schedule appears on page 12
of this report.
<PAGE> 9
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
(a)(3) List of Exhibits: (numbered in accordance with Item 601 of Regulation
S-K)
2 Not applicable
3 a) Articles of Incorporation, as restated October 21, 1988
(Incorporated by reference to Exhibit 3(a) of the Company's
Form 10-K for the year ended June 30, 1989).
b) Corporate Bylaws, amended through June 16, 1995
(Incorporated by reference to Exhibit 3(b) of the Company's
Form 10-K for the year ended June 30, 1995).
4 Instruments defining the rights of security holders, including
indentures
a) Form of Rights Agreement dated as of June 17, 1988 by and
between the Company and the First Wisconsin Trust Company,
as Rights Agent, with Form of Rights Certificate
(Incorporated by reference to Exhibits 1 and 2 of the
Company's Form 8-A dated June 27, 1988).
b) Announcement of Shareholder Rights Plan per press release
dated June 20, 1988 and explanation of plan per letter to
Company's shareholders dated June 20, 1988 (Incorporated by
reference to Exhibit 4(a) and (b), respectively, of the
Company's Form 10-K for the year ended June 30, 1988).
9 Not applicable
10 Material Contracts
a) * The 1988 Incentive Stock Option Plan (Incorporated by
reference to Exhibit B of the Proxy Statement for the Annual
Meeting of Shareholders held on October 21, 1988).
b) * The 1988 Non-Qualified Stock Option Plan for Officers, Key
Employees and Directors (Incorporated by reference to
Exhibit C of the Proxy Statement for the Annual Meeting of
Shareholders held on October 21,1988).
c) * Amendment to 1988 Incentive Stock Option Plan of Twin
Disc, Incorporated (Incorporated by reference to Exhibit A
of the Proxy Statement for the Annual Meeting of
Shareholders held on October 15, 1993).
d) * Amendment to 1988 Non-Qualified Incentive Stock Option
Plan for Officers, Key Employees and Directors of Twin Disc,
Incorporated (Incorporated by reference to Exhibit B of the
Proxy Statement for the Annual Meeting of Shareholders held
on October 15, 1993).
e) * Form of Severance Agreement for Senior Officers and form
of Severance Agreement for Other Officers (Incorporated by
reference to Exhibit 10(c) and (d), respectively, of the
Company's Form 10-K for the year ended June 30, 1989).
f) *Supplemental Retirement Plan (Incorporated by reference to
Exhibit 10(a) of the Company's Form 10-K for the year ended
June 30, 1986).
g) * Director Tenure and Retirement Policy (Incorporated by
reference to Exhibit 10(f) of the Company's Form 10-K for
the year ended June 30, 1993).
<PAGE>10
(a)(3) List of Exhibits: (numbered in accordance with Item 601 of Regulation
S-K) (continued)
h) * Form of Twin Disc, Incorporated Corporate Short Term
Incentive Plan (Incorporated by reference to Exhibit 10(g)
of the Company's Form 10-K for the year ended June 30,
1993).
* Denotes management contract or compensatory plan or arrangement.
11 Not applicable
12 Not applicable
13 Annual Report of the Registrant for the year ended June 30, 1997 is
separately filed as Exhibit (13) to this Report (except for those
portions of such Annual Report separately incorporated by reference
into this Report, such Annual Report is furnished for the
information of the Securities and Exchange Commission and shall not
be deemed "filed" as part of this report).
18 Not applicable
21 Subsidiaries of the registrant
22 Not applicable
23 Consent of Independent Accountants
24 Power of Attorney
27 Financial Data Schedule for the year ended June 30, 1997 is
separately filed as Exhibit (27) to this report. (This schedule is
furnished for the information of the Securities and Exchange
Commission and shall not be deemed "filed" for purposes of Section
11 of the Securities Act or Section 18 of the Exchange Act.)
28 Not applicable
99 Foreign Affiliate Separate Financial Statements
a) Niigata Converter Co., Ltd. financial statements for the
year ended March 31, 1995 prepared in accordance with
Japanese Commercial Code (Incorporated by reference to
Exhibit 99(a) of the Company's Form 10-K for the year ended
June 30, 1995).
b) Niigata Converter Co., Ltd. financial statements for the
year ended March 31, 1994 prepared in accordance with
Japanese Commercial Code (Incorporated by reference to
Exhibit 99(b) of the Company's Form 10-K for the year ended
June 30, 1995).
Copies of exhibits filed as a part of this Annual Report on Form 10-K may be
obtained by shareholders of record upon written request directed to the
Secretary, Twin Disc, Incorporated, 1328 Racine Street, Racine, Wisconsin
53403.
<PAGE> 11
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.
TWIN DISC, INCORPORATED
By FRED H. TIMM
----------------------------------------
Fred H. Timm, Corporate Controller and
Secretary (Chief Accounting Officer)
September 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
( By MICHAEL E. BATTEN
( ---------------------------------
( Michael E. Batten, Chairman,
( Chief Executive Officer and Director
(
(
(
September 19, 1997 ( By MICHAEL H. JOYCE
( ---------------------------------
( Michael H. Joyce, President,
( Chief Operating Officer and Director
(
(
(
( By JAMES O. PARRISH
( ---------------------------------
( James O. Parrish, Vice President-
( Finance, Treasurer and Director
( (Chief Financial Officer)
( Jerome K. Green, Director
( Paul J. Powers, Director
( Richard T. Savage, Director
September 19, 1997 ( David L. Swift, Director
( Stuart W. Tisdale, Director
( George E. Wardeberg, Director
( David R. Zimmer, Director
(
(
( By JAMES O. PARRISH
( ---------------------------------
( James O. Parrish, Attorney in Fact
<PAGE> 12
REPORT OF INDEPENDENT ACCOUNTANTS
(See Item 14)
Consolidated Financial Statement Schedule of
Twin Disc, Incorporated and Subsidiaries
To the Shareholders
Twin Disc, Incorporated
Racine, Wisconsin
Our report on the consolidated financial statements of Twin Disc, Incorporated
and Subsidiaries has been incorporated by reference in this Form 10-K from
page 39 of the 1997 Annual Report to Shareholders of Twin Disc, Incorporated
and Subsidiaries. In connection with our audits of such financial statements,
we have also audited the related financial statement schedule listed in the
index on page 8 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L. L. P.
Milwaukee, Wisconsin
July 18, 1997
<PAGE> 13
<TABLE>
TWIN DISC, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended June 30, 1997, 1996 and 1995
(In thousands)
<CAPTION>
Balance at Additions Charged Balance at
Beginning of to Costs and end of
Description Period Expenses Deductions<F1> Period
----------- ------------ ----------------- ------------ -----------
<S> <C> <C> <C> <C>
1997:
Allowance for
losses on $ 372 $ 267 $ 101 $ 538
accounts receivable------- ------- ------- -------
------- ------- ------- -------
Reserve for inventory
obsolescence 926 1,770 1,683 1,013
------- ------- ------- -------
------- ------- ------- -------
1996:
Allowance for
losses on
accounts receivable$ 408 $ 41 $ 77 $ 372
------- ------- ------- -------
------- ------- ------- -------
Reserve for inventory
obsolescence 1,581 845 1,500 926
------- ------- ------- -------
------- ------- ------- -------
1995:
Allowance for
losses on
accounts receivable$ 441 $ 54 $ 87 $ 408
------- ------- ------- -------
------- ------- ------- -------
Reserve for inventory
obsolescence 1,586 886 891 1,581
------- ------- ------- -------
------- ------- ------- -------
<FN>
<F1>Accounts receivable written-off and inventory disposed of during the year
and other adjustments.
