<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PENN ENGINEERING & MANUFACTURING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 23-0951065
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
P.O. Box 1000
Danboro, Pennsylvania 18916-1000
(215) 766-8853
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
Kenneth A. Swanstrom
Chairman of the Board
Penn Engineering & Manufacturing Corp.
P.O. Box 1000
Danboro, Pennsylvania 18916-1000
(215) 766-8853
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
------------------------
Copies To:
Frederick W. Dreher, Esquire Stanley H. Meadows, P.C.
Duane, Morris & Heckscher McDermott, Will & Emery
4200 One Liberty Place 227 West Monroe Street
Philadelphia, PA 19103-7396 Chicago, IL 60606-5096
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the registrant elects to deliver its latest annual report to
securityholders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value.......... 3,135,000 shares $19.25(1) $60,348,750(1) $20,810
=========================================================================================================================
</TABLE>
(1) The proposed maximum offering price per share and the proposed maximum
aggregate offering price have been estimated, pursuant to paragraph (a) of
Rule 457, solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PENN ENGINEERING & MANUFACTURING CORP.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
----------------------- ----------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of
Prospectus....................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................................... Use of Proceeds
5. Determination of Offering Price.................... Reclassification; Price Range of Capital Stock and
Dividends; Underwriting
6. Dilution........................................... *
7. Selling Security Holders........................... Principal and Selling Stockholders
8. Plan of Distribution............................... Outside Front Cover Page; Underwriting
9. Description of Securities to
be Registered.................................... Outside Front Cover Page; Description of Capital
Stock
10. Interests of Named Experts and Counsel............. Legal Matters; Experts
11. Information with Respect to Registrant............. Prospectus Summary; Risk Factors; Reclassification;
Price Range of Capital Stock and Dividends;
Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Business; Management;
Principal and Selling Stockholders; Description
of Capital Stock; Available Information;
Consolidated Financial Statements
12. Incorporation of Certain Information by
Reference........................................ Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... *
</TABLE>
- ------------------
* Omitted from Prospectus because item is inapplicable or answer is negative.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 22, 1996
(LOGO) 2,850,000 SHARES
PENN ENGINEERING & MANUFACTURING CORP.
COMMON STOCK
------------------------
Of the 2,850,000 shares of Common Stock of the Company offered hereby,
1,750,000 shares are being issued and sold by the Company and 1,100,000 shares
are being sold by the Selling Stockholders. The Company will not receive any of
the proceeds from the sale of shares offered by the Selling Stockholders. See
'Principal and Selling Stockholders' and 'Underwriting.'
The Company's authorized capital stock, par value $.01 per share, consists
of Common Stock and Class A Common Stock. The voting power of the Company is
vested in the Class A Common Stock, and the Common Stock has no voting rights,
except as required by Delaware law. The Common Stock and the Class A Common
Stock have the same economic rights. See 'Description of Capital Stock.'
The Common Stock is traded on the American Stock Exchange under the symbol
'PNN.' On , 1996, the last reported sale price of the Common Stock
on the American Stock Exchange was $ per share. See 'Price Range of Capital
Stock and Dividends.' The Company has applied to list the Common Stock and the
Class A Common Stock on the New York Stock Exchange.
FOR INFORMATION CONCERNING CERTAIN FACTORS RELATING TO THIS OFFERING, SEE
'RISK FACTORS' ON PAGE 8 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
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<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
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Total.................................. $ $ $ $
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Total Assuming Full Exercise of Over-
Allotment Option(3).................. $ $ $ $
=============================================================================================================
</TABLE>
(1) See 'Underwriting.'
(2) Before deducting expenses estimated at $ , which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to
the Underwriters to purchase up to 285,000 shares, solely to cover
over-allotments. See 'Underwriting.'
------------------------
The Shares are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to their right
to reject orders in whole or in part. It is expected that delivery of the Common
Stock will be made in New York City on or about , 1996.
------------------------
PAINEWEBBER INCORPORATED
------------------------
THE DATE OF THIS PROSPECTUS IS , 1996.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
(PICTURES)
(TO BE DESCRIBED IN AMENDMENT)
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND THE CLASS A COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NEW YORK STOCK EXCHANGE, THE AMERICAN STOCK EXCHANGE, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto set forth
elsewhere in this Prospectus or incorporated by reference in this Prospectus.
Unless otherwise indicated, all share amounts and financial information
presented in this Prospectus, other than the consolidated financial statements,
have been adjusted to reflect the reclassification of the Company's capital
stock outstanding prior to May 23, 1996 (the 'Prior Common Stock') into Class A
Common Stock, the authorization of the new Common Stock, and the issuance of a
dividend on May 23, 1996 of three shares of Common Stock for each outstanding
share of Prior Common Stock (the 'Stock Dividend'). See 'Reclassification' and
'Description of Capital Stock.' The Stock Dividend will have the same effect on
the total number of shares of Prior Common Stock outstanding as a four-for-one
stock split. The Common Stock and the Class A Common Stock are sometimes
referred to collectively in this Prospectus as the 'Capital Stock.' Unless
otherwise indicated, the information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option.
THE COMPANY
Penn Engineering & Manufacturing Corp. (the 'Company') is the world's
leading manufacturer of self-clinching fasteners used by the computer,
datacommunications, telecommunications, general electronics, automotive, and
avionics industries. PEM(Registered) self-clinching fasteners, which accounted
for 80% of the Company's sales in 1995, were first developed by the Company's
founder in 1943. Self-clinching fasteners become an integral part of the
material in which they are installed and provide a reliable means of attaching
components to sheet metal or plastic. Typical applications for the Company's
fastener products include personal computers, computer cabinetry, power
supplies, instrumentation, telecommunications equipment, and certain automobile
parts, such as air bags and windshield wipers. The Company's Pittman(Registered)
division manufactures high performance permanent magnet direct current motors
used in electronics, medical, and manufacturing applications.
The Company's fasteners are primarily used by sheet metal fabricators to
produce subassemblies for original equipment manufacturers ('OEMs'). The
Company's customers seek fastener solutions which provide lower total installed
cost and are highly reliable, thereby lowering production and service costs. The
Company's engineers and independent distributors continually work in close
collaboration with OEMs and their subcontractors to determine appropriate
fastener applications, which often results in OEMs specifying the Company's
fasteners. Self-clinching fasteners generally compete against loose hardware,
such as nuts and bolts. The Company's fasteners typically sell at a premium to
loose hardware. However, the Company's fasteners generally result in lower
overall manufacturing costs.
The Company has built a strong track record of growth and profitability.
From 1991 to 1995, sales have doubled and operating profits have increased from
$5.7 million to $21.0 million. The Company believes its success has been
primarily driven by the following strengths:
Strong Market Share. The Company has significantly increased its market
share over the past five years and estimates that it holds approximately 50% of
the worldwide market for self-clinching fasteners. The Company believes its
domestic market share is approximately 70%. In Europe and in Asia, the Company's
market share for self-clinching fasteners is approximately 38% and 14%,
respectively. The Company believes it has an advantage over its competitors
based on its: (i) significant manufacturing capacity, (ii) quality raw material
sourcing, (iii) high standards of internal manufacturing controls, (iv)
inventories maintained in Company warehouses in North America, Europe, and Asia,
and (v) comprehensive product line.
Long-standing Customer Relationships. The Company's strong relationships
with a diverse base of customers continually allows for the identification of
new business opportunities. The Company has been a long-term supplier of
fasteners to many of its customers. For example, the Company has supplied IBM,
Hewlett-Packard, Pitney Bowes, and Xerox for an average of 25 years. The Company
3
<PAGE>
believes that it has earned its position with such customers by virtue of its
design engineering capabilities, timely delivery, excellent quality, and
customer service.
Well-Positioned in Rapidly Growing Computer/Electronics Markets. The
Company's fasteners are on the preferred or designated vendor list of Compaq and
other OEMs which comprise approximately 33% of the worldwide personal computer
market. The Company's fasteners are used by many of the world's largest
electronics and telecommunication OEMs, including Alcatel, AMP, AT&T, Ericsson,
Philips, and Siemens. As a result, the Company expects to increase sales as
these markets continue to grow domestically and internationally.
Broad Product Application Across a Diverse Group of Industries. The
Company believes it benefits from the diversity of applications for its
self-clinching fasteners across a broad range of industries. The Company shipped
fasteners to over 12,000 customers in 1995 and no single market segment
accounted for more than 15% of the Company's total sales in 1995.
Recognized Leader in Fastening Solutions. The Company believes its
commitment to working with OEMs early in the design process places it at the
forefront in providing fastening solutions. The Company's success and reputation
for consistently developing such solutions often results in customers specifying
PEM fasteners for their products.
Successful Management Team. The Company believes an important element of
its success is its highly experienced senior management team. Kenneth A.
Swanstrom, the Company's Chief Executive Officer, has been with the Company
since 1960. The Company's Chief Financial Officer has been with the Company for
nearly 20 years. Since 1990, the Company has added management with significant
industry experience in key marketing, manufacturing, and engineering positions.
BUSINESS STRATEGY
The Company believes that the current worldwide market for self-clinching
fasteners is approximately $230 million. The Company estimates that the current
total market for all forms of fasteners which potentially could be replaced by
PEM fasteners is approximately $600 million. The Company believes it is well
positioned to achieve continued growth and intends to continue to build upon its
success by relying on a strategy which emphasizes the following key elements:
(i) focus on new applications and product development, (ii) expand production
capacity, (iii) continue to improve productivity, (iv) implement cost reduction
initiatives, and (v) increase sales to foreign markets.
Focus on New Applications and Product Development. The Company is committed
to growing with its customers both domestically and abroad. By working with OEMs
early in the design process, the Company's fasteners are often selected for use
when new products or new markets are addressed. The Company believes
considerable opportunities are available in Europe and in Asia given the growth
of the computer and electronics markets in these regions. With over 3,000
readily available proprietary catalog products, the Company is well positioned
to meet the needs of its customers. In addition, the Company engages in the
continuous development of new products and product extensions.
Expand Production Capacity. From 1991 to 1995, demand for the Company's
fasteners has increased more rapidly than the Company's capacity. In spite of
restricted capacity, fastener units shipped have more than doubled over this
period from 896 million to 1.8 billion annually. In 1995, the Company spent
$17.2 million for capital expenditures in response to the continuing demand for
the Company's products. These expenditures included construction of a 43,000
square foot addition to the Company's Danboro facility, which is expected to be
completed in June 1996. The Company intends to utilize a portion of its credit
lines and of the proceeds of this Offering to supplement cash flow from
operations to finance capital expenditures of approximately $25 million in 1996,
including a new 120,000 square foot facility to replace the Company's 58,000
square foot facility in Winston-Salem, North Carolina. These capital
expenditures are expected to increase fastener production capacity by 27%,
allowing the Company to ship 2.3 billion fastener units annually by early 1997.
The Company's
4
<PAGE>
five-year plan includes $100 million in capital expenditures to increase
capacity to 3.0 billion fasteners annually by 2000.
Continue to Improve Productivity. To increase efficient utilization of its
manufacturing facilities, the Company implements programs which include cell
manufacturing and focused work centers, demand flow production, new tooling, and
implementation of new heat treating methods and washing procedures. The Company
targets 5% annual increases in productivity. The Company will continue to
attract and retain highly-qualified employees by providing an environment which
promotes creativity.
Implement Cost Reduction Initiatives. Gross margins have increased from
28.0% in 1991 to 31.9% in 1995 despite a doubling of sales over this period. In
addition, the Company has improved operating margins from 8.1% in 1991 to 14.9%
in 1995 by controlling SG&A expenses. The Company intends to continue to reduce
costs through initiatives which monitor raw material sourcing, encourage
manufacturing innovations, and preserve a stable and productive work force.
Increase Sales to Foreign Markets. Since 1991, foreign sales have
increased approximately 119% from $16.2 million to $35.4 million in 1995 and
currently represent 25.1% of total sales. The Company has recently acquired its
previously independent distributor in Singapore which affords the Company a hub
from which to enhance service to customers in the Pacific Rim. The Company is
also establishing an applications engineering center at its facility in
Doncaster, England.
The Company's stock became publicly traded in 1966. Since then, the Company
has reported net income in every year and has paid cash dividends in each
quarter.
On May 23, 1996, the Company reclassified its outstanding capital stock
into Class A Common Stock and issued a dividend of three shares of Common Stock
for each outstanding share of Prior Common Stock. This dividend had the same
effect on the total number of shares outstanding as a four-for-one stock split.
