<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-8287
LINDBERG CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-1391480
(State of Incorporation) (IRS Identification No.)
6133 North River Road, Suite 700 Rosemont, Illinois 60018
(847) 823-2021
(Address and telephone number of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Common Stock Purchase Rights (currently traded with Common Stock)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based on the closing sale price on the Nasdaq Stock Market on
March 10, 2000) was $19,473,922.
The number of shares of the registrant's common stock outstanding as of March
10, 2000 was 5,661,061.
Documents Incorporated by Reference
Those sections or portions of the registrant's 1999 Annual Report to
Stockholders (the "Annual Report") and of the registrant's definitive proxy
statement for use in connection with its annual meeting of stockholders to be
held on April 28, 2000 (the "Proxy Statement"), described in the table of
contents and attached hereto, are incorporated by reference into Parts I, II
and III of this report.
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Item Number and Caption Page
PART I
<S> <C>
Item 1 Business.......................... Annual Report, pp. 16-17
(Notes 2 and 3); herein,
pp. 4-8
Item 2 Properties........................ 9-10
Item 3 Legal Proceedings................. Annual Report, p. 21 (Note 10);
herein, pp. 8 and 10
Item 4 Submission of Matters to a Vote
of Security Holders............ 10
PART II
Item 5 Market for the Company's
Common Equity and Related
Stockholder Matters............ Annual Report, p. 25 "Stock
Market Information" and p. 18
(Note 5); herein, p. 11
Item 6 Selected Financial Data........... Annual Report, p. 23 "Six-Year
Financial Review"; herein,
p. 11
Item 7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... Annual Report, pp. 10-11
"Management's Discussion and
Analysis"; herein, p. 11
Item 7A Quantitative and Qualitative
Disclosures About Market Risk.. Annual Report, p. 11 "Market
Risk"; herein, p. 11
Item 8 Financial Statements and
Supplementary Data............. Annual Report, pp. 12-22
"Consolidated Financial
Statements" and "Notes to
Consolidated Financial
Statements"; herein, p. 11
Item 9 Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure....... 11
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Item Number and Caption Page
PART III
Item 10 Directors and Executive Officers
of the Company
(a) Identification of directors.. Proxy Statement, pp. 1-3, "The
Election of Directors";
herein, p. 12
(b) Identification of executive
officers..................... 12
Item 11 Executive Compensation............ Proxy Statement, pp. 3-6,
"Executive Compensation";
herein, p. 12
Item 12 Security Ownership of Certain
Beneficial Owners and
Management..................... Proxy Statement, pp. 8-9,
"Stock Ownership";
herein, p. 12
Item 13 Certain Relationships and Related
Transactions................... Proxy Statement, p. 2, "The
Election of Directors", and
p. 5, "Executive Compensation
- Compensation Committee
Interlocks and Insider
Participation"; herein, p. 12
PART IV
Item 14 Exhibits, Financial Statement
Schedules and Reports on
Form 8-K....................... 13-15
Signatures................................ 16
Exhibit Index............................. 17-19
</TABLE>
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PART I
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This report or documents incorporated herein by reference contain ''forward-
looking statements'' within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are those that are not
statements of historical fact, including statements regarding future revenues,
expenses and profits. These forward-looking statements are subject to known
and unknown risks, uncertainties or other factors which may cause the actual
results of the company to be materially different from the historical results
or from any results expressed or implied by the forward-looking statements.
Such risks and factors include, but are not limited to, those discussed in
Exhibit 99.1 attached to this report and under ''Management's Discussion and
Analysis of Results of Operations and Financial Condition'' incorporated by
reference below. All cautionary statements made in this report and documents
incorporated herein should be read as being applicable to all related forward-
looking statements wherever they appear.
ITEM 1. BUSINESS
General development of business
Lindberg is the largest commercial heat treating company in North America,
with operations in major industrial centers throughout the United States
and in Mexico. The company serves more than 10,000 customers in diverse
industries, including commercial aerospace, automobile/light truck, heavy
truck/construction equipment, oil-field machinery, defense, consumer
products, tool and die, agricultural equipment and a variety of other
industries. The company was founded in 1922 and, through both internal
growth and acquisitions, today operates in 15 states and in Mexico.
On February 17, 1999, the company acquired all of the outstanding shares of
Metal-Lab of Wisconsin, Inc. ("Metal-Lab"), located in Sturtevant, Wisconsin.
Metal-Lab primarily serves the tool and die industry. Since November 1994,
the company has acquired nine companies in the United States, and continues to
seek other acquisitions.
In 1998, the company started its first heat treating operation in Mexico,
outside Monterrey. The company intends the plant to be a base of operations
that could expand over time to meet other market needs, particularly in the
growing metal-working markets of northern Mexico.
On January 18, 1999, the company sold the assets of the remaining operation of
its discontinued Precision Products segment, Arrow-Acme Company, thereby
completing the divestiture of that segment. As a result, the company
currently operates solely as a heat treating company, and reports only one
business segment.
Industry
Heat treating in the United States is performed in-house in captive heat
treating departments of manufacturers or externally by a commercial heat
treating company such as Lindberg. Management believes that the commercial
heat treating industry captures about $2 billion in business annually, which
represents about 10-15% of the total amount of heat treating performed in the
U.S. -- the balance is performed in captive heat treating departments.
In-house heat treating facilities are typically part of a larger facility,
such as a steel mill or an automobile components factory, where large volumes
justify a captive operation. Commercial heat treaters
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are independent companies that specialize in heat treating or other metal
treatments and serve a large number of customers across a variety of
industries.
Due to the time and costs associated with transporting materials and
customers' need for quick turnaround times for heat treated products,
commercial heat treating has developed as a regional industry, with customers
typically located within 100 to 200 miles of the heat treating supplier.
Consequently, the commercial heat treating industry is highly fragmented.
Commercial heat treaters are concentrated in major industrial centers of
the country. Management estimates that the top five commercial heat treating
companies in terms of revenues in the U.S. represent approximately 15-20% of
the commercial heat treating industry.
The fragmented nature of the commercial heat treating industry has presented
opportunity for consolidation. Several factors have motivated smaller
commercial heat treating owners to sell to larger commercial heat treaters,
including increasingly burdensome regulatory and certification requirements,
capital expenditures necessary to remain competitive, increasing demand for
technical expertise, and succession planning considerations. In addition, a
number of industry participants have acquired other heat treaters in order to
expand their geographical presence and provide expanded or enhanced service
capabilities.
Management expects outsourcing to be a continuing opportunity in the heat
treating industry. Many smaller companies involved in the manufacture of
metal components outsource their heat treating requirements to commercial heat
treaters in order to avoid the significant cost of heat treating equipment.
In recent years, larger manufacturers have also outsourced heat treating
requirements due to the increased demand for technical expertise required in
heat treating and the relatively small portion of the total cost of the
finished product represented by heat treating.
Processes
Lindberg offers a wide range of heat treating processes for steel, aluminum,
cast iron, titanium alloys and other metals. Processes are performed on
customer-provided products at various steps in the manufacturing cycle. The
company does not maintain a raw material inventory or own work-in-process.
The range of processing offered by the company requires different types and
sizes of primary and secondary heat treating equipment.
Heat treating improves the mechanical properties, performance, durability and
wear resistance of metals and is an important step in many manufacturing
processes involving metals. Heat treating can soften metal to improve
formability, make a part harder to improve strength, put a hard surface on a
relatively soft component to increase strength or abrasion resistance, put a
corrosion-resistant surface on an item that would otherwise corrode or temper
a brittle product. Heat treated parts are essential to the operation of
automobiles, aircraft, spacecraft, consumer products, and heavy equipment of
every kind. Typical products that the company heat treats are aircraft
components, automotive parts, machine tools and dies, oil-field drill rig
parts, bearings, gears, axles, fasteners, camshafts, crankshafts and
cutting tools.
Heat treating is a process in which metal is heated and cooled under tight
controls. Heat treating processes require three basic steps: (i) heating to a
specified temperature, (ii) holding at that temperature for the appropriate
amount of time, and (iii) cooling according to a prescribed method.
Temperatures may range as high as 2400oF, and time at temperature may vary
from a few seconds to as many as 60 hours or more. Some materials are cooled
slowly in the furnace or in the air, but others must be cooled quickly, or
''quenched.'' Primary quenching media include water, oils, gases and polymer
solutions. Each quenching medium has specific characteristics that make it
well-suited for certain applications.
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Of the company's wide range of heat treating processes, the following are the
most common:
Hardening, Tempering and Annealing are performed using a variety of equipment,
including electric and gas furnaces, neutral salt baths, press quenching and
vacuum furnaces. The purpose of these processes is to create the ideal
metallurgical properties in the treated material.
Solution Treating and Aging is performed on aluminum, titanium and stainless
steel pieces to create desired properties of ductility and hardness throughout
the piece.
Surface Treating utilizes a specialized furnace to heat steels to an
appropriate temperature. Once the selected temperature is achieved, a carbon
or nitrogen rich gas is introduced to the furnace and elements within the gas
diffuse into the surface of the steel. The surface of the material is
transformed into a tougher, more wear resistant structure, while the core of
the material retains its ductility. Types of surface treatment include
carburizing, nitriding, carbo nitriding and ferritic nitrocarburizing.
Brazing is a process which uses heat treating to bond two different pieces.
The company utilizes electric furnaces, vacuum furnaces and induction in its
brazing process.
Lindberg has established itself as a leading commercial heat treater based on
its level of quality and service, technical expertise and network of
facilities, industry certifications and national reputation. The company
delivers its services on a timely basis, while its technical expertise
provides the capability to develop customized solutions that meet specific
customer needs. The company's plants are recognized with third-party quality
endorsements, such as ISO 9000, QS 9000, NADCAP, and AS 9000 and have approved
vendor status from many customers. These certifications and approvals enable
the company to heat treat products manufactured for some of the largest
domestic manufacturers.
Operations
Because the industry is fragmented and localized, the company's operations are
decentralized so each plant can react quickly and effectively to local market
conditions. The company's divisions have considerable autonomy in most
operational areas, including sales, pricing, hiring and participation in
strategic planning for their respective local markets. In addition, the
company's facilities tend to be clustered in certain geographic areas, which
permits individual facilities to utilize additional capacity or other heat
treating processes at alternate sites if necessary.
Each plant is equipped with furnaces of various types and sizes, and support
equipment. Many pieces of primary equipment are capable of running several
different processes. Auxiliary items include fixtures, atmosphere generators,
material handling equipment, cleaning equipment and metallurgical testing
equipment. Key suppliers provide electricity and natural gas. Other
important purchased materials include quench oils, process gases, fixtures,
maintenance supplies, laboratory and testing supplies and auxiliary equipment.
The company has not experienced any material restrictions by its suppliers of
sources of energy or any other significant raw materials necessary in the
process of heat treating.
The company services certain customers which are seasonal in nature. However,
in large part because of compensating variations and the large majority of
non-seasonal customers, the company does not view its business as seasonal.
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Customers
The company serves over 10,000 customers that range from owner-operated job
shops to large, national manufacturing companies. At the plant level, each of
the company's heat treating facilities serve an average of 400 customers. The
company's largest direct customer accounted for less than 3% of the company's
net sales in 1999. The ten largest customers accounted for approximately 13%
of net sales in 1999.
The company's customers are primary suppliers to companies operating in a
variety of manufacturing industries, including commercial aerospace,
automobile/light truck, heavy truck/construction equipment, oil-field
machinery, defense, consumer products, building components, tool and die,
agricultural equipment and a variety of other industries. The company also
provides heat treating services directly to end users in such industries.