</FN>
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION> EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
<S> <C> <C>
3a) Articles of Incorporation, as restated October 21, 1988
(Incorporated by reference to Exhibit 3(a) of the Company's
Form 10-K for the year ended June 30, 1989). -
b) Corporate Bylaws, as amended through June 16, 1995
(Incorporated by reference to Exhibit 3(b) of the Company's
Form 10-K for the year ended June 30, 1995). -
4a) Form of Rights Agreement dated as of June 17, 1988 by and
between the Company and the First Wisconsin Trust Company,
as Rights Agent, with Form of Rights Certificate (Incorporated
by reference to Exhibits 1 and 2 of the Company's Form 8-A
date June 27, 1988). -
b) Announcement of Shareholder Rights Plan per press release
dated June 20, 1988 and explanation of plan per letter to
Company's shareholders dated June 20, 1988 (Incorporated by
reference to Exhibit 4(a) and (b), respectively of the
Company's Form 10-K for the year ended June 30, 1988). -
Material Contracts
10a) The 1988 Incentive Stock Option Plan (Incorporated by
reference to Exhibit B of the Proxy Statement for the
Annual Meeting of Shareholders held on October 21, 1988). -
b) The 1988 Non-Qualified Stock Option Plan for Officers,
Key Employees and Directors (Incorporated reference to
Exhibit C of the Proxy Statement for the Annual Meeting
of Shareholders held on October 21,1988). -
c) Amendment to 1988 Incentive Stock Option Plan of Twin Disc,
Incorporated (Incorporated by reference to Exhibit A of the
Proxy Statement for the Annual Meeting of Shareholders held
on October 15, 1993). -
d) Amendment to 1988 Non-Qualified Incentive Stock Option Plan
for Officers, Key Employees and Directors of Twin Disc,
Incorporated (Incorporated by reference to Exhibit B of the
Proxy Statement for the Annual Meeting of Shareholders held
on October 15, 1993). -
e) Form of Severance Agreement for Senior Officers and form of
Severance Agreement for Other Officers (Incorporated by
reference to Exhibit 10(c) and (d), respectively, of the
Company's Form 10-K for the year ended June 30, 1989). -
f) Supplemental Retirement Plan (Incorporated by reference to
Exhibit 10(a) of the Company's Form 10-K for the year ended
June 30, 1986). -
g) Director Tenure and Retirement Policy (Incorporated by
reference to Exhibit 10(f) of the Company's Form 10-K for
the year ended June 30, 1993). -
h) Form of Twin Disc, Incorporated Corporate Short Term
Incentive Plan (Incorporated by reference to Exhibit 10(g)
of the Company's Form 10-K for the year ended June 30, 1993). -
<PAGE> 15
EXHIBIT INDEX
continued
Exhibit Description Page
------- ----------- ----
13 Annual Report of the Registrant for the year ended
June 30, 1997 16
21 Subsidiaries of the Registrant 39
23 Consent of Independent Accountants 40
24 Power of Attorney 41
27 Financial Data Schedule for the year ended June 30, 1997 42
Foreign Affiliate Separate Financial Statements
99a) Niigata Converter Co., Ltd. financial statements for the year
ended March 31, 1995 prepared in accordance with Japanese
Commercial Code (Incorporated by reference to Exhibit 99(a)
of the Company's Form 10-K for the year ended June 30, 1995). -
b) Niigata Converter Co., Ltd. financial statements for the
year ended March 31, 1994 prepared in accordance with Japanese
Commercial Code (Incorporated by reference to Exhibit 99(b)
of the Company's Form 10-K for the year ended June 30, 1995). -
</TABLE>
<PAGE> 16
EXHIBIT 13
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net Sales $189,942 $176,657 $164,232
Net Earnings 7,729 6,559 5,672
Net Earnings Per Share 2.78 2.36 2.03
Dividends Per Share .70 .70 .70
Average Shares Outstanding For The Year 2,781,174 2,776,805 2,790,111
</TABLE>
<TABLE>
Sales and Earnings by Quarter
<CAPTION>
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
<S> <C> <C> <C> <C> <C>
Net Sales $40,941 $45,496 $49,204 $54,301 $189,942
Gross Profit 8,687 10,980 11,724 12,428 43,819
Net Earnings 1,132 1,742 1,916 2,939 7,729
Net Earnings Per Share .41 .63 .69 1.05 2.78
Dividends Per Share .175 .175 .175 .175 .70
Stock Price Range:
High 23 5/8 23 5/8 25 1/8 28 3/4 28 3/4
Low 21 3/4 21 3/8 21 3/8 23 3/8 21 3/8
</TABLE>
<TABLE>
Sales and Earnings by Quarter
<CAPTION>
1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year
<S> <C> <C> <C> <C> <C>
Net Sales $36,775 $41,763 $47,209 $50,910 $176,657
Gross Profit 7,093 9,295 11,340 13,149 40,877
Net Earnings 221 1,263 1,808 3,267 6,559
Net Earnings Per Share .08 .45 .65 1.18 2.36
Dividends Per Share .175 .175 .175 .175 .70
Stock Price Range:
High 25 1/4 23 3/4 23 1/4 25 1/2 25 1/2
Low 22 1/2 22 21 3/8 22 1/4 21 3/8
</TABLE>
Based on average shares outstanding for the period.
In thousands of dollars except per share and stock price range statistics.
(1)
<PAGE> 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
NET SALES, NEW ORDERS AND BACKLOG
Sales for 1997 were up over the previous year continuing a five year trend of
revenue growth. Shipments into our traditional markets generally remained
stable during the year with new business providing for the second consecutive
year of 8percent sales growth. Although order rates fluctuated during the
year, there was a positive trend which provided a $10 million increase in
backlog by year-end.
Net sales for 1997 were $190 million, an increase of 8 percent over the $177
million reported in 1996, and 16 percent above the $164 million in 1995. All
of our operations around the world contributed to the 8 percent sales increase
in 1996, but the strongest showing came from our manufacturing operations and
the domestic marketing subsidiaries. Demand from the marine and construction
equipment markets continued, and there was new interest in modulating clutches
for marine and environmental applications. There was an 8 percent sales
increase again in 1997 with almost all of the improvement provided by
shipments of power shift transmissions for a major vehicle contract. Though
some softness occurred in demand for the lower horsepower marine transmissions
at mid-year, shipments for the twelve months to our principal markets again
provided a solid base of sales comparable to the previous year.
Shipments from our overseas marketing subsidiaries showed continued
improvement throughout the period rising by about 10 percent in each of the
past two fiscal years. Sales improvements in both years were largely related
to boat building activity in the Pacific Rim with additional incremental
business obtained in 1997 for Arneson surface drives in Europe.
During the period, foreign currency exchange rates had little impact on
reported sales. The dollar, which had weakened against European currencies in
1995, stabilized in 1996 and became stronger in 1997 but did not significantly
impact reported sales in either year. Price increases, which were implemented
selectively in each year, had the overall effect of increasing revenues by
less than the rate of inflation.
The backlog of orders scheduled for shipment during the next six months
increased in the third quarter of fiscal 1996 on the strength of a large order
for power shift transmissions. However, by June of that year backlog was down
by 9 percent from a year earlier primarily due to strong year-end shipments
and a reduction in past due orders. Order rates improved early in 1997 and,
although there was some modest softening in selected markets by mid-year,
year-end backlog was up 16 percent over the prior year.
MARGINS, COSTS AND EXPENSES
Since the late 1980's we have been rearranging and restructuring our
manufacturing operations. In this continuous improvement effort, portions of
both domestic and overseas manufacturing facilities have been changed several
times. The most recent changes have been in our domestic plants. The clutch,
PTO, and drive line business unit completed its rearrangement in late 1995 and
the marine and custom transmission business units cellularization program was
(19)
completed in 1996. The benefits of those changes have been improved
productivity and product delivery. Our Belgian plant, which has a more
homogeneous production volume than in the U.S., has been realizing benefits of
its cellularization program for the past several years.
The consolidated gross margin increased by 1 percentage point in 1996,
primarily as a result of improved productivity in Europe and a favorable
product mix at our Belgian operation. Domestic margins increased in the last
quarter of that fiscal year as we began to realize the benefits of the
<PAGE> 18
manufacturing improvements. However, domestic margins were down slightly for
the year due to a first quarter voluntary separation program charge and
inefficiencies at mid-year related to a change in computer hardware and
business systems.