In this Prospectus, the terms 'Penn Engineering' and the 'Company' include
Penn Engineering & Manufacturing Corp. and its subsidiaries. The Company was
incorporated in Delaware in 1942. The Company's corporate headquarters are
located at P.O. Box 1000, Old Easton Road, Danboro, Pennsylvania 18916-1000, and
its telephone number is (215) 766-8853. PEM, SI, PEMSERTER, PITTMAN, LO-COG, and
ELCOM are registered trademarks of Penn Engineering. The Company's Internet
address is http://www.pemnet.com.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C> <C>
Common Stock Offered by:
The Company....................................... 1,750,000 shares
The Selling Stockholders.......................... 1,100,000 shares
-----------
Total..................................... 2,850,000 shares
-----------
-----------
Capital Stock to be Outstanding
After the Offering(1):
Class A Common Stock.............................. 1,707,082 shares
Common Stock...................................... 6,871,246 shares
-----------
Total Capital Stock....................... 8,578,328 shares
-----------
-----------
Voting Rights..................................... Holders of Common Stock have no voting rights, except as
required by Delaware law. Holders of Class A Common Stock have
one vote per share. See 'Description of Capital Stock.'
Use of Proceeds................................... The net proceeds of the Offering will be used to repay certain
indebtedness of the Company incurred as part of the Company's
capital investment program, to expand the Company's production
capacity, and for working capital and general corporate
purposes. See 'Use of Proceeds.'
American Stock Exchange Symbol
for the Common Stock............................ PNN(2)
</TABLE>
- ------------------
(1) Based on 5,121,246 shares of Common Stock outstanding as of March 31, 1996
after giving effect to the Reclassification and the Stock Dividend, and the
issuance of the Common Stock offered hereby by the Company, but excluding
650,000 shares of Common Stock available for issuance under the Company's
Equity Incentive and Employee Stock Purchase Plans. See 'Description of
Capital Stock.'
(2) The Company has applied to list its Common Stock and Class A Common Stock
on the New York Stock Exchange.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth certain summary consolidated financial data
of the Company and its subsidiaries. This data should be read in conjunction
with the Consolidated Financial Statements of the Company and Notes thereto, the
Selected Consolidated Financial Data and the information contained in
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
(in thousands, except per share
data)
Net sales......................... $ 70,845 $ 88,328 $ 100,665 $ 121,470 $ 141,268 $ 35,298 $ 39,028
Income before income taxes and
cumulative effect of 1992 and
1993 accounting changes......... 6,306 10,546 11,477 17,127 22,121 5,000 4,574
Net income........................ $ 3,912 $ 8,127(1) $ 7,352(2) $ 10,441 $ 13,798 $ 3,023 $ 2,869
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per share(3)........... $ 0.57 $ 1.19 $ 1.08 $ 1.53 $ 2.02 $ 0.44 $ 0.42
--------- --------- --------- --------- --------- --------- ---------
Average number of common shares
outstanding(3).................. 6,828 6,828 6,828 6,828 6,828 6,828 6,828
OTHER FINANCIAL AND OPERATING DATA:
Number of fasteners shipped (in
millions)....................... 896 1,259 1,267 1,569 1,836 429 513
Average price per thousand........ $ 52.55 $ 52.59 $ 56.39 $ 57.70 $ 57.95 $ 60.00 $ 56.81
Number of motors shipped (in
thousands)...................... 557 509 664 673 680 167 188
Average price per motor........... $ 32.36 $ 32.46 $ 35.47 $ 37.76 $ 41.12 $ 46.92 $ 40.31
Gross margin...................... 27.9% 30.8% 29.5% 31.6% 31.9% 30.2% 29.6%
Capital expenditures (in
thousands)...................... $ 2,435 $ 3,395 $ 8,354 $ 3,833 $ 17,213 $ 2,933 $ 6,518
Depreciation (in thousands)....... $ 2,819 $ 2,855 $ 3,180 $ 3,425 $ 4,165 $ 1,030 $ 1,181
EBITDA (in thousands)(4).......... $ 9,158 $ 13,412 $ 14,849 $ 20,629 $ 26,307 $ 6,041 $ 5,779
Number of employees
(at period end)................. 806 978 1,008 1,088 1,211 1,111 1,291
Sales per employee (average) (in
thousands)...................... $ 85 $ 90 $ 101 $ 116 $ 123 $ 128 $ 125
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(5)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
(in thousands)
Working capital.................................................................... $ 35,952 $ 69,691
Property, plant and equipment, net................................................. 47,228 47,228
Total assets....................................................................... 109,946 132,685
Total debt......................................................................... 11,000 --
Stockholders' equity............................................................... 78,367 112,106
</TABLE>
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(1) In 1992, the Company changed its method of accounting to include production
tooling not consumed in production during the year in inventory at year end,
resulting in an increase in that year's net income of $1.8 million.
(2) In 1993, the Company adopted Statement of Financial Accounting Standards No.
109, 'Accounting for Income Taxes,' resulting in an increase in that year's
net income of $423,000.
(3) The per share data and the average number of common shares outstanding have
been adjusted to give pro forma effect to the Reclassification and the Stock
Dividend. See 'Reclassification.'
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA represents supplemental information
only and should not be construed as an alternative to operating income or to
cash flow from operating activities as defined by U.S. generally accepted
accounting principles.
(5) Adjusted to give effect to the sale of 1,750,000 shares of Common Stock
offered by the Company in this Offering and the application of the net
proceeds therefrom, after deducting estimated underwriting discounts and
commissions and estimated offering expenses. See 'Capitalization' and 'Use
of Proceeds.'
7
<PAGE>
RISK FACTORS
In addition to other information in this Prospectus, the following factors
should be considered carefully in evaluating an investment in the Common Stock.
LIMITED TRADING HISTORY AND MARKET FOR COMMON STOCK
The first date on which the Common Stock is expected to trade on the
American Stock Exchange is May 24, 1996. Prior to that date, there was no public
market for the Common Stock. The public offering price for the Common Stock
offered hereby has been determined by negotiations between the Underwriters, the
Company and the Selling Stockholders in light of recent sale prices of the
Common Stock as reported on the American Stock Exchange. There can be no
assurance that an active public market for the Common Stock will develop or be
sustained after the Offering or that the public offering price corresponds to
the price at which the Common Stock will trade in the public market subsequent
to the Offering.
While the Company's Prior Common Stock has been traded on the American
Stock Exchange since 1966, the average volume of such trading in the 12 months
ended April 30, 1996 was approximately 500 shares per day. Accordingly, the
prices at which such trades have been made may not reflect the prices that would
have prevailed had there been a more active market. Furthermore, there can be no
assurance that the trading price for the Common Stock will approximate either
the price of the Class A Common Stock or the historical prices of the Prior
Common Stock as adjusted for the Reclassification. See 'Price Range of Capital
Stock and Dividends.'
CONTROLLING STOCKHOLDERS; IMPEDIMENTS TO CHANGE OF CONTROL
Voting control of the Company is vested in the holders of the Class A
Common Stock. The Swanstrom Family (as defined in 'Principal and Selling
Stockholders') beneficially owns, and after consummation of the Offering will
continue to own, approximately 52.9% of the Class A Common Stock. In addition,
one member of the Swanstrom Family serves as Chairman of the Board of Directors
and as Chief Executive Officer of the Company and another member of the
Swanstrom Family serves on the Company's Board of Directors and owns one of the
Company's independent distributors that was responsible for 5.6% of the
Company's sales in 1995. As long as the Swanstrom Family holds a majority of the
Class A Common Stock, they will be able to elect or remove all of the Company's
Board of Directors and, except as otherwise required by Delaware law, will be
able to determine the outcome of substantially any matter submitted for
consideration by the Company's stockholders. Moreover, control by the Swanstrom
Family may have the effect of discouraging certain types of transactions
involving an actual or potential change of control of the Company, including
transactions in which the holders of Common Stock might otherwise receive a
premium for their shares over then-current market prices. See 'Principal and
Selling Stockholders' and 'Description of Capital Stock.'
TECHNOLOGICAL CHANGES
The Company's principal end-user customers are engaged in the computer,
datacommunications, telecommunications, and electronics industries, all of which
industries are rapidly changing. Although the Company seeks to remain abreast of
the latest developments and available technologies in these industries, the
Company could be adversely affected by such developments and technological
advances and the introduction of new products in these industries. The Company
could also be adversely affected in the future by the development of alternative
fastener technologies.
RISK OF FOREIGN OPERATIONS
International sales accounted for approximately 25% of the Company's 1995
net sales. Because not all of the Company's sales and expenses are incurred in
U.S. dollars, the Company's operations have been and may continue to be affected
by fluctuations in currency exchange rates. Currency fluctuations may result in
variations in the Company's other income and consequently its results of
operations, but do not affect the Company's gross margins from sales.
Furthermore, currency
8
<PAGE>
fluctuations may cause reported sales to fluctuate from period to period
regardless of the fluctuation in the volume of such sales in foreign currencies.
The Company purchases forward foreign currency exchange contracts to attempt to
insulate the Company from the impact of foreign currency exchange rate
fluctuations.
Foreign sales are subject to numerous other risks, including political and
economic instability in foreign markets, restrictive trade policies of foreign
governments, economic conditions in local markets, the imposition of product
tariffs, and the burdens of complying with a wide variety of international and
U.S. export laws.
RECLASSIFICATION
On May 22, 1996, the Company intends to file an amendment to its
Certificate of Incorporation with the Delaware Secretary of State, which will
(i) increase the number of authorized shares of Capital Stock of the Company
from 3,000,000 shares to 23,000,000 shares, consisting of 20,000,000 shares of
Common Stock and 3,000,000 shares of Class A Common Stock, (ii) reclassify the
Prior Common Stock as Class A Common Stock, (iii) authorize a new class of
non-voting capital stock designated as Common Stock, and (iv) establish the
rights, powers, and limitations of the Common Stock and the Class A Common
Stock. On May 23, 1996, the Company will issue the Stock Dividend. The Stock
Dividend will have the same effect on the total number of shares of Capital
Stock outstanding as a four-for-one stock split. The ex-dividend date for the
Stock Dividend is May 24, 1996, which is also the date on which the Common Stock
and the Class A Common Stock are expected to begin to trade separately. The
reclassification of the Prior Common Stock and the issuance of the Stock
Dividend are collectively referred to herein as the 'Reclassification.'
The Class A Common Stock has the same rights, powers, and limitations as
that of the Prior Common Stock. The Common Stock is non-voting, except as
required by Delaware law. The other rights of the Common Stock and the Class A
Common Stock, including rights with respect to stock splits, the consideration
payable in a merger or consolidation and distributions upon liquidation, are the
same. See 'Description of Capital Stock.'
The first date on which the Common Stock is expected to trade on the
American Stock Exchange is May 24, 1996. There can be no assurance that the
trading price of the Common Stock will approximate either the offering price of
the Class A Common Stock or the historical prices of the Prior Common Stock as
adjusted to reflect the Reclassification. See 'Risk Factors' and 'Price Range of
Capital Stock and Dividends.'
9
<PAGE>
PRICE RANGE OF CAPITAL STOCK AND DIVIDENDS
The Company's Prior Common Stock has traded publicly on the American Stock
Exchange under the trading symbol PNN since 1966. The first date on which the
Common Stock and the Class A Common Stock are expected to trade on the American
Stock Exchange under the symbols PNN and PNNA, respectively, is May 24, 1996.
Prior to that date, there had been no public market for the Common Stock. See
'Risk Factors' and 'Reclassification.'
The following table sets forth, for the periods indicated, (i) the actual
high and low sales prices per share of the Prior Common Stock as reported by the
American Stock Exchange divided by four to give pro forma effect to the
Reclassification (which will have the same effect on the total number of shares
of Prior Common Stock outstanding as a four-for-one stock split) based on the
assumption that the Reclassification would have resulted in a proportionate
reduction in historical sales prices and (ii) the actual dividends paid per
share of Prior Common Stock divided by four to reflect the Reclassification
based on the assumption that dividends would have been paid at the same rate per
share on the Common Stock and the Class A Common Stock.
<TABLE>
<CAPTION>
PRIOR COMMON STOCK
---------------------------------
ADJUSTED
STOCK PRICE
-------------------- ADJUSTED
HIGH LOW DIVIDEND
--------- --------- -----------
<S> <C> <C> <C>
Year ended December 31, 1994
First Quarter.............................................................. $ 13.13 $ 11.75 $ .0625
Second Quarter............................................................. 13.03 11.78 .0625
Third Quarter.............................................................. 11.75 10.63 .0625
Fourth Quarter............................................................. 10.75 10.16 .1938(1)
Year ended December 31, 1995
First Quarter.............................................................. $ 14.75 $ 10.62 $ .0688
Second Quarter............................................................. 18.88 13.50 .0688
Third Quarter.............................................................. 25.13 18.38 .0688
Fourth Quarter............................................................. 24.25 19.25 .2938(2)
Year ending December 31, 1996
First Quarter.............................................................. $ 24.00 $ 21.25 $ .0688
Second Quarter (through May 20, 1996)...................................... 21.38 18.13 .1000(3)
</TABLE>
- ------------------
(1) Includes a regular quarterly dividend of $.0688 per share and an extra
dividend of $.125 per share. The regular quarterly dividend per share was
increased from $.0625 to $.0688 in the fourth quarter of 1994.
(2) Includes a regular dividend of $.0688 per share and an extra dividend of
$.225 per share.
(3) Payable on July 9, 1996 to stockholders of record on June 14, 1996.