Management estimates that customers serving the commercial aerospace industry
currently account for approximately 24% of the company's net sales and that
customers serving the automobile/light truck industry account for
approximately 15% of net sales. Because the company provides heat treating
services at different stages of the manufacturing process to a wide range of
manufacturers and their suppliers in a variety of industries, the company
cannot measure precisely its penetration of specific industries.
Most of the company's plants are located in major industrial areas of the
Midwest, California, Texas or the Northeast, usually serving customers in that
region. Because customers generally want to minimize the expense and risks
associated with transporting their products over long distances to and from
commercial heat treating plants, they tend to prefer heat treaters located in
close proximity to their own facilities. Customers often deliver and pick up
their parts, or the plant provides some delivery with its own trucking. This
market configuration has led to some degree of specialization for most of the
company's plants, with each plant focusing on the particular needs of the
customers in its area. The company operates with a limited backlog due to the
localized nature of its businesses and the customers' necessity for a quick
turnaround. The company's plants typically process orders within one to five
days; therefore, backlog in facilities is generally estimated to be less than
one week.
The company also offers dedicated heat treating services to certain larger
customers under long-term contracts through its Strategic Partnership 2000
("SP 2000") program. This program was developed to (i) provide services to
manufacturers that perform their own heat treating in-house, (ii) retain
existing customers whose high heat treating volume may justify moving the
process in-house and (iii) capture additional volume from customers that may
be using multiple heat treaters.
Competition
Due to the regional and highly fragmented nature of the commercial heat
treating industry, each plant has competition of varying degrees of intensity.
Competition consists of local heat treating owner-operators and certain
facilities of larger heat treating companies. Each plant competes in its
market on the basis of service and on-time delivery, quality and price. Local
management at each of the company's facilities is largely responsible for its
own pricing and cost control, and thus has the flexibility to respond to local
market conditions.
National competition in the commercial heat treating industry is limited.
There are competitors in particular localities that are larger than the
company's facility located in those markets. Such competitors may also be
divisions of larger companies and, therefore, have access
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to additonal resources. Competition also exists from in-house heat treating
facilities of manufacturers, although the company also considers such
manufacturers as potential customers.
Management believes that the company's national presence, size and reputation
for quality and service position it to supply many of the nation's largest
corporations.
Associates
Currently, the company employs approximately 1,050 associates, as compared to
1,220 associates at December 31, 1998. Of these associates, 132 are covered
by collective bargaining agreements. One agreement is currently under renewal
negotiations and four are subject to such in 2001. The company believes that
its employee relations are good.
Environmental Regulation
The company employs some environmentally hazardous materials. The company has
made expenditures to comply with laws and regulations relating to the
protection of the environment, including studies, investigations and
remediation of ground contamination, and expects to make such expenditures in
the future in its efforts to comply with existing and future requirements.
While such expenditures to date have not materially affected the company's
capital expenditures, competitive position, financial condition or results of
operations, there can be no assurance that more stringent regulation or
enforcement in the future will not have such effects.
The company has notified state authorities of a possible need for remediation
at three sites it currently operates. At all such sites, costs which may be
incurred are difficult to accurately predict until the level of contamination
is determined, and would be subject to increase if more contamination is
discovered during investigation or remediation or if state authorities require
more remediation than anticipated. Such costs may be less if the
contamination proves to be less than currently expected and to the extent
costs are covered by insurance or are allocable to others.
The company has also been notified by various state and federal governmental
authorities that they believe the company may be a ''potentially responsible
party'' or otherwise have responsibility with respect to clean-up obligations
at one waste disposal site which was never owned or operated by the company.
The company is participating in a settlement with the relevant authorities or
other parties believed by the company to be responsible for clean-up
obligations and further believes its responsibility to be of a minor nature.
Management believes that the ultimate outcome will not have a material effect
on the company's financial condition or results of operations.
At December 31, 1999, the company had reserves of $1.7 million to cover future
environmental related costs. Such reserves give no effect to possible
recoveries from insurers or other potentially responsible parties nor do they
reflect any discount for the several years over which investigation or
remediation amounts may be paid out.
Patents, Trademarks and Licenses
The company is a minority (17%) stockholder in a consortium of industrial
partners called Thixomat, Inc. Thixomat, Inc. was formed in 1989 to promote
and commercialize the ThixomoldingTM technology, a specialized molding
process.
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ITEM 2. PROPERTIES
The principal plants of the company, the approximate square footage and
whether the plants are leased or owned are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Location Square Feet Leased or Owned
Melrose Park, IL.............. 200,000 Owned
Houston, TX................... 200,000 Owned
Racine, WI.................... 193,500 Owned
Solon, OH..................... 96,300 Owned
Lansing, MI................... 83,800 Owned
Paramount, CA................. 80,000 Leased
Gardena, CA................... 60,000 Leased
Dallas, TX.................... 60,000 Owned
Rancho Dominguez, CA.......... 55,000 Leased
New Berlin, WI................ 50,000 Owned
St. Louis, MO................. 50,000 Owned
Worcester, MA................. 45,000 Owned
Huntington Park, CA........... 40,000 Owned
Minneapolis, MN............... 40,000 Leased
Sturtevant, WI................ 40,000 Owned
Westminster, CA............... 38,400 Owned
Berlin, CT.................... 36,700 Owned
Santa Fe Springs, CA.......... 36,000 Leased
Waterbury, CT................. 32,600 Leased
Los Angeles, CA............... 31,000 Owned
Tulsa, OK..................... 30,300 Owned
Wichita, KS................... 30,000 Leased
Rochester, NY................. 17,000 Leased
Monterrey, Mexico............. 2,900 Leased
</TABLE>
The following SP 2000 operations are located in customer facilities at the
locations indicated (in each case with no substantial occupancy charge):
<TABLE>
<CAPTION>
<S> <C>
Location Square Feet
Walnut, CA.................... 20,000
Reading, PA................... 15,000
Lexington, TN................. 10,000
Bedford Heights, OH........... 9,600
Clintonville, WI.............. 5,000
Downers Grove, IL............. 4,500
</TABLE>
The company's corporate office consists of an 8,900-square-foot leased space
located in Rosemont, Illinois. Four of the company's leases will expire
within the next three years, three of which are renewable at the option of the
company.
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The company's facilities are suitable for their respective uses and are, in
general, adequate for the company's current needs. Those providing products
in markets where economic activity is strong at any particular time operate at
relatively high levels of plant utilization. The company believes that it has
sufficient capacity at its current facilities to absorb additional workloads
at reasonably anticipated levels.
ITEM 3. LEGAL PROCEEDINGS
The company was the subject of an investigation by the government and a qui-
tam (whistle-blower) lawsuit regarding alleged violations of the Federal False
Claims Act and wrongful termination. The company learned of the lawsuit in
May 1998. The activities that were the subject of the investigation and
lawsuit related to only one plant, and in the fourth quarter 1998, the company
established reserves for the potential settlement of this claim. In the first
quarter of 1999, the company reached a settlement in principle with the
government and the plaintiff on terms consistent with the reserves previously
established. The company completed the settlement in the second quarter of
1999.
The company is a party to various other lawsuits and claims arising in the
ordinary course of business. See also page 8, section entitled "Environmental
Regulation." After review and consultation with legal counsel, the company
believes that any liability resulting from these matters would not materially
affect its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Incorporated by reference to page 25 of the Annual Report, section entitled
"Stock Market Information" and to page 18 of the Annual Report - Note 5 to the
Consolidated Financial Statements. As of March 10, 2000, the company had 422
stockholders of record.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference to page 23 of the Annual Report, section entitled
"Six-Year Financial Review."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated by reference to pages 10-11 of the Annual Report, section
entitled "Management's Discussion and Analysis."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference to page 11 of the Annual Report, section entitled
"Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference to pages 12-22 of the Annual Report, sections
entitled "Consolidated Financial Statements" and "Notes to Consolidated
Financial Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Identification of Directors - Incorporated by reference to pages 1-3 of
the Proxy Statement, section entitled "The Election of Directors."
<TABLE>
<CAPTION>
(b) Identification of Executive Officers
<S> <C> <C>
Name Age Position
Leo G. Thompson 59 President (since October 1987) and Chief
Executive Officer (since January 1991).
Stephen S. Penley 50 Chief Financial Officer (since January 1989);
Executive Vice President (since February 2000);
formerly Senior Vice President (July 1993 to
February 2000); Secretary (since October 1990).
Michael W. Nelson 52 Senior Group Vice President and Manager of East
and Central Operations (since March 1998);
formerly Senior Vice President and President
of Heat Treat Operations (July 1993 to
March 1998).
Paul J. McCarren 53 Group Vice President and Manager of West Coast
Operations (since March 1998); prior thereto,
various operating positions (from 1972 to
March 1998).
</TABLE>
Executive Officers of the company are elected annually by the Board of
Directors of the company in April.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to pages 3-6 of the Proxy Statement, section
entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to pages 8-9 of the Proxy Statement, section
entitled "Stock Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to page 2 of the Proxy Statement, section entitled
"The Election of Directors", and to page 5, section entitled "Executive
Compensation - Compensation Committee Interlocks and Insider Participation."
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PART IV
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<S> <C>
(a)(1) Consolidated Financial Statements Page or Reference
Consolidated Statements of Earnings for
the years ended December 31, 1999, 1998
and 1997.................................. Annual Report, p. 12
Consolidated Balance Sheets as of December
31, 1999 and 1998......................... Annual Report, p. 13
Consolidated Statements of Cash Flows for
the years ended December 31, 1999, 1998
and 1997.................................. Annual Report, p. 14
Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1999, 1998 and 1997....................... Annual Report, p. 15
Notes to Consolidated Financial Statements Annual Report, pp. 16-22
Report of Independent Public Accountants.. Annual Report, p. 22
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying
Accounts and Reserves..................... 14
Report of Independent Public Accountants
on Schedules.............................. 15
</TABLE>
Schedules other than that listed above are omitted for the reason that they
are not required or are not applicable, or because the required information is
shown in the financial statements or notes thereto.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed by the company during the
fourth quarter of 1999.
(c) Exhibits Required by Item 601 of Regulation S-K
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index which is attached hereto at pages 17-19 and which is incorporated herein
by reference.
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LINDBERG CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Allowance for Doubtful Accounts
<S> <C> <C> <C>
1999 1998 1997
-------- -------- --------
Balance at beginning of year..... $888,000 $363,000 $325,000
Provision charged to expense
during the year............... 146,000 746,000 121,000
Reserves assumed in acquisitions. 37,000 137,000 65,000
Write-offs during the year,
net of recoveries............. (417,000) (358,000) (148,000)
-------- -------- --------
Balance at end of year........... $654,000 $888,000 $363,000
======== ======== ========
</TABLE>
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REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
ON SCHEDULES
To the Stockholders of
Lindberg Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in Lindberg Corporation's annual
report to stockholders incorporated by reference in this Form 10-K and have
issued our report thereon dated January 21, 2000. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the index is the responsibility of the company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 21, 2000
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 23, 2000.
LINDBERG CORPORATION
By /s/ Stephen S. Penley
----------------------
Stephen S. Penley
Executive Vice President and Chief Financial Officer;
Principal Financial and Accounting Officer
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 company
in the capacities indicated on March 23, 2000.