In 1997, the gross margin continued to improve during the first two quarters
but declined during the second half of the year and by year-end the
consolidated margin was even with a year ago. Domestic margins showed
year-to-year improvement throughout the year, but margins in Belgium declined
in the second half. That decline was caused by a temporary drop in orders and
resultant short work-weeks with reduced productivity.
Marketing, engineering, and administrative (MEA)expenses increased by 8
percent in 1996, about the same percent as the sales growth. Increases were
due primarily to the addition of marketing and engineering personnel, higher
computer related expense, and additional product promotion and other marketing
expense.
In 1997, MEA expenses rose by almost 9 percent and increased slightly as a
percent of sales. The increase occurred at our domestic location with expense
of the full year of salaries for prior year marketing and engineering
personnel additions, a one-time expense of an accelerated product development
program, and a salaried employee bonus payment not made in the previous year.
A propulsion products marketing group also was established in 1997 to focus on
development of markets for our full line of marine propulsion products -
transmissions, Arneson drives, and water jets.
INTEREST, TAXES AND NET EARNINGS
The increase in interest income of $1.2 million in 1997 over 1996 is
attributed to interest received on an income tax refund.
The substantial increase in interest expense in 1996 was generated about
equally by higher domestic debt and payment of interest related to the audit
of prior years' tax returns. As discussed in more detail below, additional
debt was required to finance the working capital increase. Virtually all of
the short-term debt was repaid by the end of fiscal year 1997 and interest
expense declined by about 8 percent in that year.
The effective income tax rate in 1995 was slightly lower than the composite of
our various statutory tax rates as we were able to utilize the remaining small
amount of foreign tax credit carryforwards. The tax rate rose in 1996 and
1997 due primarily to the proportionately greater foreign earnings on which a
higher tax rate is applied.
As a result of the sales growth and other improvements discussed above, net
earnings for 1997 were $7.7 million, an increase of 18 percent over the $6.6
million in 1996, and 36 percent over the $5.7 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The net cash from operating activities in 1996 was a deficit of $4.1 million,
down sharply from the positive cash flows of a year earlier. Despite the
improved profitability in 1996, working capital increases more than offset the
(20)
positive cash flows from earnings and depreciation. Inventory increased in
line with the higher sales; but, as a percent of net sales, receivables rose
by two percentage points during the year. Also, current liabilities were down
from the prior year. In 1997, the positive cash flows from higher earnings
and depreciation were supplemented by reductions in accounts receivable and
inventory, and the net cash flow from operating activities was a record $20.5
million. Receivable days outstanding and inventory turnover ended the year at
their best rates since 1990. After fixing the interest rate on most of our
debt with a private placement in 1996, we focused on improving cash flow and
reducing short-term debt. Borrowings, primarily domestic, declined by $7
<PAGE> 19
million in 1997.
Fixed asset purchases in recent years have been less than depreciation as we
generally have rearranged existing machinery into cells. With that program
completed, we are in a better position to identify critical equipment needs;
and we expect future spending will exceed depreciation somewhat as individual
cell structures are refined.
Working capital and the current ratio have risen in each of the past two
years. The working capital increase of $9 million in 1996 primarily provided
the funds required to support the higher sales volume. A further increase of
$5.7 million this past year reflected an increase in cash and short-term
investments and a reduction in short-term borrowings. The current ratio at
June 30, 1997 rose to 3.3, up from 2.8 at the previous year-end.
The Company is involved in various stages of investigation relative to
hazardous waste sites on the United States EPA National Priorities List. It
is not possible at this time to determine the ultimate outcome of those
matters; but, as discussed further in Footnote N to the consolidated financial
statements, they are not expected to materially affect the Company's
operations, financial position or cash flows. The Company believes the
capital resources available in the form of existing cash, lines of credit and
funds provided by operations will be adequate to meet anticipated requirements
for capital expenditures and other foreseeable business requirements in the
future.
RECENT FINANCIAL REPORTING PROUNCEMENTS
The Financial Accounting Standards Board issued Statements of Accounting
Standards No. 128, "Earnings Per Share", and No. 131, "Disclosure about
Segments of an Enterprise and Related Information", which are addressed in
Footnotes H and I, respectively, to the consolidated financial statements.
(21)
<PAGE> 20
<TABLE>
TWIN DISC, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 and 1996
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,983 $ 2,043
Trade accounts receivable, net 32,428 34,917
Inventories 47,844 51,083
Deferred income taxes 3,491 2,710
Other 5,216 5,887
------- -------
Total current assets 97,962 96,640
Property, plant and equipment, net 34,249 35,715
Investments in affiliates 10,880 12,079
Deferred income taxes 4,559 3,758
Intangible pension asset 4,779 8,079
Other assets 6,326 6,428
------- -------
$158,755 $162,699
------- -------
------- -------
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 169 $ 7,360
Accounts payable 12,834 8,806
Accrued liabilities 16,618 17,836
------- -------
Total current liabilities 29,621 34,002
Long-term debt 19,944 19,938
Accrued retirement benefits 35,393 33,578
------- -------
84,958 87,518
Shareholders' equity:
Common shares authorized: 15,000,000;
issued: 3,643,630; no par value 11,653 11,653
Retained earnings 77,424 71,658
Foreign currency translation adjustment 6,060 10,326
Minumum pension liability adjustment (3,708) (620)
------- -------
91,429 93,017
Less treasury stock, at cost 17,632 17,836
------- -------
Total shareholders' equity 73,797 75,181
------- -------
$158,755 $162,699
------- -------
------- -------
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
(22)
<PAGE> 21
<TABLE>
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1997, 1996 and 1995
<CAPTION>
(In thousands, except per share data)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $189,942 $176,657 $164,232
Cost of goods sold 146,123 135,780 127,886
------- ------- -------
Gross profit 43,819 40,877 36,346
Marketing, engineering and
administrative expenses 31,219 28,706 26,461
------- ------- -------
Earnings from operations 12,600 12,171 9,885
Other income (expense):
Interest income 1,335 121 186
Interest expense (1,781) (1,942) (1,281)
Equity in earnings of affiliates 307 45 186
Other, net 219 512 (392)
------- ------- -------
80 (1,264) (1,301)
------- ------- -------
Earnings before income
taxes 12,680 10,907 8,584
Income taxes 4,951 4,348 2,912
------- ------- -------
Net earnings $ 7,729 $ 6,559 $ 5,672
------- ------- -------
------- ------- -------
Earnings per common share, based
on weighted average shares
outstanding $ 2.78 $ 2.36 $ 2.03
------- ------- -------
------- ------- -------
Weighted average shares
outstanding 2,781 2,777 2,790
------- ------- -------
------- ------- -------
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
(23)
<PAGE> 22
<TABLE>
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1997, 1996 and 1995
<CAPTION>
(In thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating
activities:
Net earnings $ 7,729 $ 6,559 $ 5,672
Adjustments to reconcile
to net cash provided (used)
by operating activities:
Depreciation and amortization 5,489 5,233 4,847
(Gain)loss on sale of fixed assets (127) (26) 65
Equity in earnings of affiliates (307) (45) (186)
Provision for deferred income taxes 1,481 1,646 1,038
Dividends received from affiliate 300 548 371
Changes in operating assets and
liabilities:
Trade accounts receivable, net 1,267 (6,055) (2,266)
Inventories 2,882 (3,926) (3,259)
Other assets (954) (987) (3,608)
Accounts payable 3,463 (3,513) 3,765
Accrued liabilities (391) (3,982) 2,823
Deferred retirement plan (345) 415 (1,316)
------- ------- -------
Net cash provided (used) by
operating activities 20,487 (4,133) 7,946
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of plant assets 501 18 39