On May __, 1996, the closing prices for the Common Stock and the Class A
Common Stock, as reported on the American Stock Exchange, were $______ and
$_____ per share, respectively. As of May ___, 1996, there were approximately
____ and ___ holders of record of each of the Common Stock and the Class A
Common Stock, respectively.
10
<PAGE>
DIVIDEND POLICY
The Company has paid quarterly cash dividends on the Prior Common Stock
since 1966. Any future determination as to the payment of dividends will be made
at the discretion of the Company's Board of Directors and will depend upon the
Company's results of operations, financial condition, capital requirements,
general business conditions, and such other factors as the Board of Directors
deems relevant. It is the current intention of the Board of Directors that,
following the Reclassification, the Company will pay quarterly cash dividends of
$.10 per share on the Common Stock and the Class A Common Stock and that the
Company will not pay additional year-end dividends in the future.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock by the
Company are estimated at approximately $33.7 million (or approximately $39.3
million if the over-allotment option is exercised in full), after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company intends to use such net proceeds to repay all
borrowings outstanding under the Company's short-term lines of credit and
accrued interest thereon, to expand the Company's production capacity, and for
working capital and general corporate purposes.
The Company's indebtedness under its short-term lines of credit (the
'Credit Facilities') was incurred for the purchase of capital equipment. At
March 31, 1996, the Company had approximately $26.5 million available under the
Credit Facilities. Interest on outstanding borrowings under the Credit
Facilities is payable based on money market rates of interest as offered from
time to time by the lenders. At March 31, 1996, $11.0 million was outstanding
under the Credit Facilities at a weighted average interest rate of 6.44%. At
April 30, 1996, the Company's line of credit with one bank in the amount of
$10.0 million expired and was not renewed by the Company.
The Company will not receive any of the proceeds from the sale of 1,100,000
shares of Common Stock by the Selling Stockholders. The Company will pay all
expenses incurred in the Offering other than the underwriting discounts and
commissions applicable to the shares being sold by the Selling Stockholders.
11
<PAGE>
CAPITALIZATION
The following table sets forth the cash and equivalents, short-term
investments, and the actual capitalization of the Company as of March 31, 1996,
after giving effect to the Reclassification and as adjusted to give effect to
the receipt and application by the Company of the estimated net proceeds from
the sale of 1,750,000 shares of Common Stock by the Company in this Offering
after deducting underwriting discounts and commissions and estimated offering
expenses. See 'Use of Proceeds.'
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and equivalents................................................................ $ 3,402 $ 26,141
Short-term investments.............................................................. 5,606 5,606
----------- -----------
Short-term debt..................................................................... $ 11,000 $ --
Stockholders' equity:
Common Stock, $.01 par value,
20,000,000 shares authorized, 5,316,075 shares issued and 5,121,246 shares
outstanding, and 7,066,075 shares issued and 6,871,246 shares outstanding as
adjusted (1)................................................................... 53 71
Class A Common Stock, $.01 par value,
3,000,000 shares authorized, 1,772,025 shares issued, and 1,707,082
outstanding.................................................................... 18 18
Additional paid-in capital.......................................................... 2,686 36,407
Retained earnings................................................................... 77,251 77,251
Unrealized (loss) on investments (net of tax)....................................... (64) (64)
Cumulative foreign currency translation adjustment.................................. (625) (625)
----------- -----------
79,319 113,058
Less cost of treasury stock......................................................... 952 952
----------- -----------
Total stockholders' equity........................................................ 78,367 112,106
----------- -----------
Total capitalization.............................................................. $ 89,367 $ 112,106
----------- -----------
----------- -----------
</TABLE>
- ------------------
(1) Based upon 5,121,246 shares of Common Stock outstanding as of March 31, 1996
after giving pro forma effect to the Reclassification and the issuance of
the Common Stock offered hereby by the Company, but excluding 650,000 shares
of Common Stock available for issuance under the Company's Equity Incentive
and Employee Stock Purchase Plans.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth in the following table
are derived from the consolidated financial statements of the Company. The
Company's consolidated financial statements as of December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 are included
elsewhere in this Prospectus and have been audited by Deloitte & Touche LLP,
independent auditors, whose report thereon is also included elsewhere in this
Prospectus. The Company's unaudited condensed consolidated financial statements
as of March 31, 1995 and 1996 are also included elsewhere in this Prospectus.
The selected consolidated financial data should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus and the information contained in Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ---------
1991 1992 1993 1994 1995 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales................................................ $ 70,845 $ 88,328 $ 100,665 $ 121,470 $ 141,268 $ 35,298
Cost of goods sold....................................... 51,045 61,127 70,979 83,128 96,190 24,630
--------- --------- --------- --------- --------- ---------
Gross profit............................................. 19,800 27,201 29,686 38,342 45,078 10,688
Selling, general and administrative expenses............. 14,077 16,765 18,596 21,842 24,056 6,016
--------- --------- --------- --------- --------- ---------
Operating profit......................................... 5,723 10,436 11,090 16,500 21,022 4,652
Other income............................................. 583 110 387 627 1,099 348
--------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative effect of 1992
and 1993 accounting changes............................ 6,306 10,546 11,477 17,127 22,121 5,000
Cumulative effect of 1992 and 1993 accounting changes.... -- 1,800 423 -- -- --
Provision for income taxes............................... 2,394 4,219 4,548 6,686 8,323 1,977
--------- --------- --------- --------- --------- ---------
Net income............................................... $ 3,912 $ 8,127(1) $ 7,352(2) $ 10,441 $ 13,798 $ 3,023
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Per share information:
Income before cumulative effect of 1992 and 1993
accounting changes................................... $ 0.57 $ 0.93 $ 1.02 $ 1.53 $ 2.02 $ 0.44
Net income (3)......................................... 0.57 1.19 1.08 1.53 2.02 0.44
Average number of common shares outstanding (3)........ 6,828 6,828 6,828 6,828 6,828 6,828
OTHER FINANCIAL AND OPERATING DATA:
Number of fasteners shipped (in millions)................ 896 1,259 1,267 1,569 1,836 420
Average price per thousand............................... $ 52.55 $ 52.59 $ 56.39 $ 57.70 $ 57.95 $ 60.00
Number of motors shipped (in thousands).................. 557 509 664 673 680 167
Average price per motor.................................. $ 32.36 $ 32.46 $ 35.47 $ 37.76 $ 41.12 $ 41.92
Gross margin............................................. 27.9% 30.8% 29.5% 31.6% 31.9% 30.2%
Capital expenditures (in thousands)...................... $ 2,435 $ 3,395 $ 8,354 $ 3,833 $ 17,213 $ 2,933
Depreciation (in thousands).............................. $ 2,819 $ 2,855 $ 3,180 $ 3,425 $ 4,165 $ 1,030
EBITDA (in thousands) (4)................................ $ 9,158 $ 13,412 $ 14,849 $ 20,629 $ 26,307 $ 6,041
Number of employees (at period end)...................... 806 978 1,008 1,088 1,211 1,111
Sales per employee (average) (in thousands).............. $ 85 $ 90 $ 101 $ 116 $ 123 $ 128
BALANCE SHEET DATA (AT PERIOD END):
(IN THOUSANDS)
Working capital.......................................... $ 29,665 $ 35,112 $ 34,953 $ 41,612 $ 38,881 $ 44,101
Property, plant, and equipment, net...................... 23,078 23,341 28,495 28,920 41,941 30,838
Total assets............................................. 57,486 67,132 73,542 82,127 96,074 88,855
Total debt............................................... -- -- 1,152 -- 1,500 --
Stockholders' equity..................................... 46,939 52,498 57,819 65,910 76,091 68,726
<CAPTION>
1996
---------
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales................................................ $ 39,028
Cost of goods sold....................................... 27,477
---------
Gross profit............................................. 11,551
Selling, general and administrative expenses............. 7,113
---------
Operating profit......................................... 4,438
Other income............................................. 136
---------
Income before income taxes and cumulative effect of 1992
and 1993 accounting changes............................ 4,574
Cumulative effect of 1992 and 1993 accounting changes.... --
Provision for income taxes............................... 1,705
---------
Net income............................................... $ 2,869
---------
---------
Per share information:
Income before cumulative effect of 1992 and 1993
accounting changes................................... $ 0.42
Net income (3)......................................... 0.42
Average number of common shares outstanding (3)........ 6,828
OTHER FINANCIAL AND OPERATING DATA:
Number of fasteners shipped (in millions)................ 513
Average price per thousand............................... $ 56.81
Number of motors shipped (in thousands).................. 188
Average price per motor.................................. $ 40.31
Gross margin............................................. 29.6%
Capital expenditures (in thousands)...................... $ 6,518
Depreciation (in thousands).............................. $ 1,181
EBITDA (in thousands) (4)................................ $ 5,779
Number of employees (at period end)...................... 1,291
Sales per employee (average) (in thousands).............. $ 125
BALANCE SHEET DATA (AT PERIOD END):
(IN THOUSANDS)
Working capital.......................................... $ 35,952
Property, plant, and equipment, net...................... 47,228
Total assets............................................. 109,946
Total debt............................................... 11,000
Stockholders' equity..................................... 78,367
</TABLE>
- ------------------
(1) In 1992, the Company changed its method of accounting to include production
tooling not consumed in production during the year in inventory at year end,
resulting in an increase in that year's net income of $1.8 million.
(2) In 1993, the Company adopted Statement of Financial Accounting Standards No.
109, 'Accounting for Income Taxes,' resulting in an increase in that year's
net income of $423,000.
(3) The per share data and the average number of common shares outstanding have
been adjusted to give pro forma effect to the Reclassification. See
'Reclassification.'
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA represents supplemental information
only and should not be construed as an alternative to operating income or to
cash flow from operating activities as defined by U.S. generally accepted
accounting principles.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the 'Selected
Consolidated Financial Data' and the Consolidated Financial Statements of the
Company and the Notes thereto and other financial information included elsewhere
in this Prospectus.
Overview
The Company's operations consist of two business segments: PEM brand
self-clinching fasteners, including fastener insertion machines, and Pittman
electric (dc) motors. Self-clinching fasteners, which accounted for
approximately 80% of the Company's consolidated sales in 1995 compared to 75% in
1991, are marketed through a worldwide network of distributors. In 1995, sales
to the computer/electronics and automotive industries accounted for
approximately 88% and 5% of fastener sales, respectively, with the balance
distributed among other industries, such as recreational equipment, commercial
appliances, and gaming machines.
Electric motors accounted for approximately 20% of the Company's
consolidated sales in 1995 compared to 25% in 1991, and are marketed in the
United States and Europe through regional sales representatives. The Company
primarily designs and manufactures its motors on a custom basis. End users of
the Company's motors include manufacturers of factory automation equipment,
office automation equipment, and hospital emergency/surgery equipment.
The Company's consolidated net sales increased from $70.8 million in 1991
to $141.3 million in 1995 and were $39.0 million for the first three months of
1996. Fastener unit sales increased 100.9% from 896 million in 1991 to 1.8
billion in 1995. Motor unit sales increased 22.1% from 557,000 in 1991 to
680,000 in 1995. In the first three months of 1996, the Company sold 513 million
fastener units and 186,000 motor units. This sales increase reflects the growth
of the personal computer and electronics markets, combined with increased
applications for the Company's products in other industries.
Historically, the Company has been able to achieve steady improvements in
profitability largely as a result of (i) increased customer demand for its
products, (ii) focus on cost containment and improved productivity, and (iii)
the general ability to provide the right product at the right time and at the
right location to support customer applications. The Company's gross margins
increased from 27.9% in 1991 to 31.9% in 1995 primarily due to the ability to
increase the production and shipment of fasteners without a proportionate
increase in fixed costs and overhead. As an example, the fixed manufacturing
cost of fasteners (i.e., depreciation and supervisory expenses) as a percentage
of sales declined from 11.6% in 1991 to 7.6% in 1995. In addition, process
improvement techniques, including focused work centers and product cells in
which fasteners are essentially completed before they leave the work center,
have led to manufacturing cost reductions. The Company is not always able to
pass raw material price increases along to its customers. However, through cost
reduction programs and by controlling the indirect and fixed costs of
operations, the Company increased the operating profit margins of its fastener
operations from 7.6% in 1991 to 16.2% in 1995. Annual price increases on the
Company's fastener products since 1991 have ranged from 2.0% to 2.5%.
The Company's brushless motors have an average price of approximately $210
per unit, reflecting more expensive materials and higher labor content, and are
used in equipment requiring a high degree of reliability. Brush-commutated
motors have an average price of $40 per unit and are typically used in less
expensive volume-related equipment. The percentage of total motor sales
represented by brushless motors was 8.1% in 1991 compared to 21.7% in 1995.
The motor operation's gross margins were 30.4% in 1991 compared to 28.0% in
1995. Continued emphasis on demand-flow technology has allowed Pittman to shift
from batch size manufacturing to lot size manufacturing, and reduce
work-in-process inventory by approximately 61%. Several of Pittman's key
productivity and cycle time reduction projects have also helped to increase some
component assembly productivity.