/s/ Leo G. Thompson
- --------------------
Leo G. Thompson
President and Chief Executive Officer and Director
/s/ Stephen S. Penley
- ----------------------
Stephen S. Penley
Executive Vice President and Chief Financial Officer;
Principal Financial and Accounting Officer
/s/ George H. Bodeen
- ---------------------
George H. Bodeen
Director
/s/ Dr. Raymond F. Decker
- --------------------------
Dr. Raymond F. Decker
Director
/s/ Raymond A. Jean
- --------------------
Raymond A. Jean
Director
/s/ W. Robert Reum
- -------------------
W. Robert Reum
Director
/s/ J. Thomas Schanck
- ----------------------
J. Thomas Schanck
Director
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LINDBERG CORPORATION
Annual Report on Form 10-K
for the Year Ended December 31, 1999
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit No.* Description
2.1 Purchase Agreement dated October 1, 1997 among Aerospace
Aluminum Heat Treating Company, Alta Canada Corporation,
California Manufacturing Enterprises, Inc. and Lindberg
Corporation (incorporated by reference to Exhibit 2.1 of
the company's Current Report on Form 8-K dated October
15, 1997).
2.2 Purchase Agreement dated January 16, 1998 among the
stockholders of Industrial Steel Treating Co. and
Lindberg Corporation (incorporated by reference to
Exhibit 2 of the company's Current Report on Form 8-K
dated January 30, 1998).
2.3 Purchase Agreement dated April 16, 1998 among the
stockholders of Houston Heat Treating Company and Lindberg
Corporation (incorporated by reference to Exhibit 2.1 of
the company's Current Report on Form 8-K dated April
23, 1998).
3.1 Composite Certificate of Incorporation, as amended through
April 24, 1998 (incorporated by reference to Exhibit 3.1
of the company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).
3.2 By-laws, as amended through October 22, 1999 (incorporated
by reference to Exhibit 3 of the company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999).
4.0 Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.0 of the company's Registration
Statement on Form S-2, Registration No.333-57313).
4.1 Amended and Restated Credit Agreement dated as of April
28, 1994 between the company, various financial
institutions and Continental Bank N.A. (now Bank of
America National Trust and Savings Association), as agent
(incorporated by reference to Exhibit 4.2 of the company's
Current Report on Form 8-K dated April 29, 1994).
4.2 First Amendment to Amended and Restated Credit Agreement
dated as of November 2, 1995 (incorporated by reference to
Exhibit 4.2 of the company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995).
4.3 Second Amendment to Amended and Restated Credit Agreement
dated as of January 31, 1996 (incorporated by reference to
Exhibit 4.3 of the company's Annual Report on Form 10-K
for the year ended December 31, 1995).
- -------------------
* Filed with this report unless otherwise indicated.
17
<PAGE> 18
Exhibit No.* Description
4.4 Third Amendment to Amended and Restated Credit Agreement
dated as of September 29, 1997 (incorporated by reference
to Exhibit 4.1 to the company's Current Report on Form 8-K
dated October 15, 1997).
4.5 Fourth Amendment to Amended and Restated Credit Agreement
dated as of February 10, 1998 (incorporated by reference
to Exhibit 4.5 to the company's Annual Report on Form 10-K
for the year ended December 31, 1997).
4.6 Fifth Amendment to Amended and Restated Credit Agreement
dated as of February 5, 1999 (incorporated by reference to
Exhibit 4.6 to the company's Annual Report on Form 10-K
for the year ended December 31, 1998).
4.7 Note Agreement dated as of October 15, 1995 (incorporated
by reference to Exhibit 4.3 to the company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1995).
4.8 Rights Agreement dated November 21, 1996, between the
company and Harris Trust and Savings Bank, as Rights Agent
(incorporated by reference to Exhibit 99.1 of the
company's Report on Form 8-A dated December 6, 1996).
10.1 Description of Bonus Program (incorporated by reference to
page 6 of the company's Definitive Proxy Statement on
Schedule 14A filed with the Commission in connection with
the company's 1996 annual meeting of stockholders).
10.2 Consulting Agreement between the company and George H.
Bodeen dated October 25, 1990 (incorporated by reference
to Exhibit 10.5 of the company's Annual Report on Form
10-K for the year ended December 31, 1990).**
10.3 Amended and Restated 1991 Stock Option Plan for Key
Employees (incorporated by reference to Appendix A of the
company's Definitive Proxy Statement on Schedule 14A filed
with the Commission in connection with the company's 1995
annual meeting of stockholders).**
10.4 Amended and Restated 1991 Stock Option Plan for Directors
(incorporated by reference to Appendix A of the company's
Definitive Proxy Statement on Schedule 14A filed with the
Commission in connection with the company's 1997 annual
meeting of stockholders).**
10.5 Amended and Restated Supplemental Pension Plan dated July
22, 1999 (incorporated by reference to Exhibit 10.1 to
the company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).**
- -------------------
* Filed with this report unless otherwise indicated.
** Identifies management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c).
18
<PAGE> 19
Exhibit No.* Description
10.6 Employment Agreement dated July 22, 1999, between the
company and Leo G. Thompson (incorporated by reference to
Exhibit 10.2 to the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999).**
10.7 Employment Agreement dated July 22, 1999, between the
company and Stephen S. Penley (incorporated by reference
to Exhibit 10.2 to the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999).**
11 Computation of Per Share Earnings.
13 Information on Annual Report to Stockholders incorporated
herein by reference.
21 Subsidiaries of the Company.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
99.1 Statement Concerning Forward-Looking Statements.
- -------------------
* Filed with this report unless otherwise indicated.
** Identifies management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c).
</TABLE>
19
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
EARNINGS
- --------
Earnings From Continuing Operations $7,597,003 $9,537,904 $6,961,090
Loss From Discontinued Operations -- -- (6,698,240)
---------- ---------- ----------
Net Earnings $7,597,003 $9,537,904 $ 262,850
========== ========== ==========
SHARES
- ------
Weighted Average Number of
Common Shares Outstanding (See Note) 5,900,928 5,274,881 4,806,834
Additional Shares Assuming
Conversion of Stock Options 72,313 205,250 125,994
--------- --------- ---------
Weighted Average Common Shares
Outstanding and Equivalents 5,973,241 5,480,131 4,932,828
========= ========= =========
Basic Earnings Per Share:
Continuing Operations $ 1.29 $ 1.81 $ 1.45
Discontinued Operations -- -- (1.40)
------- ------- -------
Net Earnings $ 1.29 $ 1.81 $ .05
======= ======= =======
Diluted Earnings Per Share:
Continuing Operations $ 1.27 $ 1.74 $ 1.41
Discontinued Operations -- -- (1.36)
------- ------- -------
Net Earnings $ 1.27 $ 1.74 $ .05
======= ======= =======
Note: All activity during the year has been adjusted for the number of days
in the year that the shares were outstanding.
</TABLE>
<PAGE>
Management's Discussion and Analysis
OF FINANCIAL CONDITION
In 1999, the company's borrowings increased $8.6 million from $34.8 million at
December 31, 1998 to $43.4 million at December 31, 1999. The ratio of debt to
total capitalization was 42% at the close of 1999 as compared to 38% at year-end
1998.
In 1999, a significant use of funds related to the company's acquisition of
Metal-Lab of Wisconsin ("Metal-Lab"). The company completed this acquisition in
February 1999, at a final purchase price of $11.4 million, using bank
borrowings.
Capital expenditures were another significant use of funds in 1999. The
company spent $10.3 million on capital projects during 1999 as compared to
$10.1 million in 1998. The figures for both years exclude amounts related to the
purchase price of acquisitions and amounts related to discontinued operations.
The company made capital investments in 1999 primarily to accommodate new
business opportunities and, to a lesser degree, upgrade facilities and
equipment.
In January 1999, the company sold the operating assets of Arrow-Acme
Company, the last remaining of three operations comprising the discontinued
Precision Products business segment. This segment has been reported as
discontinued operations since the fourth quarter of 1997. The company received
$2.1 million in cash and $600,000 in the form of a note receivable at the time
of the sale and also retained and collected $300,000 of accounts receivable.
In December 1999, the company repurchased 264,000 shares of its common
stock for $2.2 million, using bank borrowings. This purchase was an isolated
transaction, and the company does not contemplate the acquisition of additional
shares of its common stock in the near future.
In 1999, the company made cash outlays related to environmental matters.
These outlays largely included costs for consulting/engineering and remediation
at certain company owned sites. The company believes it will make such
expenditures in the future, but that such spending will continue to have a
limited effect on its financial condition and liquidity.
During 1999, the company paid cash dividends of $.32 per share, for a total
payout of $1.9 million to stockholders. The total amount paid represented an
increase of 10% from the $1.7 million paid to stockholders in 1998.
In February 1999, the company amended its bank revolving credit facility to
increase the total borrowing capacity from $45 million to $70 million, extend
the maturity date of the agreement to December 31, 2001 and to adjust certain
loan covenants.
The company believes that its borrowing capacity and funds generated through
operations will be sufficient to meet currently foreseeable capital investment
and working capital needs both for 2000 and for the longer term.
OF RESULTS OF OPERATIONS: 1999 VERSUS 1998
Net sales in 1999 were $120.5 million, down $4.6 million, or 4%, from $125.1
million in 1998. The lower level of net sales resulted primarily from softness
in the commercial aerospace, oil-field machinery and farm equipment markets.
These markets, which represented approximately 27% of total net sales for 1999,
began weakening in the latter half of 1998 and continued on a downward trend for
much of 1999. The softness in these two markets was offset to some degree by
strength in the automobile/light truck market, which accounted for about 15% of
the company's total net sales in 1999.
The acquisition of Industrial Steel Treating Company/Fabriform Metal
Brazing (collectively "Industrial"), Houston Heat Treating ("HHT"), Merrell
Enterprises, known as Mann Aircraft Forming ("Mann") and Quality Heat-Treating
("Quality") in 1998 and Metal-Lab in 1999 accounted for $23 million of sales in
1999 as compared to $20 million in 1998. In 1999 the company's Strategic
Partnership 2000 ("SP 2000") program provided net sales of $8.7 million,
slightly above the 1998 figure of $8.4 million. Net sales excluding the
aforementioned acquisitions and the SP 2000 program decreased by 8% in 1999 as
compared to 1998.
Gross profit in 1999 was $33.9 million, down $4.7 million, or 12%, from
$38.6 million in 1998. The gross margin in 1999 was 28.1%, compared to 30.8% in
the prior year. The decrease in gross margin was primarily related to the loss
of incremental earnings on the lower net sales at a rate in excess of the prior
year's gross margin and to a shift in sales mix toward somewhat lower margin
business.
Selling and administrative expenses in 1999 were $19.1 million, compared to
$20.5 million in 1998. The decrease in the level of expenses in 1999 resulted
primarily from cost reduction efforts, a lower level of employee incentive
expense in 1999 and expense in 1998 related to the write-off of two large
accounts receivable. Selling and administrative expenses as a percentage of net
sales decreased to 15.8% in 1999 from 16.4% in 1998.
Net interest expense in 1999 was $2.2 million, compared to $2.5 million in
1998. The decrease primarily resulted from a lower effective interest rate on
the company's revolving credit borrowings. The average interest rate on
revolving credit borrowings in 1999 was 6.0% as compared to 6.6% in 1998. The
net interest amount also benefited from higher interest income earned during the
year on notes receivable related to the sales of discontinued operations in 1998
and 1999.
During 1999, the company recorded investment earnings of $118,000 related to
its 17% minority interest in Thixomat, Inc. In 1998, the company recorded
investment earnings of $444,000. The company remains uncertain as to whether and
to what extent Thixomat will pay dividends in the future.
Reflecting the above items, net earnings in 1999 were $7.6 million, down
$1.9 million, or 20%, from $9.5 million in 1998. Net earnings per diluted
share in 1999 were $1.27, down $.47, or 27%, from $1.74 in 1998.