Acquisitions of plant assets (4,734) (4,140) (4,290)
Investment in affiliate - - (3,000)
Payment for license agreement - (2,402) -
Other - - (172)
------- ------- -------
Net cash used by investing activities (4,233) (6,524) (7,423)
------- ------- -------
Cash flows from financing activities:
Increases (decreases) in notes
payable, net (7,182) 5,076 (1,113)
Proceeds from long-term debt 4 19,914 2,500
Principal payments on long-term debt - (14,000) -
Acquisition of treasury stock - - (586)
Proceeds from exercise of stock options 188 35 71
Dividends paid (1,947) (1,943) (1,951)
------- ------- -------
Net cash provided (used) by
financing activities (8,937) 9,082 (1,079)
------- ------- -------
Effect of exchange rate changes on cash (377) (123) 131
------- ------- -------
Net change in cash and cash equivalents 6,940 (1,698) (425)
Cash and cash equivalents:
Beginning of year 2,043 3,741 4,166
------- ------- -------
End of year $ 8,983 $ 2,043 $ 3,741
------- ------- -------
------- ------- -------
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 1,822 $ 1,802 $ 1,288
Income taxes 3,318 4,946 2,698
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
(24)
<PAGE> 23
<TABLE>
TWIN DISC, INCORPORATED and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended June 30, 1997, 1996 and 1995
<CAPTION>
(In thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Common stock
Balance, June 30 $ 11,653 $ 11,653 $ 11,653
------- ------- -------
Retained earnings
Balance, July 1 71,658 67,054 63,353
Net earnings 7,729 6,559 5,672
Cash dividends (1,947) (1,943) (1,951)
Stock options exercised (16) (12) (20)
------- ------- -------
Balance, June 30 77,424 71,658 67,054
------- ------- -------
Foreign currency translation adjustment
Balance, July 1 10,326 14,081 8,729
Current adjustment (4,266) (3,755) 5,352
------- ------- -------
Balance, June 30 6,060 10,326 14,081
------- ------- -------
Minimum pension liability adjustment, net
Balance, July 1 (620) (284) (951)
Current adjustment, net of related income
taxes ($1,975 in 1997, $215 in 1996
and $(426) in 1995) (3,088) (336) 667
------- ------- -------
Balance, June 30 (3,708) (620) (284)
------- ------- -------
Treasury stock, at cost
Balance, July 1 (17,836) (17,882) (17,387)
Shares acquired - - (586)
Stock options exercised 204 46 91
------- ------- -------
Balance, June 30 (17,632) (17,836) (17,882)
------- ------- -------
Shareholders' equity balance, June 30 $ 73,797 $ 75,181 $ 74,622
------- ------- -------
------- ------- -------
</TABLE>
The notes to consolidated financial statements
are an integral part of these statements.
(25)
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in
the preparation of these financial statements:
Consolidation Principles--The consolidated financial statements include the
accounts of Twin Disc, Incorporated and its subsidiaries, all of which are
wholly owned. Certain foreign subsidiaries are included based on fiscal years
ending May 31, to facilitate prompt reporting of consolidated accounts. All
significant intercompany transactions have been eliminated.
Translation of Foreign Currencies--Substantially all foreign currency balance
sheet accounts are translated into United States dollars at the rates of
exchange prevailing at year-end. Revenues and expenses are translated at
average rates of exchange in effect during the year. Foreign currency
translation adjustments are recorded as a component of shareholders' equity.
Gains and losses from foreign currency transactions are included in earnings.
Cash Equivalents--The Company considers all highly liquid marketable
securities purchased with a maturity date of three months or less to be cash
equivalents.
Receivables--Trade accounts receivable are stated net of an allowance for
doubtful accounts of $538,000 and $372,000 at June 30, 1997 and 1996,
respectively.
Fair Value of Financial Instruments--The carrying amount reported in the
consolidated balance sheets for cash and cash equivalents, accounts
receivable, accounts payable and short-term debt approximates fair value
because of the immediate short-term maturity of these financial instruments.
The carrying amount reported for long-term debt approximates fair value
because the underlying instrument bears interest at a current market rate.
Derivative Financial Instruments--Derivative financial instruments (primarily
forward foreign exchange contracts) may be utilized by the Company to hedge
foreign exchange rate risk. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. The Company does not enter into
financial instruments for trading or speculative purposes. For financial
reporting purposes, forward foreign exchange contracts used to hedge the
currency fluctuations on transactions denominated in foreign currencies are
marked-to-market and the resulting gains and losses, together with the
offsetting losses and gains on hedged transactions, are recorded in the "Other
income (expense)" caption in the statement of operations.
Inventories--Inventories are valued at the lower of cost or market. Cost has
been determined by the last-in, first-out (LIFO) method for parent company
inventories, and by the first-in, first-out (FIFO) method for other
inventories.
Property, Plant and Equipment and Depreciation--Assets are stated at cost.
Expenditures for maintenance, repairs and minor renewals are charged against
earnings as incurred. Expenditures for major renewals and betterments are
capitalized and amortized by depreciation charges. Depreciation is provided
on the straight-line method over the estimated useful lives of the assets for
financial reporting and on accelerated methods for income tax purposes. The
lives assigned to buildings and related improvements range from 10 to 40
years, and the lives assigned to machinery and equipment range from 5 to 15
years. Upon disposal of property, plant and equipment, the cost of the asset
and the related accumulated depreciation are removed from the accounts and the
resulting gain or loss is reflected in earnings. Fully depreciated assets are
not removed from the accounts until physical disposition.
Investments in Affiliates--The Company's 25% investments in affiliates are
stated at cost, adjusted for equity in undistributed earnings since
acquisition.
Revenue Recognition--Revenues are recognized when products are shipped.
Income Taxes--The Company recognizes deferred tax liabilities and assets for
the expected future income tax consequences of events that have been
recognized in the Company's financial statements. Under this method, deferred
tax liabilities and assets are determined based on the temporary differences
between the financial statement carrying amounts and the tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
temporary differences are expected to reverse.
(26)
The Company does not provide for taxes which would be payable if undistributed
earnings of its foreign subsidiaries or its foreign affiliate were remitted
because the Company either considers these earnings to be invested for an
indefinite period or anticipates that if such earnings were distributed,
the U. S. income taxes payable would be substantially offset by foreign tax
credits.
Management Estimates--The preparation of financial statements in conformity
<PAGE> 25
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual amounts could differ from those estimates.
Reclassification--Certain amounts in the consolidated financial statements for
prior years have been reclassified to conform to the 1997 presentation.
B. INVENTORIES
The major classes of inventories at June 30 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
---- ----
<S> <C> <C>
Finished parts $38,713 $41,535
Work-in-process 5,997 5,429
Raw materials 3,134 4,119
------- -------
$47,844 $51,083
------- -------
------- -------
</TABLE>
Inventories stated on a LIFO basis represent approximately 42% and 36% of
total inventories at June 30, 1997 and 1996, respectively. The approximate
current cost of the LIFO inventories exceeded the LIFO cost by $17,526,000 and
$17,171,000 at June 30, 1997 and 1996, respectively.
C. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
---- ----
<S> <C> <C>
Land $ 1,335 $ 1,399
Buildings 18,708 19,082
Machinery and equipment 87,832 88,182
------- -------
107,875 108,663
Less accumulated depreciation 73,626 72,948
------- -------
$34,249 $35,715
------- -------
------- -------
</TABLE>
D. INVESTMENTS IN AFFILIATES
The Company's investments in affiliates consists of 25% interests in Niigata
Converter Company, Ltd., Japan and Palmer Johnson Distributors, LLC, a
domestic distributor of Twin Disc products. The Company acquired the interest
in Palmer Johnson Distributors, LLC, in July 1994.
(27)
Undistributed earnings of the affiliates included in consolidated retained
earnings approximated $3,127,000 and $3,120,000 at June 30, 1997 and 1996,
respectively.