14
<PAGE>
The Company's export sales increased 119% from $16.2 million in 1991 to
$35.4 million in 1995. Foreign customers accounted for 20.4% of the Company's
sales in 1991 compared to 25.1% in 1995 and 25.0% in the first quarter of 1996.
The Company's export sales have benefitted from the ability to serve large
multi-national computer and electronic manufacturers which have shifted product
fabrication to offshore labor markets. The Company has maintained distribution
channels and inventories in Europe and the Pacific Rim for more than 25 years
and 10 years, respectively. Between 1991 and 1995, the Company's distributors
increased their inventories of the Company's fasteners nearly 500% in Europe and
over 800% in the Pacific Rim. In addition, the Company maintains an inventory of
more than 100 million fasteners at its Danboro, Pennsylvania facility. By
increasing product availability, the Company has better positioned itself to
meet the needs of its customers in the North American, European and Pacific Rim
markets, thereby supporting the significant sales growth.
The Company has continued to improve its ability to provide products in
regions strategic to the world's major electronics and computer manufacturers.
As part of increasing the worldwide availability of its products, the Company
recently established a subsidiary in Singapore through the acquisition of the
assets of the Company's previously independent distributor in Singapore. To
better meet the Pacific Rim demand for its fasteners, the Company intends to
create a master warehouse in Singapore that will serve the same function as the
Company's existing warehouse in England. The maintenance of significant
warehouse facilities in England and Singapore allows the Company to ship product
in bulk via ocean freight rather than more costly air shipments directly to the
end user. In addition, the Company plans to establish application engineering
capabilities in England and Singapore. While the Company's international pricing
is consistent with its domestic pricing, the Company's profits from export sales
may be affected to some extent by freight costs, currency fluctuations, duties,
and local administrative costs. The Company has not experienced any material
impact from these factors to date.
Currently, the Company's fastener operation is working at near full
capacity to meet strong demand. Overtime and higher than planned outside
supplemental screw machine support have impacted negatively the costs of the
Company's fastener operation recently. The Company has invested approximately
$21 million in aggregate capital expenditures over the past two years to
increase production capacity. The Company's objective is to reduce current
overtime levels and delivery lead times and enhance its ability to respond to
new growth opportunities. The Company typically experiences a period of six to
nine months between the purchase of equipment and its full inclusion into the
manufacturing process because of equipment manufacturers' lead times. The
Company's capital expenditure program is expected to affect negatively the
Company's margins in 1996 and part of 1997. However, by mid-year 1997 the
Company's production capacity is expected to increase by 27% over its 1995
production capacity.
In the past, the Company has experienced a surge in order volume during the
first two months of the calendar year as distributors build inventory to meet
customer demand. In addition, the first quarter of the year is often negatively
impacted by relatively higher payroll costs which precede the effect of price
increases. The Company's profits in the fourth quarter are typically negatively
affected by holiday-related labor inefficiencies. Contracts with major customers
are generally negotiated on an annual basis and as a result there is no
guarantee that the Company's product pricing will support historical profit
margins. As a result, the Company targets 5% annual gains in productivity and
also targets, at a minimum, a 15% return on equity. In 1994 and 1995, the
Company achieved a return on equity of 16.9% and 19.4%, respectively.
Results of Operations
The following table sets forth for the periods indicated net sales by
segment, domestic and foreign sales and their percentage of total net sales,
gross margin by segment and as a percentage of segment sales and other data
derived from the Company's consolidated statements of income. There can be no
assurance that the trends in operating results will continue in the future.
15
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------------- -------------------------------
1993 1994 1995 1995 1996
-------------------- -------------------- -------------------- -------------------- ---------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES:
Fasteners............. $ 77,192 76.7% $ 96,067 79.1% $ 113,323 80.2% $ 28,302 80.2% $ 31,475
Motors................ 23,473 23.3 25,403 20.9 27,945 19.8 6,977 19.8 7,554
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total............... $ 100,665 100.0% $ 121,470 100.0% $ 141,268 100.0% $ 35,299 100.0% $ 39,029
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Domestic.............. $ 80,106 79.6% $ 93,979 77.4% $ 105,831 74.9% 25,705 72.8% 29,262
Foreign............... 20,559 20.4 27,491 22.6 35,437 25.1 9,594 27.2 9,767
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total............... $ 100,665 100.0% $ 121,470 100.0% $ 141,268 100.0% $ 35,299 100.0% $ 39.029
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
GROSS MARGIN:
Fasteners............. $ 23,350 30.3% $ 31,427 32.7% $ 37,258 32.9% $ 8,818 31.2% $ 9,553
Motors................ 6,336 27.0 6,914 27.2 7,820 28.0 1,851 26.5 1,999
TOTAL COMPANY:
Gross profit.......... $ 29,686 29.5% $ 38,342 31.6% $ 45,078 31.9% $ 10,669 30.2% $ 11,552
Selling, general and
administrative
expenses ('SG&A')... 18,596 18.5 21,842 18.0 24,056 17.0 6,016 18.2 7,113
Operating profit...... 11,090 11.0 16,500 13.6 21,022 14.9 4,652 13.2 4,438
Net income............ 7,352 7.3 10,441 8.6 13,798 9.8 3,023 8.6 2,869
<CAPTION>
%
---------
NET SALES:
Fasteners............. 80.6%
Motors................ 19.4
---------
Total............... 100.0%
---------
---------
Domestic.............. 75.0%
Foreign............... 25.0
---------
Total............... 100.0%
---------
---------
GROSS MARGIN:
Fasteners............. 29.6%
Motors................ 26.5
TOTAL COMPANY:
Gross profit.......... 29.6%
Selling, general and
administrative
expenses ('SG&A')... 17.0
Operating profit...... 11.2
Net income............ 7.30
</TABLE>
Three Months ended March 31, 1996 compared to Three Months ended March 31,
1995
Consolidated net sales for the quarter ended March 31, 1996 were $39.0
million, versus $35.3 million for the three months ended March 31, 1995, a 10.5%
increase. Sales to customers outside the United States for the three months
ended March 31, 1996 were $9.8 million, versus $9.6 million for the three months
ended March 31, 1995, a 2.1% increase.
Net sales of the fastener operation for the three months ended March 31,
1996 were $31.5 million, versus $28.3 million for the three months ended March
31, 1995, an 11.3% increase. The number of fastener units shipped within North
America increased 19.6% from the first three months of 1995 to the first three
months of 1996, and represented 70.9% of total fasteners shipped in the first
three months of 1996. The number of fastener units shipped to Europe increased
approximately 22.3% from the first three months of 1995 to the first three
months of 1996, while the number of fastener units shipped to the Asia-Pacific
region decreased 18.9% from the first three months of 1995 to the first three
months of 1996. The continued strong demand for personal computers as well as
other electronic equipment, which accounted for 84.0% of fastener sales in the
first three months of 1995 and 1996, were the main cause of the increased
shipment volume in North America and Europe. However, this increase was offset
by the decline in the Asia-Pacific region which was caused by high retail
personal computer inventory levels resulting from a sales surge after the
release of 'Windows 95'. Unsold computer and peripherals inventory at the end of
1995 resulted in a slowdown in personal computer orders which negatively
impacted fastener sales in the first three months of 1996. Average selling
prices for fasteners shipped in the first three months of 1996 decreased 5.3%
compared to the first three months of 1995 because of a change in product mix.
Net sales of the motor operation for the first three months of 1996 were
$7.6 million, versus $7.0 million for the first three months of 1995, an 8.6%
increase. The number of motors sold increased 12.7% from the first three months
of 1995 to the first three months of 1996, while the average selling price
declined 3.6% from the first three months of 1995 as a result of a change in
product mix toward lower margin motors.
Consolidated gross margins for the first three months of 1996 was $11.6
million, versus $10.7 million for the first three months of 1995, an 8.3%
increase. Fastener gross margins increased 8.3% from the first three months of
1995 to the first three months of 1996 as a result of the increased number of
units sold without a proportionate increase in cost. As a percentage of sales,
however, fastener gross
16
<PAGE>
margins decreased from 31.1% in the first three months of 1995 to 30.3% in the
first three months of 1996 because costs increases incurred for raw material,
outside screw machine services, and tooling were not offset by price increases,
production efficiencies, and cost containment. The Company's price increase
announced on January 1, 1996, which became effective April 1, 1996, will
partially offset these cost increases for the remainder of 1996. Motor gross
margins increased approximately 8.0% from the first three months of 1995 to the
first three months of 1996 and remained constant at 26.5% of sales for both
periods.
SG&A expenses for the first three months of 1996 were $7.1 million, versus
$6.0 million for the first three months of 1995, an 18.2% increase. SG&A
expenses, as a percentage of sales, increased from 17.0% in the first three
months of 1995 to 18.2% in the first three months of 1996. Additional SG&A
staff, wage increases for current staff, and the establishment of a Singapore
distribution center all contributed to the increased SG&A expense.
Consolidated net income for the first three months of 1996 was $2.9
million, versus $3.0 million for the first three months of 1995, a 3.3%
decrease. Other income decreased 61.1% as a result of decreased investment
income. This decrease as well as the increased cost of sales and SG&A expenses
were partially offset by a Pennsylvania income tax rate reduction that lowered
the Company's overall effective tax rate from 39.5% in 1995 to 37.3% in 1996.
Year ended December 31, 1995 compared to Year ended December 31, 1994
Consolidated net sales for 1995 were $141.3 million, versus $121.5 million
for 1994, a 16.3% increase. Sales to customers outside the United States for
1995 were $35.4 million, versus $27.5 million for 1994, a 28.9% increase.
Net sales of the fastener operation for 1995 were $113.3 million, versus
$96.1 million for 1994, a 17.9% increase. The number of fasteners sold increased
17.7% from 1994 to 1995. The number of fastener units shipped within North
America increased 12.2% from 1994 to 1995, and represented 72.1% of total
fasteners shipped in 1995. The number of fastener units shipped to Europe and
the Asia-Pacific region increased 37.2% and 26.4%, respectively, from 1994 to
1995, and represented 21.9% and 6.0%, respectively, of total fastener units
shipped in 1995. The continued strong demand for personal computers as well as
other electronic equipment, which accounted for 90.0% of fastener sales in 1994
and 1995, has been the main cause of the increased shipment volume. Average
selling prices for fasteners shipped in 1995 increased less than 1% from 1994 to
1995 as a result of selective price increases effective in the second quarter of
1995.
Net sales of the motor operation for 1995 were $27.9 million, versus $25.4
million for 1994, a 10.0% increase. The number of motors sold increased 1.0%
from 1994 to 1995, while the average selling price increased 8.9% due to a shift
in product mix toward higher-priced brushless motors and motors with additional
features and options. During 1995, brushless motor sales, which carry higher
margins, comprised 21.7% of total motor sales compared to 16.8% in 1994.
Consolidated gross margins for 1995 were $45.1 million, versus $38.3
million for 1994, a 17.8% increase. Fastener gross margins increased 18.6% from
1994 to 1995 as a result of the increased number of units sold without a
proportionate increase in cost. As a result of the continuing increase in demand
for the Company's fasteners, manufacturing operations were nearly at full
capacity, allowing the Company to realize economies of scale with regard to its
fixed expenses. In addition, increases in raw material costs were offset by cost
reductions within the manufacturing departments.
SG&A for 1995 was $24.1 million, versus $21.8 million for 1994, a 10.1%
increase. However, as a percentage of sales, SG&A improved from 18.0% in 1994 to
17.0% in 1995. Selling expenses, as a percentage of sales, declined because
sales on which the Company does not pay commissions increased in 1995 compared
to 1994. The Company's sales to Europe and to the Pacific Rim are made through
subsidiaries and distributors and consequently carry no commission-related
expenses. These sales increased approximately 29% in 1995 compared to 1994. In
addition, the increase in the Company's general and administrative expenses was
less than the increase in the Company's sales.
17
<PAGE>
Consolidated net income for 1995 was $13.8 million, versus $10.4 million
for 1994, a 32.7% increase. Increased investment income and favorable exchange
rates in 1995 contributed $.5 million to other income in 1995. The Company's
effective tax rate decreased from 39.0% in 1994 to 37.6% in 1995. This reduction
was caused primarily by a Pennsylvania state income tax rate reduction that was
retroactive to the beginning of 1995. These factors, combined with the operating
efficiencies associated with increased capacity utilization, and the increased
sales volume, all contributed to the increase in net income in 1995.
Year ended December 31, 1994 compared to Year ended December 31, 1993
Consolidated net sales for 1994 were $121.5 million, versus $100.7 million
for 1993, a 20.7% increase. Sales to customers outside the United States were
$27.5 million for 1994, versus $20.6 million for 1993, a 33.7% increase.