10 Lindberg Corporation
<PAGE>
OF RESULTS OF OPERATIONS: 1998 VERSUS 1997
Net sales in 1998 were $125.1 million, up $36.3 million, or 41%, from $88.8
million in 1997. The higher level of net sales resulted primarily from the
acquisition of six heat treating operations from July 1997 through November
1998, expansion of the company's SP 2000 program during 1998 and modest growth
at existing heat treating plants. In addition, during 1998 the company's
underlying sales activity was influenced by the commercial aerospace,
automobile/light truck and oil-field machinery markets, which represented
approximately 50% of total net sales in that year. In particular, the commercial
aerospace and oil-field machinery markets, which began strong in 1998, had
softened significantly by the fourth quarter of the year.
The acquisition of Ticorm and Alumatherm Heat Treating Company in 1997 and
Industrial, HHT, Mann and Quality in 1998 accounted for 91% of the increase in
net sales for 1998 as compared to 1997. Also, in 1998 the company's SP 2000
program provided net sales of $8.4 million in comparison to $6.2 million in
1997. Finally, net sales excluding the aforementioned acquisitions and the SP
2000 program increased by 2% in 1998 from the 1997 level.
Gross profit in 1998 was $38.6 million, up $13.5 million, or 54%, from $25.1
million in 1997. The gross margin in 1998 was 30.8%, compared to 28.3% in the
prior year. The increase in gross margin resulted primarily from the addition of
acquisitions discussed above as most of the acquired businesses had gross
margins higher than the company's margin at the time of the acquisition.
Selling and administrative expenses in 1998 were $20.5 million, compared to
$13.2 million in 1997. The increase in the level of expenses in 1998 over the
prior year resulted primarily from additional expenses of approximately $4.0
million related to the acquired facilities discussed earlier. The remaining
increase in 1998 related mainly to additional salaries and incentives paid
during the year and to the write-off of two large trade accounts receivable.
Selling and administrative expenses as a percentage of net sales increased to
16.4% in 1998 from 14.9% in 1997 due to the aforementioned expense increases.
During 1998, the company carried no investments under the equity method of
accounting, and no equity earnings were recorded. In 1997, the company recorded
such earnings from its 50% interest in its Alumatherm joint venture. In the
first nine months of 1997 prior to the acquisition of its partner's interest,
the company recorded equity earnings of $1.4 million.
Net interest expense in 1998 was $2.5 million, compared to $1.7 million in
1997. The increase primarily resulted from higher average borrowing levels
during the year. The effect of acquisitions in the latter half of 1997 and in
1998, offset to a degree by the proceeds from a common stock offering and sales
of discontinued operations in 1998, led to these higher borrowing levels. The
average interest rate on revolving credit borrowings in 1998 was 6.6%. This was
the same rate as experienced during 1997.
In the fourth quarter of 1998, the company recorded investment earnings of
$444,000 related to a dividend from its 17% minority interest in Thixomat, Inc.
This was the first such dividend declared by Thixomat.
Reflecting the above items, net earnings from continuing operations in 1998
were $9.5 million, up $2.6 million, or 37%, from $7.0 million in 1997. Net
earnings per diluted share from continuing operations in 1998 were $1.74, up
$.33, or 23%, from $1.41 in 1997.
In the fourth quarter of 1997, the company established a plan to divest its
Precision Products business segment. Accordingly, this segment was accounted for
as discontinued operations at that time. During 1998, discontinued operations
had no effect on the company's results of operations as all activity was charged
to a reserve established in 1997. For 1997, an after-tax loss of $754,000 from
operations and a $5.9 million after-tax charge related to the anticipated loss
on the eventual sale of the segment's operations were recorded.
Net earnings for 1998 were $9.5 million, or $1.74 per diluted share, as
compared to $263,000, or $.05 per diluted share, in 1997.
INFLATION
Although the company cannot accurately determine the exact effect of inflation
on its past or future operations, it does not believe inflation has had a
material effect during the past three years on sales or the financial results of
its operations.
EFFECTS OF YEAR 2000
The company maintains information technology systems at each operating facility
and at its corporate office and utilizes embedded technology such as
microprocessor-based process controllers in its heat treating operations.
Certain of these technologies are provided by third party vendors, which are
responsible for upgrades and maintenance. Company personnel maintain the others.
Subsequent to January 1, 2000, the company experienced no significant disruption
of its operations related to such information technology systems and embedded
technology.
In addition, related to the Year 2000 issue, the company experienced no
disruption to its operations related to suppliers nor did it experience
disruption of its normal business activities with customers.
MARKET RISK
The company is subject to certain fluctuations in interest rates related to
market sensitive instruments. In particular, outstanding bank debt under the
company's revolving credit facility is carried at variable interest rates
related primarily to the Eurodollar interest rate and to the U.S. prime rate.
In order to reduce its interest costs, the company maintains most of its
outstanding bank debt at the Eurodollar rate plus a rate spread. As the level
of bank debt increases relative to its total outstanding debt, the company
investigates interest rate alternatives such as fixed rate notes or term loans.
The company does not use derivative financial instruments to manage its
interest rate exposure. Based on the year-end 1999 debt level, the company's
interest costs in 2000 would increase by $370,000 assuming a 1% increase in its
average effective interest rate. This would reduce net earnings by about
$222,000.
Lindberg Corporation 11
<PAGE>
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $120,482,625 $125,069,317 $ 88,783,577
Cost of Sales (86,618,120) (86,494,542) (63,691,330)
- -----------------------------------------------------------------------------
Gross Profit 33,864,505 38,574,775 25,092,247
Selling and Administrative Expenses (19,067,393) (20,477,693) (13,211,421)
Equity in Earnings of Partnership -- -- 1,436,328
- -----------------------------------------------------------------------------
Operating Earnings 14,797,112 18,097,082 13,317,154
Interest Expense (Net) (2,229,348) (2,510,061) (1,681,103)
Investment Earnings 118,480 444,300 --
- -----------------------------------------------------------------------------
Earnings From Continuing Operations
Before Income Taxes 12,686,244 16,031,321 11,636,051
Provision for Income Taxes (5,089,241) (6,493,417) (4,674,961)
- -----------------------------------------------------------------------------
Earnings From Continuing Operations 7,597,003 9,537,904 6,961,090
- -----------------------------------------------------------------------------
Discontinued Operations,
Net of Income Taxes:
Loss From Operations -- -- (754,240)
Estimated Loss on Sale -- -- (5,944,000)
- -----------------------------------------------------------------------------
Loss From Discontinued Operations -- -- (6,698,240)
- -----------------------------------------------------------------------------
NET EARNINGS $ 7,597,003 $ 9,537,904 $ 262,850
- -----------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Continuing Operations $ 1.29 $ 1.81 $ 1.45
Discontinued Operations -- -- (1.40)
- -----------------------------------------------------------------------------
NET EARNINGS $ 1.29 $ 1.81 $ .05
- -----------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 5,900,928 5,274,881 4,806,834
- -----------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Continuing Operations $ 1.27 $ 1.74 $ 1.41
Discontinued Operations -- -- (1.36)
- -----------------------------------------------------------------------------
NET EARNINGS $ 1.27 $ 1.74 $ .05
- -----------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING
AND EQUIVALENTS 5,973,241 5,480,131 4,932,828
- -----------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
12 Lindberg Corporation
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 272,649 $ 157,391
Receivables (Less Allowance for
Doubtful Accounts of $654,000
in 1999 and $888,000 in 1998) 17,492,480 19,281,571
Current Maturities on Notes Receivable 1,044,824 --
Prepaid and Refundable Income Taxes 2,868,985 1,067,030
Prepaid Expenses 595,060 643,766
Net Assets of Discontinued Operations -- 2,142,719
Other Current Assets 493,744 601,331
- -----------------------------------------------------------------------------
Total Current Assets 22,767,742 23,893,808
PROPERTY AND EQUIPMENT:
Land 3,213,246 3,033,246
Buildings and Improvements 27,327,699 25,341,037
Machinery and Equipment 98,649,046 94,013,844
Construction in Progress 4,865,328 3,530,398
- -----------------------------------------------------------------------------
Total Property and Equipment 134,055,319 125,918,525
Less-Accumulated Depreciation (62,693,233) (59,181,581)
- -----------------------------------------------------------------------------
Net Property and Equipment 71,362,086 66,736,944
Goodwill (Less Accumulated Amortization) 32,717,675 19,922,274
Long-Term Notes Receivable 2,761,413 3,250,000
Other Non-Current Assets 2,402,162 1,686,776
- -----------------------------------------------------------------------------
TOTAL ASSETS $132,011,078 $115,489,802
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current Maturities on Long-Term Debt $ 46,695 $ 77,271
Notes Payable 2,000,000 2,000,000
Accounts Payable 2,760,142 4,187,398
Accrued Expenses:
Salaries and Wages 1,920,852 3,109,328
Taxes, other than Income 938,099 866,744
Employee Insurance and Benefits 1,853,426 1,335,370
Utilities 941,477 936,013
Other 1,394,392 2,759,315
- -----------------------------------------------------------------------------
Total Current Liabilities 11,855,083 15,271,439
NON-CURRENT LIABILITIES:
Deferred Income Taxes 14,058,612 7,055,718
Long-Term Debt (Less Current Maturities) 41,337,949 32,683,630
Accrued Pension 3,264,415 2,220,253
Other Non-Current Liabilities 1,754,467 2,465,598
- -----------------------------------------------------------------------------
Total Non-Current Liabilities 60,415,443 44,425,199
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.01:
Authorized 1,000,000 shares. No shares issued. -- --
Common Stock, par value $0.01:
Authorized 25,000,000 shares.