Combined condensed financial data of the above-listed affiliates are
summarized in U.S. dollars as follows:
<TABLE>
<CAPTION>
(In thousands)
1997 1996
---- ----
<S> <C> <C>
Current assets $ 87,375 $104,949
Other assets 43,582 51,263
------- -------
$130,957 $156,212
------- -------
------- -------
Current liabilities $ 85,479 $100,153
Other liabilities 8,479 14,622
Shareholders' equity 36,999 41,437
------- -------
$130,957 $156,212
------- -------
------- -------
1997 1996 1995
----- ---- ----
Net sales $166,171 $183,487 $169,256
Gross profit 19,911 23,436 26,173
Net earnings 1,228 181 742
<PAGE> 26
E. ACCRUED LIABILITIES
Accrued liabilities at June 30 were as follows:
(In thousands) 1997 1996
---- ----
Salaries and wages $ 5,983 $ 5,756
Retirement plans 2,150 4,122
Other 8,485 7,958
------- -------
$ 16,618 $ 17,836
------- -------
------- -------
</TABLE>
F. DEBT
Short-term notes payable consists of amounts borrowed under unsecured line of
credit agreements. Unused lines of credit total $18,700,000 at June 30, 1997.
These lines of credit are available predominately at the LIBOR interest rate
and may be withdrawn at the option of the banks. The weighted average
interest rate of short-term lines outstanding at June 30, 1997 and 1996 was
7.3% and 8.4%, respectively.
Included in long term debt is $20 million of 7.37% ten-year unsecured notes,
net of $77,000 unamortized debt issuance costs at June 30, 1997. These notes
contain certain covenants, including the maintenance of a current ratio of not
less than 1.5. Principal payments of $2,857,000 are due in the years 2000
through 2005, with the remaining balance due on June 1, 2006. Also included
in long-term debt is $21,000 of debt related to a foreign subsidiary.
(28)
G. LEASE COMMITMENTS
Approximate future minimum rental commitments under noncancellable operating
leases are as follows (in thousands):
Fiscal Year
-----------
1998 $ 2,062
1999 1,543
2000 884
2001 479
2002 345
Thereafter 187
-----
$ 5,500
-----
-----
Total rent expense for operating leases approximated $2,254,000, $2,109,000
and $1,939,000 in 1997, 1996 and 1995, respectively.
H. SHAREHOLDERS' EQUITY
At June 30, 1997 and 1996, treasury stock consisted of 856,456 and 866,356
shares of common stock, respectively. The Company issued 9,900 shares of
treasury stock in 1996 to fulfill its obligations under the stock option
plans. The difference between the cost of treasury shares issued and the
option price is charged to retained earnings.
Cash dividends per share were $.70 in 1997, 1996 and 1995.
In 1988, the Company's Board of Directors established a Shareholder Rights
Plan and distributed to shareholders, one preferred stock purchase right for
each outstanding share of common stock. Under certain circumstances, a right
may be exercised to purchase one one-hundredth of a share of Series A Junior
Preferred Stock at an exercise price of $80, subject to certain anti-dilution
adjustments. The rights become exercisable ten (10) days after a public
announcement that a party or group has either acquired at least 20%, (or at
least 30% in the case of existing holders who currently own 20% or more of the
common stock), or commenced a tender offer for at least 30%, of the Company's
common stock. Generally, after the rights become exercisable, if the Company
is a party to certain merger or business combination transactions, or
transfers 50% or more of its assets or earnings power, or certain other events
occur, each right will entitle its holders, other than the acquiring person,
to buy a number of shares of common stock of the Company, or of the other
party to the transaction, having a value of twice the exercise price of the
right. The rights expire June 30, 1998 and may be redeemed by the Company for
$.05 per right at any time until ten (10) days following the stock acquisition
date. The Company is authorized to issue 200,000 shares of preferred stock,
none of which have been issued. The Company has designated 50,000 shares of
the preferred stock for the purpose of the Shareholder Rights Plan.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (FAS) 128 "Earnings Per Share", which becomes effective
for the Company's 1998 fiscal year and establishes new standards for reporting
earnings per share. FAS 128 is not expected to have a significant effect on
the Company's earnings per share computations.
(29)
<PAGE> 27
I. BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company and its subsidiaries are engaged in one line of business, the
manufacture and sale of power transmission equipment. Transfers among
geographic areas are made at established intercompany selling prices.
Principal products include industrial clutches, hydraulic torque converters,
fluid couplings, power-shift transmissions, marine transmissions, universal
joints, power take-offs, and reduction gears. The Company sells to both
domestic and foreign customers in a variety of market areas, principally
construction, industrial, marine, energy and natural resources and
agricultural.
<PAGE> 28
One customer accounted for approximately 11%, 10% and 12% of consolidated net
sales in 1997, 1996 and 1995, respectively.
Information about the Company's operations in different geographic areas is
summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States $131,844 $120,137 $108,607
Foreign:
Europe 34,332 34,206 35,572
Other 23,766 22,314 20,053
------- ------- -------
Total $189,942 $176,657 $164,232
------- ------- -------
------- ------- -------
Transfers between geographic areas:
United States $ 28,716 $ 30,230 $ 26,167
Foreign:
Europe 16,398 23,130 15,024
Other 415 322 361
------- ------- -------
Total $ 45,529 $ 53,682 $ 41,552
------- ------- -------
------- ------- -------
Net sales:
United States $160,560 $150,367 $134,774
Foreign:
Europe 50,730 57,336 50,596
Other 24,181 22,636 20,414
Eliminations (45,529) (53,682) (41,552)
------- ------- -------
Total $189,942 $176,657 $164,232
------- ------- -------
------- ------- -------
Earnings before income taxes:
United States $ 6,009 $ 2,821 $ 4,332
Foreign:
Europe 4,378 6,126 2,635
Other 2,293 1,960 1,617
------- ------- -------
Total $ 12,680 $ 10,907 $ 8,584
------- ------- -------
------- ------- -------
Identifiable assets at June 30:
United States $115,973 $117,552 $106,971
Foreign:
Europe 33,329 36,356 39,537
Other 12,947 12,794 10,269
Eliminations (3,494) (4,003) 1,524
------- ------- -------
Total $158,755 $162,699 $158,301
------- ------- -------
------- ------- -------
</TABLE>
(30)
Net earnings of the foreign subsidiaries were $3,840,000,$4,758,000 and
$2,480,000 in 1997, 1996 and 1995, respectively. The net assets of the
foreign subsidiaries were $26,341,000 and $32,085,000 at June 30, 1997 and
1996, respectively. Undistributed earnings of foreign subsidiaries, on which
no provisions for United States income taxes have been made, aggregated
approximately $20,500,000 (including $2,022,000 translation component) at June
30, 1997. Included in earnings are foreign currency transaction gains
(losses) of $334,000, $409,000 and $(248,000) in 1997, 1996 and 1995,
respectively.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (FAS) 131 "Disclosure about Segments of an Enterprise and
Related Information", which becomes effective for the Company's 1999 fiscal
year. FAS 131 establishes new standards for reporting information about
operating segments in financial statements. The Company is evaluating the
extent to which its segment reporting may be affected by FAS 131.
<PAGE> 28
J. STOCK OPTION PLANS
The Company has a non-qualified stock option plan for officers, key employees
and directors to purchase up to 125,000 shares of common stock, and an
incentive stock option plan for officers and key employees to purchase up to
225,000 shares of common stock. The plans are administered by the Executive
Selection and Compensation Committee of the Board of Directors which has the
authority to determine which officers and key employees will be granted
options. The grant of options to non-employee directors is fixed and based on
such directors' seniority. Except as described in the following sentence, all
options allow for exercise prices not less than the grant date fair market
value, immediate vesting and expire ten years after the date of grant. For
options under the incentive stock option plan, if the optionee owns more than
10% of the total combined voting power of all classes of the Company's stock,
the price will be not less than 110% of the grant date fair market value and
the options expire five years after the grant date.