Net sales of the fastener operation for 1994 were $96.1 million, versus
$77.2 million for 1993, a 24.5% increase. The number of fasteners sold increased
22.3% from 1993 to 1994. The number of fastener units shipped within North
America increased 17.7% from 1993 to 1994, while the number of fastener units
shipped to Europe and the Asia-Pacific region increased 37.5% and 43.5%,
respectively, from 1993 to 1994. This volume increase resulted from the
continuing demand for telecommunications and data communications equipment and
personal computers. The remainder of the fastener revenue increase was due to an
effective selling price increase of approximately 3% implemented during the
second quarter of 1994.
Net sales of the motor operation for 1994 were $25.4 million, versus $23.5
million for 1993, an 8.2% increase. The number of motors sold increased 1.4%
from 1993 to 1994, while the average selling price increased 6.8% from 1993 to
1994 due to a shift in product mix towards higher-priced brushless motors.
Domestic motor sales increased 12.1% from 1993 to 1994, while foreign sales
decreased 17.5% due to a product phase-out by an overseas customer. During 1994,
brushless motor sales, which carry higher margins, comprised 16.8% of total
motor net sales compared to 14.3% in 1993.
Consolidated gross margins for 1994 were $38.3 million, versus $29.7
million for 1993, a 29.3% increase. Fastener gross margins increased 34.6% from
1993 to 1994 as a result of the increased number of units sold without a
proportionate increase in costs. As a result of the continuing increase in
demand for the Company's fasteners, manufacturing operations were nearly at full
capacity, allowing the Company to realize economies of scale with regard to its
fixed expenses. In addition, increases in raw material costs were offset by cost
reductions within the manufacturing departments.
SG&A for 1994 was $21.8 million, versus $18.6 million for 1993, a 17.5%
increase. However, as a percentage of sales, SG&A declined from 18.5% in 1993 to
18.0% in 1994 as sales volume increases more than offset the labor and benefit
increases included in SG&A. Cost of products sold, as a percentage of sales,
also decreased from 70.5% in 1993 to 68.4% in 1994 due to economies of scale
resulting from increased production volume, better factory utilization, and
continued emphasis on cost containment.
Consolidated net income for 1994 was $10.4 million, versus $7.4 million for
1993, a 40.5% increase. Adoption of Statement of Financial Accounting Standards
No. 109, 'Accounting for Income Taxes' resulted in an increase in net income of
$.4 million in 1993. Other income totaled $.6 million in 1994, an increase of
62.2% over 1993. This increase was primarily caused by favorable currency
exchange rates as well as an increase in investment income.
Liquidity and Capital Resources
The Company's liquidity needs are primarily for capital expenditures and
working capital. Cash flow from operations continues to be the primary source of
financing for the Company's growth. The Company generated cash from operations
of $14.7 million in 1995 compared to $12.3 million in 1994 and $9.0 million in
1993. Working capital decreased in 1995 to $38.9 million from $41.6 million in
18
<PAGE>
1994 primarily due to the increase in notes and accounts payable needed to
finance capital expenditures and raw material inventory. Working capital
increased to $41.6 million in 1994 from $35.0 million in 1993 primarily due to
increased receivables resulting from increased sales volume.
The Company annually invests in capital assets primarily to increase
production capacity and efficiency. In 1995, the Company spent $17.2 million for
capital expenditures in response to the continuing demand for the Company's
products. These expenditures included construction of a 43,000 square foot
addition to the Company's Danboro facility, which is expected to be completed in
June 1996. Capital expenditures in 1994 and 1993 were $3.8 million and $8.4
million, respectively. In addition to the working capital described above, the
Company had available unused short-term lines of credit totaling $36.0 million
as of December 31, 1995. The Company expects to utilize a portion of these
credit lines, together with a portion of the proceeds of the Offering, to
supplement cash flow from operations to finance capital expenditures of
approximately $25 million in 1996, including a new 120,000 square foot facility
to replace the Company's 58,000 square foot facility in Winston-Salem, North
Carolina. The Company's five-year plan includes $100 million in capital
expenditures to increase capacity to 3.0 billion fasteners annually during this
period. The Company expects to use internally generated earnings and external
financing to fund these expenditures.
The Company's total dividends paid increased 31.1% from $2.6 million in
1994 to $3.4 million in 1995 after having increased 32.6% from $2.0 million in
1993 to $2.6 million in 1994. On April 17, 1996, the Company declared a
quarterly cash dividend of $.10 per share, on total shares outstanding after
the Stock Dividend, payable on July 9, 1996, to stockholders of record on
June 14, 1996.
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<PAGE>
BUSINESS
THE COMPANY
The Company is the world's leading manufacturer of self-clinching fasteners
used by the computer, datacommunications, telecommunications, general
electronics, automotive, and avionics industries. PEM self-clinching fasteners,
which accounted for 80% of the Company's sales in 1995, were first developed by
the Company's founder in 1943. Self-clinching fasteners become an integral part
of the material in which they are installed and provide a reliable means of
attaching components to sheet metal or plastic. Typical applications for the
Company's fastener products include personal computers, computer cabinetry,
power supplies, instrumentation, telecommunications equipment, and certain
automobile parts, such as air bags and windshield wipers. The Company's Pittman
division manufactures high performance permanent magnet dc motors used in
electronics, medical, and manufacturing applications.
The Company's fasteners are primarily used by sheet metal fabricators which
utilize the Company's fasteners to produce subassemblies for OEMs. The Company's
customers seek fastener solutions which provide lower total installed cost and
are highly reliable, thereby lowering production and service costs. The
Company's engineers and independent distributors continually work in close
collaboration with OEMs and their subcontractors to determine appropriate
fastener applications, which often results in OEMs specifying the Company's
fasteners. Self-clinching fasteners generally compete against loose hardware,
such as nuts and bolts. The Company's fasteners typically sell at a premium to
loose hardware. However, the Company's fasteners generally result in lower
overall manufacturing costs.
The Company also manufactures and sells manual and automated presses for
fastener installation under the PEMSERTER trademark. The rapid and accurate
installation provided by PEMSERTER presses, together with the Company's broad
range of fastener products, provides the Company's customers with a complete
fastening system.
The Company's Pittman division produces high-quality, high-performance,
permanent magnet motors used in light-weight precision applications such as
chart drives, tape drives, computer-aided drafting, robotics, mass information
data storage, and medical equipment. Pittman's broad range of products can be
economically adapted to the specific requirements of individual customers.
The Company has built a strong track record of growth and profitability.
From 1991 to 1995, sales have doubled and operating profits have increased from
$5.7 million to $21.0 million. The Company believes its success has been
primarily driven by the following strengths:
Strong Market Share. The Company has significantly increased its market
share over the past five years and estimates that it holds approximately 50% of
the worldwide market for self-clinching fasteners. The Company believes its
domestic market share is approximately 70%. In Europe and in Asia, the Company's
market share for self-clinching fasteners is approximately 38% and 14%,
respectively. The Company believes it has an advantage over its competitors
based on its: (i) significant manufacturing capacity, (ii) quality raw material
sourcing, (iii) high standards of internal manufacturing controls, (iv)
inventories maintained in Company warehouses in North America, Europe, and Asia,
and (v) comprehensive product line.
Long-standing Customer Relationships. The Company's strong relationships
with a diverse base of customers continually allows for the identification of
new business opportunities. The Company has been a long-term supplier of
fasteners to many of its customers. For example, the Company has supplied IBM,
Hewlett-Packard, Pitney-Bowes, and Xerox for an average of 25 years. The Company
believes that it has earned its position with such customers by virtue of its
design engineering capabilities, timely delivery, excellent quality, and
customer service.
Well-Positioned in Rapidly Growing Computer/Electronics Markets. The
Company's fasteners are on the preferred vendor list of Compaq and other OEMs
which comprise approximately 33% of the
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<PAGE>
worldwide personal computer market. The Company's fasteners are used by many of
the world's largest electronics and telecommunication OEMs, including Alcatel,
AMP, AT&T, Ericsson, Philips, and Siemens. As a result, the Company expects to
increase sales as these markets continue to grow domestically and
internationally.
Broad Product Application Across a Diverse Group of Industries. The
Company believes it benefits from the diversity of applications for its
self-clinching fasteners across a broad range of industries. The Company shipped
fasteners to over 12,000 customers in 1995 and no single market segment
accounted for more than 15% of the Company's total sales in 1995.
Recognized Leader in Fastening Solutions. The Company believes its
commitment to working with OEMs early in the design process places it at the
forefront in providing fastening solutions. The Company's success and reputation
for consistently developing such solutions often results in customers specifying
PEM fasteners for their products.
Successful Management Team. The Company believes an important element of
its success is its highly experience senior management team. Kenneth A.
Swanstrom, the Company's Chief Executive Officer, has been with the Company
since 1960. The Company's Chief Financial Officer has been with the Company for
nearly 20 years. Since 1990, the Company has added management with significant
industry experience in key marketing, manufacturing and engineering positions.
BUSINESS STRATEGY
The Company believes that the current worldwide market for self-clinching
fasteners is approximately $230 million. The Company estimates that the current
total market for all forms of fasteners which potentially could be replaced by
PEM fasteners is approximately $600 million. The Company believes it is well
positioned to achieve continued growth and intends to build upon its success by
relying on a strategy which emphasizes the following key elements: (i) focus on
new customer applications and product development, (ii) expand production
capacity, (iii) continue to improve productivity, (iv) implement cost reduction
initiatives, and (v) increase sales to foreign markets.
Focus on New Applications and Product Development. The Company is committed
to growing with its customers both domestically and abroad. By working with OEMs
early in the design process, the Company's fasteners are often selected for use
when new products or new markets are addressed. The Company believes
considerable opportunities are available in Europe and in Asia given the growth
of the computer and electronics markets in these regions. With over 3,000
readily available proprietary catalog products, the Company is well positioned
to meet the needs of its customers. In addition, the Company engages in the
continuous development of new products and product extensions.
Expand Production Capacity. From 1991 to 1995, demand for the Company's
fasteners has increased more rapidly than the Company's capacity. In spite of
restricted capacity, fastener units shipped have more than doubled over this
period from 896 million to 1.8 billion annually. In 1995, the Company spent
$17.2 million for capital expenditures in response to the continuing demand for
the Company's products. These expenditures included construction of a 43,000
square foot addition to the Company's Danboro facility, which is expected to be
completed in June 1996. The Company intends to utilize a portion of its credit
lines and of the proceeds of this Offering to supplement cash flow from
operations to finance capital expenditures of approximately $25 million in 1996
including a new 120,000 square foot facility to replace the Company's 58,000
square foot facility in Winston-Salem, North Carolina. These capital
expenditures are expected to increase fastener production capacity by
approximately 27%, allowing the Company to ship 2.3 billion fastener units
annually by early 1997. The Company's five-year plan includes $100 million in
capital expenditures to increase capacity to 3.0 billion fasteners annually by
2000.
Continue to Improve Productivity. To increase efficient utilization of its
manufacturing facilities, the Company implements programs which include cell
manufacturing and focused work
21
<PAGE>
centers, demand flow production, new tooling, and implementation of new heat
treating methods and washing procedures. The Company targets 5% annual increases
in productivity. The Company will continue to attract and retain
highly-qualified employees by providing an environment which promotes
creativity.
Implement Cost Reduction Initiatives. Gross margins have increased from
28.0% in 1991 to 31.9% in 1995 despite a doubling of sales during this period.
In addition, the Company has improved operating margins from 8.1% in 1991 14.9%
in 1995 by controlling SG&A expenses. The Company intends to continue to reduce
costs through initiative which monitor raw material sourcing, encourage
manufacturing innovations, and preserve a stable and productive work force.
Increase Sales to Foreign Markets. Since 1991, the Company's foreign sales
have increased approximately 119% from $16.2 million to $35.4 million in 1995
and currently represent 25.1% of total sales. The Company has recently acquired
its previously independent distributor in Singapore which affords the Company a
hub from which to enhance service to customers in the Pacific Rim. The Company
is also establishing an applications engineering center at its facility in
Doncaster, England.
PEM FASTENER PRODUCTS
Products and Markets
The Company's fastener products include self-clinching studs, nuts,
standoffs, panel fasteners, inserts, and other specialty fastener and insert
products. The Company believes that it has an advantage over other manufacturers
of self-clinching fasteners based on the reputation it enjoys for its large
manufacturing capacity, the quality of its raw material sourcing, the high
standards of the Company's internal manufacturing controls, the inventories
maintained at the Company's three warehouse facilities, and the breadth of the
Company's product line. The Company is continuously pursuing the creation of new
markets for its products by developing new applications, products, and product
extensions for the industries the Company serves. However, by providing a
general methodology for the assembly of products using sheet metal or plastic,
the Company's fastener business is not dependent upon the continued existence of
any particular product application and is highly adaptable to technological
changes.
The Company believes that one of its primary strengths is the use of its
fasteners throughout an extremely diverse group of products and across a wide
range of industries. Although the computer industry is the largest single market
sector which uses the Company's fasteners, computer manufacturers accounted for
less than 15% of the Company's total fastener shipments in 1995. The Company
shipped fasteners to over 12,000 customers in 1995, and no single end-user of
the Company's products accounted for more than 10% of the Company's total sales.