Issued 6,673,397 shares. 66,734 66,734
Additional Paid-In Capital 31,326,150 31,326,023
Retained Earnings 34,906,679 29,200,569
Treasury Shares (1,012,336 in 1999 and 790,661
in 1998), at Cost (6,440,164) (4,529,767)
Cumulative Foreign Translation Adjustment (25,855) (93,781)
Underfunded Pension Liability Adjustment (92,992) (176,614)
- -----------------------------------------------------------------------------
Total Stockholders' Equity 59,740,552 55,793,164
- -----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $132,011,078 $115,489,802
- -----------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
Lindberg Corporation 13
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 7,597,003 $ 9,537,904 $ 262,850
Adjustments to Reconcile Net
Earnings to Net Cash Provided by
Operating Activities:
Depreciation 7,252,771 6,094,212 4,084,315
Equity Earnings, Net of
Cash Distributions -- -- (235,128)
Goodwill Amortization 1,077,436 603,522 119,347
Increase in Deferred Taxes 1,487,100 906,717 101,497
Non-Cash Portion of
Discontinued Operations
Reserve, Net of
Tax Benefit -- -- 5,944,000
Investment Earnings 444,300 (444,300) --
Change in Assets and
Liabilities:
Receivables 1,922,653 195,155 (2,337,872)
Prepaid and Refundable
Income Taxes (1,059,838) 208,893 310,846
Prepaid Expenses and
Other Current Assets (8,687) (289,659) (220,486)
Accounts Payable (1,427,256) 482,191 18,311
Accrued Expenses (2,128,095) 1,548,360 356,720
Other (306,708) 522,069 1,605,242
- -----------------------------------------------------------------------------
Total Adjustments to Reconcile
Net Earnings to Net Cash
Provided by Operating
Activities 7,253,676 9,827,160 9,746,792
- -----------------------------------------------------------------------------
Net Cash Provided by
Operating Activities 14,850,679 19,365,064 10,009,642
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (10,262,640) (10,051,114) (7,336,401)
Acquisitions, Net of Cash Acquired (11,411,312) (32,724,040) (16,555,267)
Sale of Discontinued Operations 2,358,601 10,403,974 1,102,600
- -----------------------------------------------------------------------------
Net Cash Used in Investing
Activities (19,315,351) (32,371,180) (22,789,068)
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings Under Revolving
Credit Agreement 10,400,000 8,800,000 7,100,000
Payments on Senior Notes (2,000,000) (2,000,000) --
Issuance of Notes Payable 303,400 -- 8,220,000
Repayment of Notes Payable (2,387) (8,220,000) (901,437)
Other Debt (77,270) 15,061 145,840
Issuance of Common Stock -- 16,000,000 --
Repurchase of Common Stock (2,152,920) -- --
Dividends Paid (1,890,893) (1,714,824) (1,537,935)
- -----------------------------------------------------------------------------
Net Cash Provided by
Financing Activities 4,579,930 12,880,237 13,026,468
- -----------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 115,258 (125,879) 247,042
Cash at Beginning of Year 157,391 283,270 36,228
- -----------------------------------------------------------------------------
Cash at End of Year $ 272,649 $ 157,391 $ 283,270
- -----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 2,834,028 $ 3,083,627 $ 1,679,402
Income Taxes Paid 4,737,131 5,470,439 3,875,117
- -----------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
14 Lindberg Corporation
<PAGE>
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------------------------
Cumulative Underfunded
Additional Foreign Pension
Common Paid-In Retained Treasury Translation Liability
Stock Capital Earnings Shares Adjustment Adjustment Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 14,183,493 $ 1,493,406 $ 22,652,574 $ (5,054,651) $ -- $ (227,920) $ 33,046,902
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Earnings 262,850 262,850
Pension Adjustment 73,385 73,385
------------
Comprehensive Income 336,235
Dividends Paid (1,537,935) (1,537,935)
Exercise of Stock Options 32,786 213,430 246,216
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 14,183,493 1,526,192 21,377,489 (4,841,221) -- (154,535) 32,091,418
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Earnings 9,537,904 9,537,904
Foreign Translation Adjustment (93,781) (93,781)
Pension Adjustment (22,079) (22,079)
------------
Comprehensive Income 9,422,044
Change in Common Stock Par Value (14,126,759) 14,126,759 --
Issuance of Common Stock 10,000 15,634,257 15,644,257
Dividends Paid (1,714,824) (1,714,824)
Exercise of Stock Options 38,815 311,454 350,269
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 66,734 31,326,023 29,200,569 (4,529,767) (93,781) (176,614) 55,793,164
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Earnings 7,597,003 7,597,003
Foreign Translation Adjustment 67,926 67,926
Pension Adjustment 83,622 83,622
------------
Comprehensive Income 7,748,551
Repurchase of Common Stock (2,152,920) (2,152,920)
Dividends Paid (1,890,893) (1,890,893)
Exercise of Stock Options 127 242,523 242,650
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 66,734 $ 31,326,150 $ 34,906,679 $ (6,440,164) $ (25,855) $ (92,992) $ 59,740,552
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Lindberg Corporation 15
<PAGE>
Notes to Consolidated Financial Statements For the Years Ended
December 31, 1999, 1998 and 1997
NOTE 1. ACCOUNTING POLICIES
A. NATURE OF OPERATIONS The company provides commercial heat treating
throughout the U.S. and Mexico to metal-working industries.
B. PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements
include the accounts of Lindberg Corporation and its subsidiaries. Significant
intercompany balances and transactions have been eliminated.
The company's 50% share in the Alumatherm Heat Treating Company
("Alumatherm") partnership was carried on the equity basis of accounting from
the partnership formation on July 1, 1994, until the acquisition of the
partner's interest in that entity on October 1, 1997 (see Note 2).
The company's investment in Thixomat, Inc. ("Thixomat") is accounted for on
the cost basis. Income from that investment is recognized when dividends are
declared (see Note 9).
C. REVENUE RECOGNITION The company recognizes revenues from sales upon
shipment to its customers.
D. PROPERTY AND DEPRECIATION Property and equipment are stated at cost.
Depreciation is provided on the straight-line method for financial statement
purposes and on accelerated methods for income tax purposes. Maintenance costs
are charged to expense as incurred. Expenditures which improve efficiency or
capacity or extend the useful life of assets are capitalized. Interest cost
incurred during the period of construction of plant and equipment is capitalized
as part of the cost of such plant and equipment.
E. GOODWILL AND AMORTIZATION Goodwill, which represents the excess of the
purchase price paid over the fair market value of the net identifiable assets
acquired, is amortized using the straight-line method over 30 years. The company
reviews the valuation and amortization periods of goodwill whenever events or
changes in circumstances warrant such a review. Accumulated goodwill
amortization was $1.8 million and $731,000 at December 31, 1999 and 1998,
respectively.
F. USE OF ESTIMATES The preparation of these financial statements, in
conformity with generally accepted accounting principles, required the use of
certain estimates by management determining the company's assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
G. FOREIGN EXCHANGE Assets and liabilities of the company's Mexican
operation are translated using the exchange rate in effect at the balance sheet
date and revenues and expenses are translated monthly at the average rate for
the period. Exchange gains or losses on translation of the company's net equity
investment in this subsidiary are deferred as a separate component of
stockholders' equity. Foreign exchange gains and losses on transactions during
the year are reflected in income.
H. INCOME TAXES The company's provision for income taxes represents income
taxes paid or payable for the current year adjusted for the change in deferred
taxes during the year. Deferred income taxes reflect the net tax effects of
temporary differences between the financial statement bases and the tax bases of
assets and liabilities and are adjusted for changes in tax rates and tax laws
when changes are enacted.
I. INTERNAL USE SOFTWARE Effective January 1, 1999 the company adopted
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1), which provides guidance for determining whether
computer software is for internal use and how to account for the related costs.
SOP 98-1 did not have a material effect on the Consolidated Financial
Statements.
J. SEGMENT REPORTING Effective January 1, 1998, the company adopted
SFAS 131, "Disclosure about Segments of an Enterprise and Related Information"
(SFAS 131). The company does not operate in more than one segment of business
and no customer directly accounted for more than 10% of the company's sales.
Assets and revenues related to the company's operation in Mexico accounted for
less than 1% of the company's total.
K. COMPREHENSIVE INCOME Effective January 1, 1998, the company adopted
SFAS 130, "Reporting Comprehensive Income" (SFAS 130). In accordance with the
provisions of SFAS 130, presentation of the company's comprehensive income is
included within the company's Consolidated Statements of Stockholders' Equity.
L. EARNINGS PER SHARE Effective January 1, 1997, the company adopted
SFAS 128, "Earnings per Share" (SFAS 128). The provisions of SFAS 128 require
computations of basic and diluted earnings per share. Diluted earnings per share
reflects the potential dilution that could occur if outstanding stock options
were converted into common stock. Basic earnings per share excludes dilution
effects. Earnings per share for all years have been computed in accordance with
SFAS 128.
M. RECLASSIFICATIONS Certain prior period amounts have been reclassified to
be consistent with the 1999 presentation.
NOTE 2. ACQUISITIONS
1999 On February 17, 1999, the company acquired all of the outstanding shares
of Metal-Lab of Wisconsin, Inc. ("Metal-Lab"), located in Sturtevant, Wisconsin,
for $11.1 million of cash and $300,000 of a note payable. Metal-Lab primarily
serves the tool and die industry.
1998 On January 16, 1998, the company acquired all of the outstanding shares of
both Industrial Steel Treating Co. and Fabriform Metal Brazing, Inc.
(collectively "Industrial"), related heat treating companies in the Los Angeles
area which primarily serve the aerospace industry, for $10.6 million. The
purchase was effective as of January 1, 1998. On April 16, 1998, the company
acquired all of the outstanding shares of Houston Heat Treating Company ("HHT")
for $10.7 million. HHT primarily serves the oil-field machinery industry. On
September 30, 1998, the company acquired all of the outstanding shares of
Merrell Enterprises, Inc. (d/b/a Mann Aircraft Forming) of Gardena, California,
a metal stretching and forming business, for $2.9 million. On November 12, 1998,
the company acquired all of the outstanding shares of Quality Heat-Treat, Inc.
("Quality") and the assets of certain related companies of Quality for $8.5
million. Quality, located in Dallas, primarily serves the heavy
truck/construction equipment and oil-field machinery industries.
16 Lindberg Corporation
<PAGE>
1997 On July 31, 1997, the company acquired all of the outstanding shares of
Ticorm, Inc. for $1.9 million of cash and $1.9 million of notes payable. On
October 1, 1997, the company acquired the remaining 50% share of Alumatherm from
its partner for $6.5 million of cash and $6.3 million of notes payable. Both of
these acquired businesses are heat treating companies which primarily serve the
aerospace industry in the Los Angeles area.
Prior to the purchase of Alumatherm, the company reported Alumatherm under
the equity method of accounting as an unconsolidated partnership. Accordingly,
the Consolidated Statement of Earnings for the year ended December 31, 1997
includes its equity in Alumatherm's earnings during the period in which it held
its partnership interest.
Cash payments made as part of each purchase were funded with additional
borrowings under the company's revolving credit agreement. All of the
acquisitions were accounted for using the purchase method; accordingly, the
results of operations have been included in the consolidated totals of the
company since the dates of their respective acquisitions. The cost of the
acquisitions has been allocated to the assets and liabilities based on their
estimated fair market value. With the exception of HHT, Industrial and
Alumatherm, the acquired companies did not materially impact the consolidated
financial position or results of operations for the periods presented. The
allocation of the total cost of HHT, Industrial and Alumatherm is as follows:
(in thousands)
<TABLE>
<CAPTION>
HHT Industrial Alumatherm
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Property and Equipment $ 9,261 $ 5,740 $ 3,525
Accounts Receivable 974 1,947 1,858
Other Assets 40 638 376
Goodwill 3,638 5,852 9,967
Accounts Payable (11) (157) (273)
Other Liabilities (3,202) (3,406) (850)
- ----------------------------------------------------------------------------
$ 10,700 $ 10,614 $ 14,603(1)
(1) Includes the purchase price and elimination of the related equity
investment account.
</TABLE>
The following table presents pro forma information for the combined entities
of Lindberg Corporation, HHT and Industrial for the twelve months ended December
31, 1999 and 1998 assuming the acquisitions had taken place at the beginning of
the periods presented (in thousands, except per share data).
<TABLE>
<CAPTION>
Unaudited 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Net Sales $120,483 $127,051
Earnings from Continuing Operations 7,597 9,793
Net Earnings 7,597 9,793
Per Diluted Share:
Earnings from Continuing Operations 1.27 1.79
Net Earnings 1.27 1.79
</TABLE>
Pro forma adjustments to the Consolidated Statements of Earnings include
additional depreciation and interest charges, goodwill amortization, the
reduction of certain other expenses and income tax effects. The pro forma
information is provided for illustrative purposes only and is not necessarily
reflective of the future results of the company or results of operations that
would have actually occurred had the transactions been in effect for the periods
presented.
NOTE 3. DISCONTINUED OPERATIONS
On December 22, 1997, the Board of Directors approved a plan to sell the
company's Precision Products business segment ("Precision Products"). Precision
Products consisted of two aluminum die casting facilities (Impact Industries,
Inc. and Arrow-Acme Company) and one aluminum semi-permanent mold foundry
(Harris Metals). On April 22, 1998, the company sold certain assets of Impact
Industries, Inc; on June 11, 1998, the company sold the assets of Harris Metals;
and on January 18, 1999, it sold the assets of Arrow-Acme Company. The company
received cash and a note in each transaction. Precision Products is reported as
discontinued operations and the Consolidated Financial Statements have been
reclassified to segregate the net assets and operating results of the business.