Shares available for future options as of June 30 were as follows:
1997 1996
---- ----
Non-qualified stock
option plan 23,950 28,650
Incentive stock option plan 53,400 67,500
Stock option transactions under the plans during 1997 and 1996 were
as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
1997 Price 1996 Price
---- --------- ---- -------
<S> <C> <C> <C> <C>
Non-qualified stock
option plan:
Options outstanding
at beginning of year 95,350 $21.69 81,450 $21.21
Granted 15,100 21.88 13,900 24.50
Cancelled (10,400) 23.32 -
Exercised ($17.88-$19.50
per share) (5,900) 19.03 -
------- -------
Options outstanding
at June 30 94,150 $21.71 95,350 $21.69
------- -------
------- -------
(31)
Options price range
($14.00 - $20.00)
Number of shares 42,500
Weighted average price $18.82
Weighted average remaining life 6.74 years
Options price range
($20.01 - $29.63)
Number of shares 51,650
Weighted average price $24.09
Weighted average remaining life 6.09 years
Weighted Weighted
Average Average
1997 Price 1996 Price
---- --------- ---- -------
Incentive stock option plan:
Options outstanding
at beginning of year 151,450 $21.52 132,050 $20.78
Granted 24,250 22.05 25,050 24.89
Cancelled (10,150) 22.57 (3,400) 23.60
Exercised ($14.00-$19.50
per share) (4,000) 18.81 (2,250) 15.29
------- -------
Options outstanding
at June 30 161,550 $21.60 151,450 $21.52
------- -------
------- -------
Options price range
($14.00 - $20.00)
Number of shares 71,100
Weighted average price $18.44
<PAGE> 29
Weighted average remaining life 6.32 years
Options price range
($20.01 - $29.63)
Number of shares 90,450
Weighted average price $24.08
Weighted average remaining life 6.23 years
</TABLE>
The Company has elected to continue to account for its stock option plans
under the guidelines of Accounting Principles Board Opinion No. 25.
Accordingly, no compensation cost has been recognized in the statement of
operations. Had the Company recognized compensation expense based on the fair
value at the grant date for awards under the plans, consistent with the method
prescribed by FASB Statement 123, the net earnings and earnings per share
would have been as follows (in thousands, except per share amounts):
1997 1996
Net earnings
As reported $7,729 $6,559
Pro forma 7,554 6,365
Earnings per share
As reported $ 2.78 $2.36
Pro forma 2.72 2.29
The above pro forma net earnings and earnings per share were computed using
the fair value of options at the date of grant (for options granted after June
1995) as calculated by the Black-Scholes option-pricing method and the
following assumptions: 20% volatility, 3% annual dividend yield, interest
rates based on expected terms and grant dates, 3 year term for the
Non-Qualified Plan and 5 year term for the Incentive Plan and exercise price
equal to the fair market value on grant date for the Non-Qualified Plan and
110% of the fair market value on grant date for the Incentive Plan.
(32)
K. ENGINEERING AND DEVELOPMENT COSTS
Engineering and development costs include research and development expenses
for new products, development and major improvements to existing products, and
other charges for ongoing efforts to refine existing products. Research and
development costs charged to operations totalled $3,517,000, $2,564,000 and
$2,718,000 in 1997, 1996 and 1995, respectively. Total engineering and
development costs were $8,288,000, $6,998,000 and $7,411,000 in 1997, 1996 and
1995, respectively.
L. RETIREMENT PLANS
The Company has noncontributory, qualified defined benefit pension plans
covering substantially all domestic employees and contributory plans covering
certain foreign employees. Domestic plan benefits are based on years of
service, and for salaried employees on final average compensation. The
Company's funding policy for the plans covering domestic employees is to
contribute an actuarially determined amount which falls between the minimum
and maximum amount that can be contributed for federal income tax purposes.
Domestic plan assets consist principally of listed equity and fixed income
securities.
In addition, the Company has unfunded, non-qualified retirement plans for
certain management employees and directors. Benefits are based on final
average compensation and do not vest until such management employee reaches
normal retirement with the Company.
Net pension expense for the Company's domestic defined benefit plans
consists of the following components:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 1,636 $ 1,529 $ 1,585
Interest cost on projected benefit obligation 7,056 6,823 6,643
Actual return on plan assets (5,198) (9,956) (3,835)
Net amortization and deferral (188) 5,304 (588)
------ ------ ------
Net pension cost $ 3,306 $ 3,700 $ 3,805
------ ------ ------
------ ------ ------
</TABLE>
(33)
The following table sets forth the Company's domestic defined
benefit plans' funded status and the amounts recognized in the Company's
balance sheets as of June 30:
<PAGE> 30
<TABLE>
<CAPTION>
(In thousands) 1997 1996
---- ----
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 76,030 $ 70,042
Non-vested benefit obligation 12,451 15,683
------- -------
Accumulated benefit
obligation 88,481 85,725
Effect of projected future
compensation levels 552 4,622
------- -------
Projected benefit obligation 89,033 90,347
Plan assets at fair value (76,097) (73,422)
------ ------
Deficiency of plan assets
compared to projected
benefit obligation 12,936 16,925
Unrecognized net loss (7,012) (4,042)
Unrecognized prior service
cost (3,427) (8,656)
Unrecognized transitional net
liability (535) (667)
Adjustment required to
recognize additional
minimum liability 10,858 9,095
------- -------
Accrued retirement cost
at June 30 $ 12,820 $ 12,655
------- -------
------- -------
Assumptions used in accounting for the retirement plans
are as follows:
</TABLE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Discount rate 8.0% 7.8%
Rate of increase in compensation
levels 4.5% 4.5%
Expected long-term rate of return on
plan assets 9.0% 9.0%
Total accrued retirement costs at June 30 are summarized as follows:
(In thousands) 1997 1996
---- ----
Current:
Domestic defined benefit plans $ (493) $ 1,156
Foreign contributory benefit plans 446 673
------ ------
(47) 1,829
Long-term:
Domestic defined benefit plans 13,313 11,499
------ ------
$13,266 $13,328
------ ------
------ ------
</TABLE>
Effective as of January 1, 1997, the Twin Disc, Incorporated Retirement Plan
for Salaried Employees was amended to freeze the benefit formula in effect
prior to January 1, 1997 and to change the formula for benefit accruals to a
cash balance pension plan. The effect of this change was to decrease the
unrecognized prior service cost by $4.2 million.
Retirement plan expense for the Company's foreign plans was $325,000, $597,000
and $307,000 in 1997, 1996 and 1995, respectively.
(34)
The Company sponsors defined contribution plans covering substantially all
domestic employees. These plans provide for employer contributions based
primarily on employee participation. The total expense under the plans was
$1,281,000, $1,056,000 and $906,000 in 1997, 1996 and 1995, respectively.
In addition to providing pension benefits, the Company provides health care
and life insurance benefits for certain domestic retirees. All employees
retiring after December 31, 1992, and electing to continue coverage through
the Company's group plan, are required to pay 100% of the premium cost.
The Company recognized $2,293,000, $2,680,000 and $2,841,000 in non-pension
postretirement benefit expense in 1997, 1996 and 1995, respectively, which
<PAGE> 31
consists primarily of interest cost.
The following table sets forth the status of the postretirement benefit
programs (other than pensions) and amounts recognized in the Company's
consolidated balance sheet at June 30:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $25,998 $28,077
Fully eligible active plan participants 440 433
Other active participants 504 471
------ ------
26,942 28,981
Unamortized net amount resulting
from changes in plan experience and
actuarial assumptions (2,665) (4,279)
------ ------
Accrued postretirement benefit obligation $24,277 $24,702
------ ------
------ ------
</TABLE>
The current portion of the accumulated postretirement benefit obligation of
$2,197,000 and $2,293,000 is included in accrued liabilities at June 30, 1997
and 1996, respectively.
The assumed weighted average discount rate used in determining the actuarial
present value of the accumulated postretirement benefit obligation was 8.00%
and 7.75% at June 30, 1997 and 1996, respectively. The assumed weighted
average health care cost trend rate was 9% in fiscal year 1997, decreasing by
1% each year thereafter until it reaches 7% in fiscal year 1999, and remains
constant thereafter. A 1% increase in the assumed health care trend would
increase the accumulated postretirement benefit obligation by approximately
$1.8 million and the interest cost by approximately $142,000.