Product Segments
The table below highlights some of the major markets and products which use
the Company's fasteners.
<TABLE>
<CAPTION>
ELECTRONICS MARKETS (88%) AUTOMOTIVE MARKETS (5%) OTHER MARKETS (7%)
- -------------------------- ----------------------- ------------------
<S> <C> <C>
Personal computers Air bags Test equipment
Computer peripherals Wiper blades Garage door openers
Telecommunications equipment Engine brackets Vending machines
Datacommunications equipment Muffler hangers Gas meters
TV set-top boxes Bumper fasteners Snowmobiles
ATM machines After-market trim Gaming machines
</TABLE>
22
<PAGE>
Electronics
The Company's marketing and engineering efforts are closely aligned with
one another. As a result, the Company is able to identify potential new
applications and markets for fasteners on a continuous basis and provide
innovative solutions to a wide variety of customers' fastening problems. This
approach has led the Company to focus on many of the rapidly growing companies
within the computer, electronics, and telecommunications industries. Fleck
Research Institute estimates that the computer, telecommunications, and
datacommunications sectors will grow annually by 8.3%, 5.8%, and 15.2%,
respectively, through the year 2000. The Company tracks computer chip shipments,
a barometer for growth of the electronics industry, which have increased by 30%
to 40% annually over the last five years and are expected to grow at a rate of
20% annually through 2000. Continued strong demand for telecommunications and
information technology worldwide and specifically for emerging market countries
should fuel growth of these sectors well into the next century.
Use of the Company's fasteners has also increased in telecommunications
equipment applications, including telephone switching equipment, cellular
transmission equipment, and base equipment. The increasing need for high quality
fasteners in datacommunications equipment, such as net servers and data storage
equipment, has also expanded the markets for the Company's products.
The electronics markets have historically accounted for a significant
portion of the Company's fastener sales. Self-clinching fasteners provide a
strong and reliable means of attachment of components in materials, such as
sheet metal or plastic, that are too thin to support load-bearing threads. Once
a fastener has been installed in such sheet material, an ordinary bolt or
machine screw can be inserted into the threaded cavity of the fastener, thereby
permitting the attachment to the sheet material of an item which would otherwise
have to be permanently riveted or welded to the sheet. Computer and electronics
manufacturers have increasingly shifted to the Company's self-clinching
fasteners to provide an improved product at a lower overall manufacturing cost.
The Company's fasteners, primarily because of an extremely low parts per million
defect rate, are currently on the preferred or designated supplier list for
Compaq and other OEMs which currently comprise 33% of the worldwide personal
computer market. Such designation provides significant opportunities for the
Company while it increases capacity domestically and distribution on a global
scale.
The Company has established its position within the computer and
electronics markets by successfully identifying and meeting the needs of the
fastest growing OEMs. The Company believes its ability to provide effective
fastener solutions in a variety of electronics applications differentiates it
from many of its competitors. Since 1991, the Company has met the high volume
demand for self-clinching fasteners of Compaq, one of the world's largest
computer manufacturers, and has increased shipments to Compaq's subcontractors
from approximately six million units in 1991 to approximately 100 million units
in 1995.
The Company believes its designation as a lowest cost supplier by AMP, a
major international electronics manufacturer, positions the Company to benefit
from continued demand for existing products, and affords a significant advantage
for new product introductions by that manufacturer. Internationally, the Company
has benefited also from increasing its distribution capacity to serve growing
demand from its bases in England and Singapore.
In addition to gaining new business through its preferred supplier status
with certain customers, the Company constantly strives to provide manufacturers
with fastener solutions for both new products and new applications and with
replacements to less effective fastening systems, such as loose
23
<PAGE>
hardware, in existing products. Below is a list of recent new applications for
the Company's fasteners and the advantages provided thereby.
<TABLE>
<CAPTION>
PRODUCT PENN ENGINEERING ADVANTAGE
- ------------------------------------ ---------------------------------------------------------------------------
<S> <C>
Supercomputers The Company's double sided pin replaces two more costly pins that require
hand attachment
Home computers Larger body size of the Company's fastener resolves critical grounding
issues
Connector housing for high speed The Company's fastener replaces four pieces of loose hardware
data exchange equipment
Global positioning systems The Company's fasteners meet stringent durability tests and replace loose
hardware
Cover plate for compact cellular The Company's stud eliminates costs and steps involved with tapping and
transmitter combiner soldering, and provides more consistent torque-out and push-out values
Printed circuit boards for mobile The Company's fastener eliminates loose hardware, speeds assembly, and
telephone terminals allows quicker access to boards for field service
</TABLE>
Automotive
The Company has a long history of supplying major automotive OEM and
aftermarket suppliers, and sales to the automotive industry constituted
approximately 5% of the Company's sales in 1995. The Company has built its
position in the automotive industry by supplying customers' needs for
highly-engineered fastening solutions. The Company's fasteners are used in the
manufacture of windshield wiper systems, exterior and interior trim systems such
as door handles, instrument panels, and bumpers, and automotive electronic
systems for sunroofs, global positioning systems, and vehicle security systems.
In 1994, the Company was designated as a Tier I automotive supplier.
The Company's engineers work in close collaboration with automotive
suppliers to identify trends and future opportunities. For example, the
Company's fasteners were among the first used in airbags in 1980. Today, the
Company's fasteners are used by the five suppliers which hold over 90% of the
worldwide automotive airbag market. The Company has been able to consistently
meet the stringent quality, delivery, and service requirements of the world's
leading automotive airbag suppliers. Accordingly, the Company expects to
continue to benefit from increasing airbag demand as regulatory and consumer
pressures make multiple airbags standard for most vehicles.
Competitive Advantages
The Company's application engineers work in collaboration with OEMs to
develop innovative solutions to fastening needs, which often results in the OEM
including the Company's fasteners in production specifications. The Company's
engineering representatives and its independent distributors work with
subassembly fabricators and OEMs to develop fastening solutions which will
reduce overall manufacturing costs.
The Company's fastener products compete on the basis of product quality,
breadth of product line and reliability of delivery, and to a lesser extent, on
price. Just-in-time manufacturing and designed-for-assembly or
designed-for-manufacturing methodologies adopted by many electronics
manufacturers place increased demands on subcontractors' and assemblers' to
produce high volumes of products within short lead times. The Company believes
that its large manufacturing capacity, quality raw materials sourcing, broad
product line, and maintenance of inventories in Pennsylvania, England, and
Singapore provide a competitive advantage. The Company's products typically sell
at a
24
<PAGE>
premium compared to loose hardware; however, the speed and cost of installation
and low rejection rate usually result in lower overall assembly costs. The
Company maintains a catalog of more than 3,000 readily available proprietary
fastener products.
Future Growth Opportunities
The Company believes that the current worldwide market for self-clinching
fasteners is approximately $230 million. If all other forms of fasteners are
included that could potentially be replaced with PEM brand self-clinching
fasteners, the Company estimates a current total market of approximately $600
million. For example, self-clinching fasteners are finding increasing
applications as replacements for weld nuts and weld studs that have historically
been used in large volumes in the appliance and automotive industries due in
part to the increased use of electronic components in automobiles and
appliances.
The Company originated the market for self-clinching fasteners and believes
it manufactures more self-clinching fasteners than any other company. The
Company further believes that it offers a broader range of self-clinching,
broaching, and insert fasteners than any of its competitors. Both the Company's
fastener and motor divisions were awarded IS0-9001 certification in 1995. This
recognition of the Company's compliance and adherence to international quality
standards also provides the Company with a competitive advantage.
Sales of fasteners to customers in the United States and Canada accounted
for 72% of total fastener sales in 1995. Export shipments in terms of units
increased from 19.5% of total fastener shipments in 1991 to 28% of total
fastener shipments in 1995. The Company's sales of fasteners to customers in
Europe, where the Company has maintained a presence for over 25 years, have
increased 294% since 1991. The Company owns and maintains warehouse facilities
in England and Singapore to ensure that adequate supplies of the Company's
products are available to its customers. In addition to the inventory of
fasteners located in those facilities, the Company's Danboro facility maintains
significant supplies of inventory for its domestic distributors that can also be
used for export sales. While the design and process engineering activities have
historically been concentrated in the United States, the Company has experienced
a shift toward increased design activities overseas. To address this change and
to strategically position itself in these growing markets, the Company is
developing an applications engineering center at its facility in England to
serve the European markets and plans to establish a similar center in Singapore
to serve the Pacific Rim markets.
Manufacturing
All fastener products produced by the Company are fabricated from metal bar
stock of various shapes and sizes, and coiled (wire) stock of various diameters.
The materials used include brass, low carbon steels, free machining steels,
aluminum, and various stainless steel alloys. The Company purchases
approximately 70% of its fastener raw material from domestic sources.
The fastener manufacturing process involves machining, including single and
multiple-spindle screw machines, multi-station cold forming machines, and cold
heading equipment to produce both internally and externally threaded fasteners.
Secondary equipment (such as thread rolling, tapping, and assembly) and other
finishing processes are involved in producing the completed fastener. Heat
treating is required on approximately 50% of the Company's fastener products to
produce a hardness greater than the sheet in which the part is installed, and
approximately 60% of the Company's products also require some type of plating,
primarily zinc, for surface protection. The Company performs substantially all
of its heat treating requirements, but all of its plating requirements are
provided by subcontractors.
The Company has an advantage over its competitors due to its raw material
purchasing power, its substantial capital expenditure program, its extensive
installed machine base, and its over 50 years of manufacturing experience. The
Company designs and manufactures much of its own production tooling because
equivalent tools are not available in the marketplace. All manufacturing
equipment purchased by the Company is first analyzed in depth to evaluate its
potential for increased speed,
25
<PAGE>
improved quality, compatibility with existing tooling and product flow, and
operator friendliness. Typically, an equipment purchase is expected to produce a
full return on investment within two years. Recently purchased equipment has
production capabilities which exceed that of most existing equipment by over
55%.
The Company has realized a decrease in the cost of fastener products sold
as a percentage of sales from 72.1% in 1991 to 68.1% in 1995. This improvement
has resulted from economies of scale due to increased production volume, more
efficient factory utilization, and process improvements such as cell
manufacturing and focused work centers.
The Company's fastener production capacity increased by approximately 24%
during 1995 through the expansion of facilities, addition of equipment, and
refinements in production processes. The Company is currently involved in
efforts to expand its fastener production capacity which the Company anticipates
will increase such capacity by approximately 27% by early 1997. Several other
projects are underway to improve labor-intensive operations such as labor
reporting, inventory control, production reporting, job tracking, and raw
material management. The Company's continuing objective is to increase efficient
utilization of its human resources as well as its physical resources. The
Company targets annual productivity increases of 5%.
PITTMAN DIVISION MOTOR PRODUCTS
Products and Markets
The Company's Pittman division develops, manufactures, and sells permanent
magnet, direct current motors including LO-COG(Registered) brush-commutated
'servo' motors, which provide precise control of speed and torque, and ELCOM
brushless servo motors, which feature slotless stator construction and
dramatically increased life span due to the elimination of brush commutation and
its associated dust, mechanical noise, and electrical noise problems. Pittman's
application engineers and technical sales representatives work closely with its
over 4,000 active customers to develop the exact motor configuration to meet the
customers' needs. Pittman was among the first motor manufacturers to develop
motor components which could be used in assembling a multitude of motor
products. By combining shaft lengths, motor housing lengths, winding
characteristics, brush chemistry, lubricant chemistry, gear combinations, and
other customized features, thousands of motor combinations are readily available
to solve a particular customer's needs.
Founded in 1934, Pittman rapidly gained recognition as one of the
preeminent motor manufacturers in the hobby field. After its acquisition by the
Company in 1970 and an infusion of new capital, Pittman began to expand its
product line substantially to address office automation and instrumentation.
The total electric motor market in North America in 1995 had revenues in
excess of $8.7 billion with over 758 million units shipped by over 100
manufacturers. Pittman currently competes in a segment of this market which is
comprised of approximately 20 motor manufacturers in the factory automation,
office automation, and instrumentation markets. These markets, which currently
have approximately $330 million in revenues and shipments of approximately 4.9
million units, are expected to grow to $460 million in revenues, and shipments
of 7.0 million units by the year 2000.
Product Segments
The following table sets forth some of the applications that use Pittman
motors.
<TABLE>
<CAPTION>
FACTORY AUTOMATION (50%) OFFICE AUTOMATION (45%) INSTRUMENTATION (5%)
- ------------------------ ----------------------- --------------------
<S> <C> <C>
Robotics Tape drives Centrifuges
X-Y tables Archival storage equipment Lab micropositioners
Material handling equipment Printers Analog recorders
Packaging equipment Copiers Medical diagnositcs
Process control equipment ATM machines Blood analyzers
</TABLE>
26
<PAGE>
Customers range from multi-national computer companies to semiconductor
processing equipment manufacturers. While Pittman's top 25 customers represent
approximately 50% of its sales, no single customer accounts for more than 10% of
sales. The Company believes that Pittman's long history of quality products and
engineering expertise will enable it to compete effectively and to expand its
market share and markets.