The estimated loss recorded during 1997 for the sale of Precision Products was
$6.7 million, which included a reduction in asset values of $5.8 million and a
provision for anticipated closing costs and operating losses until disposal of
$900,000. The loss was reported net of an income tax benefit of $800,000 for an
after-tax loss of $5.9 million.
The loss on the sale of Precision Products was based on estimates of the
proceeds expected to be realized on the sale of the operations. The amounts the
company ultimately realized did not differ significantly from the amounts
assumed in arriving at the loss on disposal of the discontinued operations.
Summary operating results of the discontinued operations for 1999, 1998 and 1997
are as follows: (in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 268 $ 16,669 $ 34,567
Costs and Expenses 189 17,016 35,835
- ----------------------------------------------------------------------------
Earnings (Loss) Before Taxes 79 (347) (1,268)
(Provision) Benefit for Income Taxes (32) 141 514
- ----------------------------------------------------------------------------
Net Income (Loss) $ 47 $ (206) $ (754)
</TABLE>
Lindberg Corporation 17
<PAGE>
Notes to Consolidated Financial Statements
NOTE 4. INCOME TAXES
The major components of the provision for income taxes for 1999, 1998 and 1997
are as follows: (in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal $ 3,644 $ 4,816 $ 3,448
State 638 1,235 800
Foreign -- -- 107
- ----------------------------------------------------------------------------
Currently Payable 4,282 6,051 4,355
Federal 691 371 269
State 116 71 51
- ----------------------------------------------------------------------------
Deferred 807 442 320
- ----------------------------------------------------------------------------
$ 5,089 $ 6,493 $ 4,675
</TABLE>
The differences between the provision for income taxes at the statutory
rate and that shown in the Consolidated Statements of Earnings are summarized as
follows: (in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated Pretax Earnings
at Statutory Rate $ 4,340 $ 5,542 $ 3,973
State Income Taxes,
Net of Federal Tax Benefit 469 846 614
Other 280 105 88
- ----------------------------------------------------------------------------
$ 5,089 $ 6,493 $ 4,675
</TABLE>
Significant components of the company's deferred tax liabilities and assets
at December 31, 1999 and 1998 are as follows: (in thousands)
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Book/Tax Basis Differences $(12,887) $ (7,451)
Other Liabilities (2,652) (809)
- ----------------------------------------------------------------------------
Total Deferred Tax Liabilities (15,539) (8,260)
- ----------------------------------------------------------------------------
Deferred Tax Assets:
Reserves Not Deducted for Tax 1,500 869
Employee Benefit Provisions in
Excess of Cash Payments 1,887 1,308
Other Assets 138 14
- ----------------------------------------------------------------------------
Total Deferred Tax Assets 3,525 2,191
- ----------------------------------------------------------------------------
Net Deferred Tax Liability (12,014) (6,069)
- ----------------------------------------------------------------------------
Included in Consolidated Balance Sheets in:
Prepaid and Refundable Income Taxes 2,045 987
Deferred Income Taxes (14,059) (7,056)
- ----------------------------------------------------------------------------
$(12,014) $ (6,069)
</TABLE>
NOTE 5. DEBT
Long-term debt consists of the following: (in thousands)
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit $ 37,000 $ 26,600
Senior Notes 6,000 8,000
Notes Payable 301 56
Capital Leases 84 105
- ----------------------------------------------------------------------------
43,385 34,761
Less-Current Maturities (2,047) (2,077)
- ----------------------------------------------------------------------------
$ 41,338 $ 32,684
</TABLE>
As of December 31, 1999, the company had in place an amended unsecured
revolving credit agreement with two banks providing a line of credit of $70
million. The agreement requires no prepayments and comes due on December 31,
2001.
The company may choose from two interest rate alternatives - (i) the bank's
reference rate (prime rate) and (ii) a Eurodollar loan rate plus an applicable
margin based on the company's ratio of funded debt to earnings before interest,
taxes, depreciation and amortization. The effective interest rate for the
agreement was 6.0% and 6.6% during 1999 and 1998, respectively; the year-end
rates were 7.1% and 6.3% for 1999 and 1998, respectively.
The company also has outstanding senior notes which bear interest at 7.16%
annually and mature in November 2002.
The revolving credit and senior note agreements contain various covenants
which, among others, require the company to meet certain financial ratios and
include restrictions on dividend payments and the incurrence of additional
indebtedness. At December 31, 1999, the company had approximately $23.7 million
available for dividend payments.
The company also has a second bank agreement which provides for the issuance
of letters of credit, up to a maximum of $5,000,000. At December 31, 1999, a
letter of credit totaling $4,250,000 was issued in accordance with an insurance
agreement.
Annual maturities of long-term debt, excluding the revolving credit
agreement, for the five years following December 31, 1999 are $2,047,000,
$2,050,000, $2,054,000, $32,000 and $29,000, respectively.
18 Lindberg Corporation
<PAGE>
NOTE 6. LEASES
The company has a number of lease agreements related to the rental of production
and administrative facilities and equipment. These are of varying terms and
extend as far as the year 2010. The company capitalizes all leases which qualify
as capital leases.
The following is a schedule of estimated future minimum rental payments
required under leases that have initial or remaining noncancelable terms in
excess of one year as of December 31, 1999: (in thousands)
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
- ----------------------------------------------------------------------------
<S> <C> <C>
2000 $ 1,986 $ 31
2001 1,711 31
2002 1,500 31
2003 1,176 4
2004 1,090 --
Thereafter 1,611 --
- ----------------------------------------------------------------------------
Total Minimum Payment Required $ 9,074 97
Less Imputed Interest (13)
--------
Present Value of Minimum Lease Payments $ 84
</TABLE>
The total rent expense for 1999, 1998 and 1997 was $2,668,000, $2,466,000
and $1,765,000, respectively.
NOTE 7. EMPLOYEE BENEFITS
The company has various defined benefit pension plans covering certain of its
employees.
Effective January 1, 1998, the company adopted SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132). The
provisions of SFAS 132 change the required disclosures for net pension expense,
the reconciliations of the projected benefit obligation and the fair value of
plan assets, and the funded status of pension plans. The pension expense related
to these plans included amortization of past service cost over 30 years. The
standards utilized by the company to fund the pension plans satisfy the minimum
funding requirements under the provisions of ERISA.
Net pension expense for 1999, 1998 and 1997 included the following
components: (in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 761 $ 675 $ 727
Interest Cost 1,420 1,245 1,226
Expected Return on Plan Assets (1,667) (1,596) (1,494)
Amortization of:
Unrecognized Net
(Gain) Loss 45 (3) (13)
Unrecognized
Prior Service Cost 97 45 48
Unrecognized Net (Asset)
Obligation (134) (147) (103)
- ----------------------------------------------------------------------------
$ 522 $ 219 $ 391
</TABLE>
The following tables provide a reconciliation of the changes in the
projected benefit obligation and fair value of plan assets during the twelve
months ending December 31, 1999 and 1998 and a statement of the funded status as
of December 31, 1999 and 1998: (in thousands)
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
Accumulated Benefit Obligation,
December 31 $ 16,085 $ 15,137
- ----------------------------------------------------------------------------
Reconciliation of Projected
Benefit Obligation:
Projected Benefit Obligation, January 1 $ 19,327 $ 17,756
Service Cost 761 675
Interest Cost 1,420 1,245
Plan Amendments 1,480 --
Actuarial (Gain) Loss (388) 738
Benefits Paid (1,170) (1,087)
Divestiture (528) --
- ----------------------------------------------------------------------------
Projected Benefit Obligation, December 31 $ 20,902 $ 19,327
Reconciliation of Fair Value of Plan Assets:
Plan Assets at Fair Value, January 1 $ 21,746 $ 21,179
Actual Return on Plan Assets 2,250 1,413
Company Contributions 218 241
Benefits Paid (1,170) (1,087)
Divestiture (579) --
- ----------------------------------------------------------------------------
Plan Assets at Fair Value, December 31 $ 22,465 $ 21,746
Funded Status:
Funded Status of the Plan, December 31 $ 1,563 $ 2,419
Unrecognized Net (Gain) Loss (4,108) (3,078)
Unrecognized Prior Service Cost 1,636 341
Unrecognized Net (Asset) Obligation (572) (700)
- ----------------------------------------------------------------------------
Net Amount Recognized $ (1,481) $ (1,018)
</TABLE>
The following table provides the amounts recognized in the Consolidated
Balance Sheets as of December 31, 1999 and 1998: (in thousands)
<TABLE>
<S> <C> <C>
Accrued Benefit Liability $ (2,865) $ (1,532)
Intangible Asset 1,229 220
Accumulated Comprehensive
Income Adjustment 155 294
- ----------------------------------------------------------------------------
Net Amount Recognized $ (1,481) $ (1,018)
</TABLE>
Weighted Average Assumptions:
Discount Rate Used in Determining
the Projected Benefit Obligation 7.5% 7.0%
Expected Long-Term Rate of
Return on Plan Assets 9.0% 9.0%
Rate of Increase in Future
Compensation Levels 5.0% 5.0%
Lindberg Corporation 19
<PAGE>
Notes to Consolidated Financial Statements
The accumulated benefit obligation (ABO) and fair value of plan assets for
pension plans with ABOs in excess of plan assets were $2.7 million and $451,000,
respectively, as of December 31, 1999, and $1.6 million and $429,000,
respectively, as of December 31, 1998.
The company also maintains two defined contribution plans. The company
matches 50% of contributions up to 4% of compensation for both plans.
Additionally, the company also contributes one percent of each employee's
compensation for all those who are not participants in a defined benefit plan,
have six months of service, and who are still participants in a 401(k) savings
plan at the end of the year. The company made distributions for contributions
and related expenses of $770,000, $739,000 and $598,000 to these defined
contribution plans in 1999, 1998 and 1997, respectively.
The company provides no postretirement benefits other than the benefit plans
listed above.
NOTE 8. STOCK OPTIONS
The company maintains a stock option plan for key employees covering a maximum
of 675,000 shares. The plan provides for the issuance, from time to time, of
options to purchase shares of the company's common stock at prices not less than
100% of the fair market value of the stock at the time an option is granted.
Under the terms of this plan, options to purchase an aggregate of 562,000 shares
have been granted. At December 31, 1999, 113,000 were available for future
grant. The following table summarizes activity under this plan during 1999, 1998
and 1997.
<TABLE>
<CAPTION>
Average Option
Shares Price per Share
- ----------------------------------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1996 318,225 $ 6.70
Options Granted 73,900 9.00
Options Exercised (56,125) 6.26
Options Cancelled (26,300) 7.52
- ----------------------------------------------------------------------------
Outstanding, December 31, 1997 309,700 7.26
Options Granted 182,300 12.81
Options Exercised (42,355) 6.29
Options Cancelled (6,575) 9.19
- ----------------------------------------------------------------------------
Outstanding, December 31, 1998 443,070 9.61
Options Exercised (33,325) 5.53
Options Cancelled (6,150) 10.83
- ----------------------------------------------------------------------------
Outstanding, December 31, 1999 403,595 $ 9.93
</TABLE>
The company accounts for employee stock options under APB Opinion 25, as
permitted under generally accepted accounting principles. Accordingly, no
compensation cost has been recognized in the accompanying financial statements
related to these options. Had compensation cost for these plans been determined
consistent with SFAS 123, "Accounting for Stock Based Compensation," the
company's net earnings and net earnings per share would have been the following:
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings from Continuing Operations:
As Reported $ 7,597 $ 9,538 $ 6,961
Pro forma 7,340 9,309 6,863
Net Earnings:
As Reported 7,597 9,538 263
Pro forma 7,340 9,309 165
- ----------------------------------------------------------------------------
Diluted Earnings Per Share from Continuing Operations:
As Reported $ 1.27 $ 1.74 $ 1.41
Pro forma 1.23 1.70 1.39
Diluted Net Earnings Per Share:
As Reported 1.27 1.74 .05
Pro forma 1.23 1.70 .03
</TABLE>
The pro forma effects reflected above may not be indicative of pro forma
results which may be expected in future years.