M. INCOME TAXES
United States and foreign earnings before income taxes were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
United States $ 6,009 $ 2,821 $ 4,332
Foreign 6,671 8,086 4,252
------ ------ ------
$12,680 $10,907 $ 8,584
------ ------ ------
------ ------ ------
(35)
</TABLE>
<TABLE>
The provision (credit) for income taxes is comprised of the following:
<CAPTION>
(In thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Currently payable:
Federal $ 913 $ 829 $ 782
State 100 78 12
Foreign 2,457 1,925 1,007
------ ------ ------
3,470 2,832 1,801
------ ------ ------
Deferred:
Federal 1,559 388 452
State (51) (54) 12
Foreign (27) 1,182 647
------ ------ ------
1,481 1,516 1,111
------ ------ ------
$ 4,951 $ 4,348 $ 2,912
------ ------ ------
------ ------ ------
</TABLE>
The components of the net deferred tax asset as of June 30, were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Retirement plans and employee benefits $11,605 $ 9,971
Research and development expenses 553 926
Other 2,525 1,550
Alternative minimum tax credit
carryforwards 1,143 1,223
Foreign net operating loss tax and
credit carryforwards - 672
R&E tax credit carryforwards - 335
<PAGE> 32
------ ------
15,826 14,677
------ ------
Deferred tax liabilities:
Fixed assets 5,634 6,368
Other 2,142 1,841
------ ------
7,776 8,209
------ ------
Total net deferred tax assets $ 8,050 $ 6,468
------ ------
------ ------
</TABLE>
(36)
<TABLE>
Following is a reconciliation of the applicable U.S. federal income tax rate
to the effective tax rates reflected in the statements of operations:
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
U.S. federal income tax rate 34.0% 34.0% 34.0%
Increases (reductions)
in tax rate resulting from:
Utilization of net operating
loss carryforwards - - (1.6)
Foreign tax items .2 4.2 (1.8)
Employee benefits - foreign - - 1.8
Accrual for prior years 3.7 - -
Other, net 1.1 1.7 1.5
---- ---- ----
39.0% 39.9% 33.9%
---- ---- ----
---- ---- ----
</TABLE>
N. CONTINGENCIES
The Company is involved in various stages of investigation relative to
hazardous waste sites, two of which are on the United States EPA National
Priorities List (Superfund sites). The Company's assigned responsibility at
each of the Superfund sites is less than 2%. The Company has also been
requested to provide administrative information related to two other potential
Superfund sites but has not yet been identified as a potentially responsible
party. Additionally, the Company is subject to certain product liability
matters.
At June 30, 1997 the Company has accrued approximately $1,320,000, which
represents management's best estimate available for possible losses related to
these contingencies. This amount has been provided over the past several
years. Based on the information available, the Company does not expect that
any unrecorded liability related to these matters would materially affect the
consolidated financial position, results of operations or cash flows.
(37)
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders
Twin Disc, Incorporated
Racine, Wisconsin
We have audited the accompanying consolidated balance sheets of Twin Disc,
Incorporated and Subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity, and
cash flows for each of the three years in the period ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Twin Disc,
Incorporated and Subsidiaries as of June 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
July 18, 1997
(39)
<PAGE> 34
<TABLE>
FINANCIAL SUMMARY
<CAPTION>
1997 1996 1995 1994 1993
(In thousands of dollars, except where noted)
Statement of Operations
<S> <C> <C> <C> <C> <C>
Net sales $189,942 $176,657 $164,232 $141,193 $139,403
Costs and expenses,
including marketing,
engineering and
administrative 177,342 164,486 154,347 136,244 135,284
Earnings
from operations 12,600 12,171 9,885 4,949 4,119
Other income
(expense) 80 (1,264) (1,301) 18 (95)
Earnings
before income taxes 12,680 10,907 8,584 4,967 4,024
Income taxes 4,951 4,348 2,912 578 1,362
Net earnings 7,729 6,559 5,672 4,389 2,662
Overseas operations
Sales 58,098 55,520 55,625 45,862 44,766
Earnings (loss) 3,840 4,758 2,480 2,365 1,673
Balance Sheet
Assets
Cash and equivalents 8,983 2,043 3,741 4,166 2,903
Receivables, net 32,428 34,917 29,247 25,682 25,106
Inventories 47,844 51,083 47,157 41,569 42,562
Other current assets 8,707 8,597 10,345 8,993 6,961
Total current assets 97,962 96,640 90,490 80,410 77,532
Investments and
other assets 26,544 30,344 30,463 26,830 21,813
Fixed assets less
accumulated
depreciation 34,249 35,715 37,348 36,676 37,560
Total assets 158,755 162,699 158,301 143,916 136,905
Net assets overseas 26,341 32,085 32,368 29,580 28,059
Liabilities and Shareholders' Equity
Current liabilities 29,621 34,002 36,852 32,710 31,252
Long-term debt 19,944 19,938 14,000 11,500 13,000
Deferred liabilities 35,393 33,578 32,827 34,309 31,244
Shareholders' equity 73,797 75,181 74,622 65,397 61,409
Total liabilities and
shareholders' equity 158,755 162,699 158,301 143,916 136,905
</TABLE>
1993 Net Earnings data and Return percentages reflect operating earnings
before the effect of adopting Financial Accounting Standards 106 and 109. The
cumulative effect of their adoption was a net loss of $14.44 million or $5.16
per share.
(40-41)
<PAGE> 35
<TABLE>
FINANCIAL SUMMARY (CONTINUED)
<CAPTION>
1997 1996 1995 1994 1993
(In thousands of dollars, except where noted)
<S> <C> <C> <C> <C> <C>
Comparative Financial Information
Per share statistics
Net earnings 2.78 2.36 2.03 1.57 .95
Dividends .70 .70 .70 .70 .70
Shareholders' equity 26.48 27.07 26.75 23.36 21.93
Return on equity 10.5% 8.7% 7.6% 6.7% 4.3%
Return on assets 4.9% 4.0% 3.6% 3.0% 1.9%
Return on sales 4.1% 3.7% 3.5% 3.1% 1.9%
Average shares
outstanding 2,781,174 2,776,805 2,790,111 2,799,390 2,799,603
Number of shareholder
accounts 845 913 996 1,058 1,139
Number of employees 1,081 1,080 1,097 1,099 1,114
Additions to plant
and equipment 4,734 4,140 4,290 4,216 4,684
Depreciation 5,141 5,071 4,792 4,670 4,958
Net working capital 68,341 62,638 53,638 47,700 46,280
</TABLE>
1993 Net Earnings data and Return percentages reflect operating earnings
before the effect of adopting Financial Accounting Standards 106 and 109. The
cumulative effect of their adoption was a net loss of $14.44 million or $5.16
per share.