Pittman's brush-commutated motors are often found in office automation
applications and have an average price of $40. Pittman's brushless motors are
favored where a significantly increased life span is required, such as
semiconductor manufacturer's processing equipment and medical equipment, and
have an average price of $210. Pittman has in excess of 6,000 documented design
permutations of the seven modular product families.
The following table presents the amount and percentage of total Pittman
sales of brush-commutated and brushless motors for 1993 through 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1993 1994 1995
-------------------------- -------------------------- --------------------------
NET SALES % OF SALES NET SALES % OF SALES NET SALES % OF SALES
----------- ------------- ----------- ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Brush-commutated............................ $ 18,087 82.5 $ 20,923 83.1 $ 21,671 78.2
Brushless................................... 3,839 17.5 4,254 16.9 6,055 21.8
----------- ------ ----------- ------ ----------- ------
$ 21,926 100.0 $ 25,177 100.0 $ 27,726 100.0
----------- ------ ----------- ------ ----------- ------
----------- ------ ----------- ------ ----------- ------
</TABLE>
In an effort to increase its export sales, Pittman has established a
relationship with a Swiss motor manufacturer that conducts all of Pittman's
European sales. Technical sales representatives trained by Pittman will seek new
applications and customers in Europe. Pittman is currently developing a strategy
to expand its presence in the Asia-Pacific market.
Manufacturing
All Pittman motors are manufactured to customer order. As a result,
finished goods inventories are minimal. The primary manufacturing operation
performed at Pittman is the assembly of brush commutated and brushless motors.
Pittman maintains basic manufacturing capabilities such as turning, milling,
drilling, and tapping operations, but these processes are primarily used to
facilitate the modification of sub-level components. There are four main
sub-assembly components and seven modular product families involved in the basic
brush and brushless products. This manufacturing strategy supports the
value-added marketing strategy employed by Pittman over the past six years. The
strengths of Pittman's manufacturing operations are a highly dedicated and
motivated work force and a flexible, modular manufacturing methodology.
Pittman utilizes just-in-time and demand-flow manufacturing technology
whereby quantities of motors are assembled in lots of one, thus reducing
work-in-process and lead times and increasing manufacturing flexibility to
customers' changes and quality. As a result of the implementation of these
processes beginning in 1990, manufacturing lead time has been reduced from
twelve weeks to four weeks. Work-in-process inventory has been reduced by 61%
and component inventory has been reduced by approximately 36%. The
implementation of these strategies aided the process of Pittman's receipt of ISO
9001 certification. Pittman has focused its manufacturing efforts toward
value-added assembly, and currently more than 55% of all products receive at
least one value-added assembly operation.
Pittman has several key productivity and cycle time reduction projects
currently in various stages of completion for 1996. The first project will allow
the production rate of one of Pittman's key sub-assembly components (magnet and
housing) to increase by 50%. The second project utilizes a state-of-the-art
custom manufactured computer numerically controlled (CNC) lathe that allows the
reduction of final assembly rework by as much as 90% in most cases. The third
project is the development of a proprietary process that has the potential to
improve the productivity of the final assembly and test operations by up to 25%.
27
<PAGE>
Pittman has established a goal of reducing its manufacturing lead time to
one week by the year 2000. Pittman has committed to achieving continuous cycle
time reduction, continuous product improvement, and continuous quality
improvement through the utilization of advanced manufacturing strategies and
technologies.
SALES AND MARKETING
Fasteners. The Company's fastener products are sold through a world-wide
network of 39 authorized distributors located in 29 countries and the Company's
subsidiaries in Singapore and England. Many of the distributors and engineering
representative organizations have been affiliated with the Company for more than
20 years. The Company's independent distributors, which maintain their own
inventories of the Company's products, may sell other industrial components, but
are not allowed to carry fasteners which compete with the Company's products.
The Company's return allowances, which are made through the exchange of
inventory, have generally averaged less than 1% of sales. Customers receive
technical support from the Company's world-wide network of independent
engineering representatives. The Company's engineers work in collaboration with
individual manufacturers early in the design process to engineer fastening
solutions that often result in the specification of PEM fasteners in new
products. The Company supplies its customers and distributors through sales
warehouses in Doncaster, England and Singapore, in addition to maintaining a
significant inventory at its Danboro, Pennsylvania facility.
Pittman motors. Domestic sales of Pittman motors are handled by technical
sales representatives who have the expertise to combine Pittman's motor products
with available motion system components and deliver a complete motion control
system to the customer. European sales are conducted through an exclusive
agreement with a Swiss manufacturer of precision motors that utilize a different
technology from and are complementary to Pittman's motors.
EMPLOYEES
At December 31, 1995, the Company had 1,211 full time employees. Of this
total, 1,048 persons were employed in the Company's fastener operations, of whom
11% were salaried and 89% were paid hourly, and 200 persons were engaged in the
manufacture of Pittman motor products, of whom 17% were salaried and 83% were
paid hourly. None of the Company's personnel are governed by collective
bargaining agreements, and the Company has never experienced a strike. The
Company believes that its labor rates are comparable to those of its competitors
and that the Company's relations with its employees are good.
TRADEMARKS
The Company owns all of the rights to the principal trademarks used by it
in the domestic and international markets in which it operates. The Company's
principal trademarks are registered in the U.S. and in many other countries, and
the Company considers protection of such trademarks to be important to its
business.
28
<PAGE>
PROPERTIES
As of December 31, 1995, the Company's principal plants and offices, all of
which were owned by it, were as follows:
<TABLE>
<CAPTION>
LOCATION SIZE OF FACILITY USE OF FACILITY
-------- ---------------- ---------------
<S> <C> <C>
Danboro, 183,442 square feet Executive offices and manufacture of
Pennsylvania fasteners
Winston-Salem, 58,280 square feet Manufacture of components for fasteners
North Carolina
Harleysville, 54,000 square feet Manufacture of electric motors
Pennsylvania
Suffolk, 50,000 square feet Manufacture of components for fasteners
Virginia
Doncaster, 10,500 square feet Office and warehouse for the
South Yorkshire, distribution of fasteners
England
</TABLE>
The Company considers all of its plants and equipment to be modern and well
maintained. The Company is building a 43,000 square foot addition to its Danboro
facility for increased manufacturing capacity and office space. This addition is
expected to be completed by June 1996. The Company also has purchased 16.3 acres
in Winston-Salem, North Carolina where the Company is building a 120,000 square
foot building. Upon the completion of this new facility, which is scheduled for
completion in October 1996, the Company intends to sell its existing North
Carolina facility.
The Company carries fire, casualty, business interruption, and public
liability insurance for all of its facilities in amounts which are deemed
adequate.
29
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kenneth A. Swanstrom................. 56 Chairman of the Board, President, Chief
Executive Officer and Director
Mark W. Simon........................ 57 Vice President - Finance, Corporate Secretary
and Director
Martin Bidart........................ 59 Vice President - Manufacturing
Raymond L. Bievenour................. 53 Vice President - Sales/Marketing
Richard B. Ernest.................... 61 Vice President - Quality
Joseph F. Lopes...................... 62 Vice President - Engineering
Kent R. Fretz........................ 58 Vice President and General Manager - Pittman
Willard S. Boothby, Jr............... 74 Director
Frank S. Hermance.................... 47 Director
Lewis W. Hull........................ 79 Director
Thomas M. Hyndman, Jr................ 71 Director
Maurice D. Oaks...................... 62 Director
Daryl L. Swanstrom................... 49 Director
</TABLE>
Kenneth A. Swanstrom has been associated with the Company, which was
founded by his parents, since 1960. Mr. Swanstrom has served as Chairman of the
Board and Chief Executive Officer since August 1993, as President and Chief
Operating Officer since 1979 and as a director since 1970.
Mark W. Simon has served as Vice President - Finance and Chief Financial
Officer since 1981, as a director since 1983, and has been an employee of the
Company since 1977.
Martin Bidart has served as Vice President - Manufacturing since 1990.
Prior to 1990, Mr. Bidart was employed by SPS Technologies, Inc. for 32 years
holding various positions, including Vice President - Operations.
Raymond L. Bievenour has served as Vice President - Sales/Marketing since
1990. Prior to 1990, Mr. Bievenour was employed by AMP, Inc. for 18 years
holding various positions, including National Field Sales Manager.
Richard B. Ernest has served as Vice President - Quality since 1993, was
Vice President - Engineering from 1970 to 1993, and has been an employee of the
Company since 1961.
Joseph F. Lopes has served as Vice President - Engineering since 1993.
Prior to 1993, Mr. Lopes was employed by SPS Technologies, Inc. for 30 years
holding various positions, including Manager of Aerospace Operations.
Kent R. Fretz has served as Vice President and General Manager of the
Company's Pittman division since 1991. Prior to 1991, Mr. Fretz held various
positions at Pittman, and has been an employee of the Company since 1975.
30
<PAGE>
Willard S. Boothby, Jr., a director since 1984, served as Chairman and
Chief Executive Officer of the investment banking firm of Blyth Eastman Dillon.
Upon its merger with PaineWebber Incorporated, the Representative of the
Underwriters, Mr. Boothby served as Managing Director until his retirement in
1988. Mr. Boothby serves as a director of Glenmede Fund, and previously served
as a director of The Georgia-Pacific Corporation, Burlington Industries, Inc.,
Getty Oil, The Insurance Company of North America, and Sperry-Rand Corporation.
Frank S. Hermance, a director since January 1996, is Executive Vice
President and Chief Operating Officer of Ametek, Inc., and President of its
Precision Instrument Group.
Lewis W. Hull, a director since 1974, has been Chairman since 1952 of Hull
Corporation, a manufacturer of freeze-drying and injection molding equipment.
Mr. Hull is also a director of Willow Grove Bank.
Thomas M. Hyndman, Jr., a director since 1974, has been Of Counsel to
Duane, Morris & Heckscher, counsel to the Company, since 1993 and was a senior
partner of that firm for many years prior thereto. Mr. Hyndman is also a
director of Rochester & Pittsburgh Coal Company.
Maurice D. Oaks, a director since 1994, was Vice President of Worldwide
Operations Planning of Bristol-Myers Squibb from October 1990 until his
retirement in October 1992 and, from July 1989 to September 1990, was Executive
Vice President of Squibb Pharmaceutical Group, U.S.
Daryl L. Swanstrom, a director since 1987, is President of Engineered
Components/Spyraflo, Inc., a distributor of electronic components and of the
Company's fastener products. Mrs. Swanstrom is the widow of Kenneth A.
Swanstrom's brother.
31
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of April 17, 1996, as
adjusted to reflect the Reclassification and the completion of the Offering,
with respect to (i) each person who is known by the Company to own beneficially
5% or more of each class of Capital Stock, and (ii) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF PERCENT
TITLE OF NUMBER OF SHARES OF SHARES OF
CLASS OF SHARES PERCENT COMMON BENEFICIALLY CLASS
NAME OF INDIVIDUAL CAPITAL BENEFICIALLY OF STOCK TO OWNED AFTER AFTER
OR IDENTITY OF GROUP STOCK OWNED(1) CLASS BE SOLD OFFERING(1) OFFERING
- ---------------------------------- ------------ ----------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
5% HOLDERS:
Kenneth A. Swanstrom
P.O. Box 1000
Danboro, PA 18916
Individually(2) Common 733,923 14.3% 100,000 633,923 9.2%
Class A 244,641 14.3% -- 244,641 14.3%
Trust under the Will of Common 188,926 3.7% 97,500 91,426 1.3%
Gladys Swanstrom(3) Class A 62,975 3.7% -- 62,975 3.7%
Trusts under the Will of Common 295,416 5.8% 97,500 197,916 2.9%
Klas A. Swanstrom(3) Class A 98,472 5.8% -- 98,472 5.8%
Daryl L. Swanstrom
P.O. Box 2249
Peachtree City, GA 30269
Individually(4) Common 547,077 10.2% 350,000 197,077 2.9%
Class A 182,359 10.2% -- 182,359 10.2%
Trust under Item Fourth Common 162,720 3.2% 100,000 62,720 *
of the Will of Lawrence Class A 54,240 3.2% -- 54,240 3.2%
W. Swanstrom(5)
Trust under Item Fifth Common 416,649 8.1% 200,000 216,649 3.2%
of the Will of Lawrence Class A 138,883 8.1% -- 138,883 8.1%
W. Swanstrom(5)
Thomas M. Hyndman, Jr.(6)
c/o Duane, Morris & Heckscher
4200 One Liberty Place
Philadelphia, PA 19103-7396
Individually Common 1,710 * -- 1,710 *
Class A 570 * -- 570 *
Trust under the Will of Common 188,926 3.67% 97,500 91,426 1.3%
Gladys Swanstrom(3) Class A 62,975 3.67% -- 62,975 3.7%
Trusts under the Will of Common 295,416 5.8% 97,500 197,916 2.9%
Klas A. Swanstrom(3) Class A 98,472 5.8% -- 98,472 5.8%
Trust under Item Fourth Common 162,720 3.2% 100,000 62,720 *
of the Will of Lawrence Class A 54,240 3.2% -- 54,240 3.2%
W. Swanstrom(5)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF PERCENT
TITLE OF NUMBER OF SHARES OF SHARES OF
CLASS OF SHARES PERCENT COMMON BENEFICIALLY CLASS
NAME OF INDIVIDUAL CAPITAL BENEFICIALLY OF STOCK TO OWNED AFTER AFTER
OR IDENTITY OF GROUP STOCK OWNED(1) CLASS BE SOLD OFFERING(1) OFFERING
- ---------------------------------- ------------ ----------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Trust under Item Fifth Common 416,649 8.1% 200,000 216,649 3.2%
of the Will of Lawrence Class A 138,883 8.1% -- 138,883 8.1%
W. Swanstrom(5)
Trust under Deed of Common 173,250 3.4% 77,500 95,750 1.4%
Klas A. Swanstrom Class A 57,750 3.4% -- 57,750 3.4%
dated 6/12/73(7)
First Union Corporation Common 343,366 6.7% 155,000 188,366 2.7%
of New Jersey(8) Class A 114,455 6.7% -- 114,455 6.7%
550 Broad Street
Newark, NJ 07102
Quest Advisory Corp.(9) Common 524,550 7.6% -- 524,550 7.6%
Quest Management Company Class A 174,850 10.2% -- 174,850 10.2%
1414 Avenue of the Americas
New York, NY 10019
Lazard Freres & Co.(10) Common 348,000 5.1% -- 348,000 5.1%
30 Rockefeller Plaza Class A 116,000 6.8% -- 116,000 6.8%
New York, NY 10020
Dimensional Fund Common 258,900 3.7% -- 258,900 3.7%
Advisors Inc.(11) Class A 86,300 5.1% -- 86,300 5.1%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
All Executive Officers and Common 2,705,760 52.9% 1,100,000 1,605,760 23.4%
Directors as a group Class A 901,920 52.9% -- 901,920 52.9%
(13 persons)
</TABLE>
- ------------------
* Less than 1%.