There were no stock option grants to employees in 1999. The fair values of
the option grants in 1998 and 1997 were estimated at the date of grant using the
Black-Scholes option pricing model. The following table provides the
weighted-average assumptions and the fair values of the grants.
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Risk-Free Interest Rate 4.9% 5.7%
Dividend Yield 3.5% 2.1%
Volatility 65.2% 40.1%
Fair Value of Options $5.83 - $6.01 $ 3.29
</TABLE>
The options vest ratably over 4 years and are assumed to have an average
life of 5 years.
The company also administers a stock option plan for members of the Board
of Directors who are not employees of the company covering a maximum of 150,000
shares. Under the terms of this plan, options to purchase an aggregate of 91,500
shares have been granted, of which 70,500 were outstanding at year-end. The
average exercise price for the outstanding options is $8.99 per share. At
December 31, 1999, 58,500 shares were available for future grant.
20 Lindberg Corporation
<PAGE>
NOTE 9. RELATED PARTY
The company holds a 17% equity interest in Thixomat, a company formed to promote
and commercialize ThixomoldingTM technology. The Chairman of Thixomat serves on
the Board of Directors of Lindberg. In addition, the President of Lindberg
serves on Thixomat's Board of Directors. At December 31, 1999, the company held
a $434,000 equity investment, accounted for at cost, in Thixomat.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The company is a party to various lawsuits and claims arising in the ordinary
course of business. Management, after review and consultation with legal
counsel, considers that any liability resulting from these matters would not
materially affect the financial condition or results of operations of the
company.
The company was the subject of an investigation by the government and a
quitam (whistle-blower) lawsuit regarding alleged violations of the Federal
False Claims Act and wrongful termination. The company learned of the lawsuit in
May 1998. The activities that were the subject of the investigation and lawsuit
related to only one plant and, in the fourth quarter 1998, the company
established reserves for the potential settlement of this claim. In the first
quarter of 1999, the company reached a settlement in principle with the
government and the plaintiff on terms consistent with the reserves previously
established. The company completed the settlement in the second quarter of
1999.
The company employs some environmentally hazardous materials. The company
has made expenditures to comply with laws and regulations relating to the
protection of the environment, including studies, investigations and remediation
of ground contamination, and expects to make such expenditures in the future in
its efforts to comply with existing and future requirements. While such
expenditures to date have not materially affected the company's capital
expenditures, competitive position, financial condition, or results of
operations, there can be no assurance that more stringent regulation or
enforcement in the future will not have such effects.
The company has notified state authorities of a possible need for
remediation at three sites it currently operates. At all such sites, costs which
may be incurred are difficult to accurately predict until the level of
contamination is determined, and would be subject to increase if more
contamination is discovered during investigation or remediation or if state
authorities require more remediation than anticipated. Such costs may be less if
the contamination proves to be less than currently expected and to the extent
costs are covered by insurance or are allocable to others.
The company has also been notified by state and federal governmental
authorities that it may be a "potentially responsible party" or otherwise have
responsibility with respect to clean-up obligations at one waste disposal site
which was never owned or operated by the company. The company is participating
in a settlement with the relevant authorities and other parties believed by the
company to be responsible for clean-up obligations and further believes its
financial responsibility to be of a minor nature.
At December 31, 1999, the company had reserves of approximately $1.7 million
to cover future environmental related anticipated costs. Such reserves give no
effect to possible recoveries from insurers or other potentially responsible
parties nor do they reflect any discount for the several years over which
investigation or remediation amounts may be paid out.
NOTE 11. CAPITAL STOCK CHANGE AND STOCKHOLDER RIGHTS PLAN
In 1998, the company's stockholders approved an amendment to the company's
certificate of incorporation. This amendment changed the par value of the common
stock from $2.50 to $0.01 per share and increased the number of authorized
shares from 12 million to 25 million. The amendment also authorized a new class
of preferred stock with par value of $0.01 per share and authorized one million
such shares.
The company has in place a Stockholder Rights Plan designed to deter unfair
takeover tactics and to prevent an acquirer from gaining control of the company
without offering a fair price to all stockholders. Under the plan, the company
declared a dividend distribution of one common share purchase right on each
outstanding share of common stock. The rights become exercisable after a person
or group acquires beneficial ownership of 20% or more of the common stock of the
company or publicly announces a tender offer or exchange offer for 20% or more
of the common stock. Initially, each right will entitle its holder to buy one
share of common stock of the company at an exercise price of $40 per share. If a
person or group acquires beneficial ownership of 20% or more of the outstanding
common stock of the company: 1) each right will entitle its holder to purchase
shares of common stock of the company at one-half their market price, or, in
certain circumstances, at their par value (currently $0.01 per share) and 2) if
the company or its assets are acquired in certain merger or other transactions,
holders of rights may acquire common stock of the acquiring company having a
market value of twice the exercise price of the right. Rights held by the 20%
holder will become void and will not be exercisable to purchase shares at the
reduced purchase price. The rights, which do not have voting rights, will expire
on November 21, 2006 and may be redeemed by the company's board of directors at
a price of $0.01 per right prior to their expiration or the accumulation of 20%
or more of the company's common stock.
Lindberg Corporation 21
<PAGE>
Notes to Consolidated Financial Statements
NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1999 and 1998 are shown below:
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999 March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $32,141 $31,584 $29,010 $27,748
Gross Profit 9,776 9,427 7,853 6,809
Net Earnings 2,498 2,419 1,663 1,017
Basic Net Earnings Per Share .42 .41 .28 .17
Diluted Net Earnings Per Share .42 .40 .28 .17
- ------------------------------------------------------------------------------
1998 March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------
Net Sales $30,872 $33,034 $31,365 $29,798
Gross Profit 9,600 10,358 9,685 8,932
Net Earnings 2,440 2,683 2,355 2,060
Basic Net Earnings Per Share .50 .55 .43 .35
Diluted Net Earnings Per Share .48 .52 .41 .34
- ------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
Report of Independent Public Accountants
TO THE STOCKHOLDERS OF LINDBERG CORPORATION
We have audited the accompanying consolidated balance sheets of Lindberg
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of earnings, stockholders'
equity and cash flows for the years ended December 31, 1999, 1998 and 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 in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lindberg Corporation and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the years ended December 31, 1999, 1998 and
1997, in conformity with generally accepted accounting principles in the United
States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 21, 2000
22 Lindberg Corporation
<PAGE>
Six-Year Financial Review
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS (in thousands)
Net Sales $ 120,483 $ 125,069 $ 88,784 $ 72,776 $ 67,967 $ 59,380
Gross Profit 33,865 38,575 25,092 20,257 19,265 15,028
Selling and Administrative Expenses (19,068) (20,478) (13,211) (11,507) (11,530) (10,217)
Equity in Earnings of Partnership -- -- 1,436 893 301 54
- ------------------------------------------------------------------------------------------------------------------------
Operating Earnings 14,797 18,097 13,317 9,643 8,036 4,865
Interest Expense (Net) (2,229) (2,510) (1,681) (1,512) (1,638) (789)
Other Income 118 444 -- -- 615 --
- ------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 12,686 16,031 11,636 8,131 7,013 4,076
Provision for Income Taxes (5,089) (6,493) (4,675) (3,293) (2,840) (1,633)
- ------------------------------------------------------------------------------------------------------------------------
Earnings From Continuing Operations 7,597 9,538 6,961 4,838 4,173 2,443
Earnings (Loss) From Discontinued Operations -- -- (6,698)(1) 178 1,462 1,931
- ------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 7,597 $ 9,538 $ 263 $ 5,016 $ 5,635 $ 4,374
- ------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Continuing Operations $ 1.27 $ 1.74 $ 1.41 $ .99 $ .88 $ .51
Discontinued Operations -- -- (1.36) .04 .30 .41
- ------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 1.27 $ 1.74 $ .05 $ 1.03 $ 1.18 $ .92
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION (in thousands)
Working Capital $ 10,913 $ 8,622 $ 16,147 $ 30,100 $ 29,237 $ 23,726
Property and Equipment (Net) 71,362 66,737 39,097 30,879 27,332 26,224
Total Assets 132,011 115,490 89,563 74,888 68,639 65,878
Long-Term Debt 41,338 32,684 25,863 20,700 18,900 16,500
Total Debt 43,385 34,761 36,166 21,601 18,900 17,900
Stockholders' Equity 59,741 55,793 32,091 33,047 29,182 24,669
- ------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL INFORMATION
Cash Dividends Declared and
Paid (in thousands) $ 1,891 $ 1,715 $ 1,538 $ 1,379 $ 1,181 $ 989
Cash Dividends Per Share .32 .32 .32 .29 .25 .21
Return on Average Stockholders' Equity 13% 22% 1% 16% 21% 19%
Book Value Per Share of Stockholders' Equity $ 10.55 $ 9.48 $ 6.65 $ 6.91 $ 6.17 $ 5.23
Debt/Capitalization Ratio 42% 38% 53% 40% 39% 42%
Shares Outstanding at Year-End 5,661,061 5,882,736 4,828,381 4,779,141 4,727,391 4,717,016
Capital Expenditures (in thousands) $ 10,263 $ 10,051 $ 7,336 $ 5,365 $ 4,029 $ 4,396
Depreciation (in thousands) 7,253 6,094 4,084 3,690 3,459 3,258
Goodwill Amortization (in thousands) 1,077 604 119 5 -- --
Number of Employees at Year-End 1,045 1,220 975 667 642 633
- ------------------------------------------------------------------------------------------------------------------------
(1) 1997 includes a net charge of $5,944,000 related to the discontinuance of
the company's Precision Products segment.
</TABLE>
SAFE HARBOR STATEMENT
Statements contained in this annual report that are not based on historical
facts are forward-looking statements subject to uncertainties and risks
including, but not limited to, product and service demand and acceptance;
economic conditions; the impact of competition and pricing; capacity and supply
constraints or difficulties; results of financing and acquisition efforts;
regulatory and other legal issues; and other risks detailed in the company's
Securities and Exchange Commission filings.
Lindberg Corporation 23
<PAGE>
Corporate Information
DIRECTORS
George H. Bodeen 2
Chairman of the Board
Dr. Raymond F. Decker 1, 2
Chairman, Thixomat, Inc.
Raymond A. Jean 1
Corporate Vice President
Amsted Industries
W. Robert Reum 1
Former Chairman, President
and Chief Executive Officer
The Interlake Corporation
J. Thomas Schanck 2
Former Vice Chairman
Illinois Tool Works Inc.