(40-41)
<PAGE> 36
DIRECTORS
MICHAEL E. BATTEN
Chaiman, Chief Executive Officer
JEROME K. GREEN
Former Group Vice President, The Marmon Group, (A Diversified Manufacturer),
Chicago, Illinois
MICHAEL H. JOYCE
President, Chief Operating Officer
JAMES O. PARRISH
Vice President-Finance & Treasurer
PAUL J. POWERS
Chairman, President-Chief Executive Officer, Commercial Intertech Corp.,
(Manufacturer of Hydraulic Components, Fluid Purification Products, Pre-
Engineered Buildings and Stamped Metal Products), Youngstown, Ohio
RICHARD T. SAVAGE
President-Chief Executive Officer, Modine Manufacturing Company,
(Manufacturer of Heat Exchange Equipment), Racine, Wisconsin
DAVID L. SWIFT
Retired Chairman, President-Chief Executive Officer, Acme-Cleveland
Corporation, (Manufacturer of Diversified Industrial Products), Pepper Pike,
Ohio
STUART W. TISDALE
Retired Chairman-Chief Executive Officer, WICOR, Inc. (Parent Company of
Wisconsin Gas Company, Sta-Rite Industries, Incorporated and WEXCO of
Delaware, Incorproated), Milwaukee, Wisconsin
GEORGE E. WARDEBERG
President, Chief Executive Officer, WICOR, Inc. (Parent Company of
Wisconsin Gas Company, Sta-Rite Industries, Incorporated and WEXCO of
Delaware, Incorproated), Milwaukee, Wisconsin
DAVID R. ZIMMER
Executive Vice President-Operations, United Dominion Industries,
(Manufacturer of Diversified Engineered Products), Charlotte, North Carolina
(42)
<PAGE> 37
OFFICERS
MICHAEL E. BATTEN
Chairman, Chief Executive Officer
MICHAEL H. JOYCE
President, Chief Operating Officer
JAMES O. PARRISH
Vice President-Finance & Treasurer
PHILIPPE PECRIAUX
Vice President-Europe
JAMES MCINDOE
Vice President-International Marketing
LANCE J. MELIK
Vice President-Corporate Development
FRED H. TIMM
Corporate Controller & Secretary
PAUL A. PELLIGRINO
Vice President-Engineering
JOHN W. SPANO
Vice President-Sales and Marketing
(43)
<PAGE> 38
CORPORATE DATA
ANNUAL MEETING
Corporate Offices, 2:00 PM, October 17, 1997
SHARES TRADED
New York Stock Exchange: Symbol TDI
ANNUAL REPORT ON SECURITIES AND EXCHANGE COMMISSION FORM 10-K
SINGLE COPIES OF THE COMPANY'S 1997 ANNUAL REPORT ON SECURITIES AND
EXCHANGE
COMMISSION FORM 10-K WILL BE PROVIDED WITHOUT CHARGE TO
SHAREHOLDERS AFTER
SEPTEMBER 30, 1997, UPON WRITTEN REQUEST DIRECTED TO THE SECRETARY,
TWIN DISC,
INCORPORATED, 1328 RACINE STREET, RACINE, WISCONSIN 53403.
TRANSFER AGENT & REGISTRAR
Firstar Trust Company, Milwaukee, Wisconsin
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., Milwaukee, Wisconsin
GENERAL COUNSEL
von Briesen, Purtell, & Roper,s.c., Milwaukee, Wisconsin
CORPORATE OFFICES
Twin Disc, Incorporated, Racine, Wisconsin 53403, Telephone: (414) 638-4100
WHOLLY OWNED SUBSIDIARIES
Twin Disc International S.A., Nivelles, Belgium
Twin Disc Spain, S.A., Madrid, Spain
Twin Disc Italia S.R.L., Viareggio, Italy
Twin Disc (Pacific) Pty. ltd., Brisbane, Queensland, Australia
Twin Disc (Far East) Ltd., Singapore
Twin Disc (South Africa) Pty. Ltd., Johannesburg, South Africa
Mill-Log Equipment Co., Inc., Coburg, Oregon
Southern Diesel Systems Inc., Miami, Florida
TD Electronics, Inc., Loves Park, Illinois
PARTIALLY OWNED AFFILIATES
Niigata Converter Company, Ltd., Kamo, Omiya and Tokyo, Japan
Palmer Johnson Distributors, LLC, Sturgeon Bay, Wisconsin
MANUFACTURING FACILITIES
Racine, Wisconsin; Nivelles, Belgium; Kamo and Omiya Japan
SALES OFFICES
DOMESTIC
Racine, Wisconsin; Coburg, Oregon; Seattle, Washington; Miami, Florida;
Jacksonville, Florida
OVERSEAS
Nivelles, Belgium; Brisbane and Perth Australia; Singapore; Johannesburg,
South Africa; Madrid, Spain; Viareggio, Italy
AFFILIATES
Tokyo, Japan; Sturgeon Bay, Wisconsin
MANUFACTURING LICENSES
Niigata Converter Company, Ltd., Tokyo, Japan; Transfluid S.R.L., Milan,
Italy; Nakamura Jico Co. Ltd., Tokyo, Japan; Hindustan Motors, Ltd., Madras,
India
(44)
<PAGE> 39
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
--------------------------
Twin Disc, Incorporated, the registrant (a Wisconsin Corporation) owns 100% of
the following subsidiaries:
1. Twin Disc International, S.A. (a Belgian corporation)
2. Twin Disc Spain, S.A. (a Spanish corporation)
3. Twin Disc Italia S.R.L. (an Italian corporation)
4. Twin Disc (Pacific) Pty. Ltd. (an Australian corporation)
5. Twin Disc (Far East) Ltd. (a Delaware corporation operating in
Singapore and Hong Kong)
6. Twin Disc (South Africa) Pty. Ltd. (a South African corporation)
7. Mill-Log Equipment Co., Inc. (an Oregon corporation)
8. Southern Diesel Systems Inc. (a Florida corporation)
9. TD Electronics, Inc. (a Wisconsin corporation)
The registrant has no parent nor any other subsidiaries. All of the above
subsidiaries are included in the consolidated financial statements.
<PAGE> 40
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Twin Disc, Incorporated on Form S-8 (Twin Disc, Incorporated 1988 Incentive
Stock Option Plan and Twin Disc, Incorporated 1988 Non-Qualified Stock Option
Plan for Officers, Key Employees and Directors) of our reports dated July 18,
1997, on our audits of the consolidated financial statements and financial
statement schedule of Twin Disc, Incorporated as of June 30, 1997 and 1996 and
for the years ended June 30, 1997, 1996 and 1995, which reports are included
in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
September 19, 1997
<PAGE> 41
EXHIBIT 24
POWER OF ATTORNEY
-----------------
The undersigned directors of Twin Disc, Incorporated hereby severally
constitute Michael E. Batten and James O. Parrish , and each of them singly,
true and lawful attorneys with full power to them, and each of them, singly,
to sign for us and in our names as directors the Form 10-K Annual Report for
the fiscal year ended June 30, 1997 pursant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, and generally do all such things in our names
and behalf as directors to enable Twin Disc, Incorporated to comply with the
provisions of the Securities and Exchange Act of 1934 and all requirements of
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures so they may be signed by our attorneys, or either of them, as set
forth below.
JEROME K. GREEN )
--------------------------------------------------- )
Jerome K. Green, Director )
)
)
PAUL J. POWERS ) July 25, 1997
--------------------------------------------------- )
Paul J. Powers, Director )
)
)
RICHARD T. SAVAGE )
--------------------------------------------------- )
Richard T. Savage, Director )
)
)
DAVID L. SWIFT )
--------------------------------------------------- )
David L. Swift, Director )
)
)
STUART W. TISDALE )
--------------------------------------------------- )
Stuart W. Tisdale, Director )
)
)
DAVID R. ZIMMER )
--------------------------------------------------- )
David R. Zimmer, Director )
)
)
GEORGE E. WARDEBERG )
--------------------------------------------------- )
George E. Wardeberg, Director )
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TWIN DISC, INCORPORATED AND
SUBSIDIARIES
SET FORTH IN THE ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED
JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,983
<SECURITIES> 0
<RECEIVABLES> 32,966
<ALLOWANCES> 538
<INVENTORY> 47,844
<CURRENT-ASSETS> 97,962
<PP&E> 107,875
<DEPRECIATION> 73,626
<TOTAL-ASSETS> 158,755
<CURRENT-LIABILITIES> 29,621
<BONDS> 19,944
0
0
<COMMON> 11,653
<OTHER-SE> 62,144
<TOTAL-LIABILITY-AND-EQUITY> 158,755
<SALES> 189,942
<TOTAL-REVENUES> 189,942
<CGS> 146,123
<TOTAL-COSTS> 146,123
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,781
<INCOME-PRETAX> 12,680
<INCOME-TAX> 4,951
<INCOME-CONTINUING> 7,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,729
<EPS-PRIMARY> 2.78
<EPS-DILUTED> 0
</TABLE>