Leo G. Thompson
President and
Chief Executive Officer
Committees of the Board:
1 Audit
2 Executive Compensation
OFFICERS
George H. Bodeen
Chairman of the Board
Leo G. Thompson
President and
Chief Executive Officer
Stephen S. Penley
Executive Vice President,
Chief Financial Officer
and Secretary
Michael W. Nelson
Senior Group Vice President
Paul J. McCarren
Group Vice President
Terrence D. Brown
Vice President
Geoffrey S. Calhoun
Vice President
Jerome R. Sullivan
Vice President
Roger J. Fabian
Vice President
Brian J. McInerney
Treasurer and Assistant Secretary
U.S. LOCATIONS
Gardena, California
Huntington Park, California
Los Angeles, California
Paramount, California
Rancho Dominguez, California
Santa Fe Springs, California
Westminster, California
Berlin, Connecticut
Waterbury, Connecticut
Melrose Park, Illinois
Wichita, Kansas
Worcester, Massachusetts
Lansing, Michigan
Minneapolis, Minnesota
St. Louis, Missouri
Rochester, New York
Solon, Ohio
Tulsa, Oklahoma
Dallas, Texas
Houston, Texas
New Berlin, Wisconsin
Racine, Wisconsin
Sturtevant, Wisconsin
FOREIGN LOCATION
Monterrey, Mexico
SP 2000 OPERATIONS
Walnut, California
Waterbury, Connecticut
Downers Grove, Illinois
Bedford Heights, Ohio
Reading, Pennsylvania
Lexington, Tennessee
Clintonville, Wisconsin
New Berlin, Wisconsin
24 Lindberg Corporation
<PAGE>
Stockholder Information
STOCK TRANSFER AGENT AND REGISTRAR
Harris Trust & Savings Bank Chicago, Illinois
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP Chicago, Illinois
GENERAL COUNSEL
Bell, Boyd & Lloyd LLC Chicago, Illinois
CORPORATE OFFICES
Lindberg Corporation
6133 North River Road, Suite 700
Rosemont, Illinois, 60018
847 823-2021
INTERNET ADDRESS
www.lindberght.com
ANNUAL MEETING
The annual stockholders' meeting will be held on Friday, April 28, 2000, at 9
a.m., in the auditorium at Riverway, 6133 North River Road, Rosemont, Illinois.
A formal notice of the meeting will be mailed to stockholders on or about April
1, 2000.
FORM 10-K
A copy of the company's Annual Report to the Securities and Exchange Commission
(Form 10-K), for the year ended December 31, 1999, is available to any
stockholder upon written request to the Secretary of the Company, 6133 North
River Road, Suite 700, Rosemont, Illinois, 60018.
STOCK MARKET INFORMATION
The company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol LIND. The tables below show the range of
high and low sale prices of the common stock as reported by the Nasdaq National
Market and dividend payments during the past two years.
<TABLE>
<CAPTION>
Sale Price Dividend
1999 High Low Per Share
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Quarter
1st $13.250 $ 8.625 $.08
2nd 12.438 9.313 .08
3rd 13.375 8.406 .08
4th 9.750 7.625 .08
- -------------------------------------------------------------------------------
$.32
Sale Price Dividend
1998 High Low Per Share
- -------------------------------------------------------------------------------
Quarter
1st $18.125 $12.750 $.08
2nd 25.000 16.750 .08
3rd 20.250 12.375 .08
4th 14.250 8.375 .08
- -------------------------------------------------------------------------------
$.32
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<S> <C>
Name Where Incorporated
- ---- ------------------
Alumatherm Heat Treating Company, L.L.C. Delaware
Fabriform Metal Brazing, Inc. California
Houston Heat Treating Company Texas
Impind, Inc. Delaware
Industrial Steel Treating Co. California
Merrell Enterprises, Inc. California
Metal-Lab of Wisconsin, Inc. Wisconsin
Quality Heat-Treat, Inc. Texas
Ticorm, Inc. California
Lindberg de Mexico Mexico
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated January 21, 2000 included in
Registration Statement File Nos. 33-47323 and 33-60361.
Arthur Andersen LLP
Chicago, Illinois
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000059593
<NAME> LINDBERG CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 272,649
<SECURITIES> 0
<RECEIVABLES> 17,492,480
<ALLOWANCES> 654,000
<INVENTORY> 0
<CURRENT-ASSETS> 22,767,742
<PP&E> 134,055,319
<DEPRECIATION> 62,693,233
<TOTAL-ASSETS> 132,011,078
<CURRENT-LIABILITIES> 11,855,083
<BONDS> 0
0
0
<COMMON> 66,734
<OTHER-SE> 31,326,150
<TOTAL-LIABILITY-AND-EQUITY> 132,011,078
<SALES> 120,482,625
<TOTAL-REVENUES> 120,482,625
<CGS> 86,618,120
<TOTAL-COSTS> 86,618,120
<OTHER-EXPENSES> 19,067,393
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,229,348
<INCOME-PRETAX> 12,686,244
<INCOME-TAX> 5,089,241
<INCOME-CONTINUING> 7,597,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,597,003
<EPS-BASIC> 1.29
<EPS-DILUTED> 1.27
</TABLE>
<PAGE> 1
EXHIBIT 99.1
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The company's Annual Report on Form 10-K, news releases and other
public documents, as well as oral statements that may be made by or on behalf
of the company, contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
are those that are not statements of historical fact, including statements
regarding future revenues, expenses and profits. These forward-looking
statements are subject to known and unknown risks, uncertainties or other
factors which may cause the actual results of the company to be materially
different from the historical results or from any results expressed or implied
by the forward-looking statements. Such risks and factors include, but are
not limited to, those discussed below and under "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the company's
Annual Report on Form 10-K. All cautionary statements made in this report
should be read as being applicable to all related forward-looking statements
wherever they appear.
Economy; Industry Concentration
The company provides services to customers operating across a wide
range of manufacturing industries, and its financial results have historically
followed general economic conditions in the United States. The company has
benefited from the strong U.S. economy in recent years. However, a prolonged
retrenchment in the general U.S. economy could have a material adverse effect
on the company's operating results and, ultimately, financial condition. In
addition, due to the high fixed cost structure of the heat treating business,
a reduction in the company's sales volume can have a disproportionately
adverse effect on its profitability.
The company estimates that customers serving the commercial aerospace
and automobile/light truck industries currently account for approximately 24%
and 15%, respectively, of the company's net sales. A significant decline in
either commercial aircraft or automobile production could have a material
adverse effect on the company's business and financial condition, if the
company were unable to replace such business with orders from other
industries. The company's concentration in certain industries may change
depending on the company's acquisitions and the condition of the industries
served by the company.
Risks Associated with Acquisition Strategy
The company's growth strategy includes acquisitions of heat treating
businesses that complement its current operations. Although the company
believes that there are many suitable acquisition candidates, it may not be
able to capitalize on certain opportunities due to potential sellers'
valuations and competition from other prospective buyers. The company's
acquisition activities may involve certain other risks, including potential
disruption to the company's ongoing business, integration difficulties,
difficulty implementing uniform standards, controls, procedures and policies,
potential impairment of relationships with employees and customers, and
potential liabilities of an acquired company. Future acquisitions may be
financed by internally generated funds, bank borrowings, or public offerings
or private placements of equity or debt securities, to the extent such
financing opportunities are available to the company. Any acquisitions funded
by equity of the company may be dilutive.
Approved Vendor Status
Many of the company's customers are contractors or subcontractors to
major manufacturers that impose stringent quality standards and that require
their contractors and subcontractors to use only
<PAGE> 2
approved vendors. The company is an approved vendor for these major
manufacturers and, as an approved vendor, it is subject to periodic audit and
renewal of certifications. Should the company lose its status as an approved
vendor for one or more major manufacturers, the company may suffer a loss in
revenues and may incur additional costs in connection with seeking
recertification.
Environmental Regulations
The company is subject to federal, state and local environmental laws
and regulations concerning emissions into the air, discharges into waterways
and the generation, handling and disposal of waste materials. The company's
past expenditures relating to environmental compliance have not had a material
adverse effect on the company. However, there can be no assurance that
changes in these laws and regulations or in their enforcement, or the
discovery of new environmental issues requiring corrective measures in the
future, will not adversely affect the company's capital expenditures, earnings
and competitive position.
Product and Other Liabilities
The company's business may expose it to potential product liability
claims in the event that a failure of a product containing parts treated by
the company results in personal injury or death. In addition, if any product
with parts treated by the company proves to be defective, the company may be
required to participate in a recall involving such product. Although the
company maintains various types of insurance coverage, there can be no
assurance that such coverage will be adequate for liabilities that may be
incurred or that it will continue to be available on terms acceptable to the
company.
The company believes that it is in material compliance with applicable
laws and regulations relating to occupational hazards and safety. However,
the company's operations entail risk of injury to production workers. There
can be no assurance that the company will not incur material costs and
liabilities in connection with personal injuries suffered by its associates.
Risks Associated with Government Programs
The company estimates that approximately 10% to 15% of the company's
net sales are generated from government contractors and subcontractors whose
products are used by the defense industry. As a service provider to
contractors and subcontractors of the U.S. government, the company is
directly and indirectly subject to various federal rules, regulations and
orders applicable to government contracts. Although the company believes that
it is in material compliance with all such laws, any future violation could
result in civil liability, cancellation or suspension of existing contracts
or ineligibility for future contracts funded in whole or in part with federal
funds. Future changes in these rules, regulations and orders may make
compliance substantially more costly. In addition, a significant reduction
in defense budgets in the future may adversely affect the company's volume and
margins.
Competition
Competition in the heat treating industry is intense. Companies
generally compete on a local level for customers in a defined geographic area
on the basis of timely delivery, quality and price. In certain markets, the
company competes against companies that may have larger facilities and
greater resources in those markets.
2
<PAGE> 3
Dependence upon Key Personnel
The company's continued success will depend to a large extent upon the
abilities and continued efforts of its senior management and upon the
company's ability to attract and retain highly qualified personnel, including
personnel associated with businesses acquired by the company. The loss of key
members of the company's management team could adversely affect the company's
results of operations and future growth prospects.
Volatility of Stock Price; Limited Public Float
The market price of the common stock is affected by a number of
factors, including limited trading volume, variations in the company's
operating results, evolving business prospects and competitors, as well as
general conditions in the economy and the financial markets. Also, the equity
markets generally have experienced significant price and volume fluctuations
in recent years. This volatility can impact significantly the stock price of
many companies for reasons unrelated to their performance.
Although a public market exists for the common stock, trading activity
has been limited. Due to the relatively small number of shares currently
outstanding, the trading of a relatively small number of shares could subject
the stock price to volatility and significantly affect the market price of the
common stock.
Limitations on Change in Control
Certain provisions in the company's Certificate of Incorporation and
By-laws may have the effect of delaying, deferring or preventing a change in
control of the company, even if such a change would potentially be beneficial
to many stockholders. These provisions include a staggered board and super-
majority stockholder vote or approval by a super-majority of the Board of
Directors for a change in the number of directors. In addition, the Board of
Directors has the authority, without further action by the stockholders, to
issue up to one million shares of preferred stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof, and to
issue authorized but unissued shares of common stock up to a maximum of 25
million shares. The issuance of preferred stock or additional shares of
common stock could have the effect of delaying, deferring or preventing a
change in control of the company, even if such change in control would
potentially be beneficial to the company's stockholders. The company's
stockholder rights plan may also have the effect of discouraging a change in
control of the company, as could the elimination of stockholder action by
written consent without a meeting, as the company's charter provides. A two-
thirds vote of the holders of the company's voting securities is required for
certain mergers and other major corporate transactions with holders of 10% or
more of the company's voting securities without approval of the company's
Board of Directors prior to such 10% ownership. Further, the company has not
opted out of the provision under Delaware law that imposes certain
restrictions on any business combination between the company and an
``interested stockholder'' as defined in the Delaware statute.
3