(1) Under the rules of the Commission, a person is deemed to be the beneficial
owner of securities if such person has, or shares, 'voting power' which
includes the power to vote, or to direct the voting of, such securities or
'investment power' which includes the power to dispose, or to direct the
disposition, of such securities. Under these rules, more than one person may
be deemed the beneficial owner of the same securities. The information set
forth in the above table includes all shares of Common Stock and Class A
Common Stock of the Company over which the above-named persons individually
or together share voting power or investment power adjusted, however, to
eliminate the reporting of shares more than once in order not to overstate
the beneficial ownership of such persons.
(2) Under the rules of the Commission, the maximum beneficial ownership of the
Company's outstanding Capital Stock which Kenneth A. Swanstrom could be
deemed to have is 23.8%. Of these shares, Mr. Swanstrom has sole voting and
dispositive power with respect to 720,522 shares of Common Stock and 240,174
shares of Class A Common Stock of which totals, 11,301 shares of Common
Stock and 3,767 shares of Class A Common Stock are owned by Mr. Swanstrom's
wife and 2,100 shares of Common Stock and 700 shares of Class A Common Stock
are owned by their daughters. Mr. Swanstrom disclaims beneficial ownership
of the shares held by his wife and daughters. Mr. Swanstrom has shared
voting and dispositive power with respect to 188,925 shares of Common Stock
and 62,975 shares of Class A Common Stock held by the Trust under the Will
33
<PAGE>
of Gladys Swanstrom and 295,416 shares of Common Stock and 98,472 shares of
Class A Common Stock held by the Trusts under the Will of Klas A. Swanstrom.
(3) The Trustees are Kenneth A. Swanstrom, Thomas M. Hyndman, Jr. and PNC Bank.
(4) Under the rules of the Commission, the maximum beneficial ownership of the
Company's outstanding Capital Stock which Daryl L. Swanstrom could be deemed
to have is 22.0%. Of this total, Mrs. Swanstrom has sole voting and
dispositive power with respect to 523,077 shares of Common Stock and 174,359
shares of Class A Common Stock and shared voting and dispositive power with
respect to 162,720 shares of Common Stock and 52,240 shares of Class A
Common Stock held by the Trust under Item Fourth of the Will of Lawrence W.
Swanstrom and 440,649 shares of Common Stock and 138,883 shares of Class A
Common Stock held by the Trust under Item Fifth of the Will of Lawrence W.
Swanstrom. Pursuant to an agreement between Mrs. Swanstrom and the Company,
which expires December 31, 2006, Mrs. Swanstrom has agreed not to sell or
otherwise transfer or dispose of any shares of the Company's Class A Common
Stock owned by her or that she may acquire without first offering to sell
such shares to the Company. The purchase price upon exercise of the
Company's option to purchase such shares is the higher of the market price
of such shares on the day prior to the day such shares are offered to the
Company or the price offered by a third party for such shares.
(5) The Trustees are Daryl L. Swanstrom, Thomas M. Hyndman, Jr. and NationsBank
of Georgia, N.A.
(6) Under the rules of the Commission, the maximum beneficial ownership of the
Company's outstanding Capital Stock which Thomas M. Hyndman, Jr. could be
deemed to have is 24.2%. Of these shares, Mr. Hyndman has sole voting and
dispositive power with respect to 1,710 shares of Common Stock and 570
shares of Class A Common Stock and shared voting and dispositive power with
respect to the 162,720 shares of Common Stock and 54,240 shares of Class A
Common Stock held by the Trust under Item Fourth of the Will of Lawrence W.
Swanstrom, 416,649 shares of Common Stock and 138,883 shares of Class A
Common Stock held by the Trust under Item Fifth of the Will of Lawrence W.
Swanstrom, 188,926 shares of Common Stock and 62,975 shares of Class A
Common Stock held by the Trust under the Will of Gladys Swanstrom, 173,250
shares of Common Stock and 57,750 shares of Class A Common Stock held by the
Trust under the Deed of Klas A. Swanstrom dated 6/12/73, and 295,416 shares
of Common Stock and 98,472 shares of Class A Common Stock held by the Trusts
under the Will of Klas A. Swanstrom.
(7) The Trustees are Thomas M. Hyndman, Jr. and First Union Corporation of New
Jersey.
(8) Under the rules of the Commission, the maximum beneficial ownership of the
Company's outstanding Capital Stock which First Union Corporation of New
Jersey could be deemed to have is 6.7%, of which 173,250 shares of Common
Stock and 57,750 shares of Class A Common Stock are held by the Trust under
the Deed of Klas A. Swanstrom dated 6/14/73 with voting power shared with
Mr. Hyndman, 115,500 shares of Common Stock and 38,500 shares of Class A
Common Stock are held by the Trust under Deed of Klas A. Swanstrom dated
9/26/66 and 49,500 shares of Common Stock and 16,500 shares of Class A
Common Stock are held by the Trust under Deed of Gladys Swanstrom dated
9/26/66.
(9) According to Amendment No. 7 to a Schedule 13G dated February 4, 1996, filed
by Quest Advisory Corp., a New York corporation ('Quest'), Quest Management
Company ('QMC') and Charles M. Royce, Quest, QMC, and Mr. Royce reported as
a 'group' pursuant to Rule 13d-1(b)(ii)(H) of the Securities Exchange Act of
1934 (the 'Exchange Act') with respect to these shares. According to such
Amendment, and after giving effect to the Reclassification, Quest has sole
voting and dispositive power with respect to 496,950 shares of Common Stock
and 165,650 shares of Class A Common Stock, and QMC has sole voting and
dispositive power with respect to 27,600 shares of Common Stock and 9,200
shares of Class A Common Stock. Mr. Royce may be deemed to be a controlling
person of Quest and QMC and as such may be deemed to beneficially own the
shares of Capital Stock beneficially owned by Quest and QMC. Mr. Royce does
not own any shares outside of Quest and QMC and disclaims beneficial
ownership of the shares held by Quest and QMC.
34
<PAGE>
(10) According to Amendment No. 1 to a Schedule 13G dated February 14, 1996, and
after giving effect to the Reclassification, Lazard Freres & Co., a
registered investment advisor, is deemed to have beneficial ownership of
348,000 shares of Common Stock and 116,000 shares of Class A Common Stock
as of December 31, 1994.
(11) According to Amendment No. 2 to a Schedule 13G dated January 31, 1995, and
after giving effect to the Reclassification, Dimensional Fund Advisors Inc.
('Dimensional'), a registered investment advisor, is deemed to have
beneficial ownership of 258,900 shares of Common Stock and 86,300 shares of
Class A Common Stock as of December 31, 1994, all of which shares are held
in portfolios of DFA Investment Dimensions Group Inc., a registered
open-end investment company, or in series of DFA Investment Trust Company,
a Delaware business trust, or the DFA Group Trust and DFA Participation
Group Trust, investment vehicles for qualified employee benefit plans, for
all of which Dimensional serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares.
As of May 22, 1996, members of the Swanstrom Family owned approximately
3,579,560 shares of Capital Stock as adjusted to reflect the Reclassification,
or approximately 52.4% of the Capital Stock outstanding prior to the Offering.
Upon completion of the Offering, the Swanstrom Family will still have sole or
shared voting power with respect to approximately 52.4% of the Class A Common
Stock and consequently will continue to have effective control of the election
of the Company's Board of Directors and any other vote of the holders of the
Class A Common Stock that does not require super majority approval. Members of
the Swanstrom Family will be able to sell shares of Common Stock in the future
without adversely affecting their voting percentage. See 'Risk Factors' and
'Description of Capital Stock.'
The Company and its directors, certain officers and the Swanstrom Family
have agreed that, for a period of 120 days after the date of this Prospectus,
they will not, directly or indirectly, assign, transfer, offer, sell,
hypothecate or otherwise dispose of any shares of Capital Stock or any
securities convertible into or exchangeable for, or any rights to purchase or
acquire, Capital Stock, except pursuant to the Underwriting Agreement or the
granting of stock options or the issuance of shares pursuant to the Company's
stock option and stock purchase plans and bona fide gifts of shares by
directors, officers or members of the Swanstrom Family to family members or to
charities, without the prior written consent of the Representative. See
'Underwriting'.
The term 'Swanstrom Family' as used herein means Kenneth A. Swanstrom,
Daryl L. Swanstrom, the Trust under the Will of Gladys Swanstrom, the Trusts
under the Will of Klas A. Swanstrom, the Trust under Item Fourth of the Will of
Lawrence W. Swanstrom, the Trust under Item Fifth of the Will of Lawrence W.
Swanstrom, the Trust under Deed of Klas A. Swanstrom and the Trust under Deed of
Gladys Swanstrom.
35
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary description is subject to the detailed provisions of
the Company's Certificate of Incorporation, as amended, and the Company's
By-laws, as amended, and does not purport to be complete and is qualified in its
entirety by reference thereto.
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $.01 per share, and 3,000,000 shares of Class A
Common Stock, par value $.01 per share. See 'Capitalization' for information on
the number of shares of Capital Stock outstanding prior to and after the
completion of the Offering.
VOTING
The holders of shares of Class A Common Stock are entitled to one vote per
share on any matter to be voted on by the stockholders of the Company. There is
no provision in the Company's Certificate of Incorporation permitting cumulative
voting. The holders of shares of Common Stock are not entitled to vote on any
matter to be voted on by the stockholders of the Company, except as required
under the Delaware General Corporation Law (the 'DGCL').
Under the Certificate of Incorporation of the Company and the DGCL, only
the affirmative vote of the holders of a majority of the outstanding shares of
Class A Common Stock entitled to vote is required to amend the Certificate of
Incorporation or to authorize additional shares of Common Stock or Class A
Common Stock; and the affirmative vote of the holders of a majority of the Class
A Common Stock is required to approve any merger or consolidation of the Company
with or into any other corporation or sale of substantially all its assets or to
approve the dissolution of the Company, subject to certain existing
anti-takeover provisions of the Company's Certificate of Incorporation that
requires the vote of the holders of at least 80% of the outstanding Class A
Common Stock if such transaction is with a related person and is not approved by
the requisite vote of the Company's Board of Directors.
The holders of the Class A Common Stock will elect the entire Board of
Directors. In addition, as permitted under the DGCL, the Certificate of
Incorporation provides that the number of authorized shares of either class may
be increased or decreased, but not below the number of shares then outstanding,
by the affirmative vote of the holders of a majority of the Class A Common
Stock.
Under the DGCL, the holders of Common Stock are entitled to vote on
proposals to change the par value of the Common Stock or to alter or change the
powers, preferences or special rights of the shares of Common Stock, which may
affect them adversely.
DIVIDENDS AND DISTRIBUTIONS
Each share of Common Stock and Class A Common Stock is equal in respect to
dividends and other distributions in cash, stock or property, including
distributions in connection with any reclassification and upon liquidation,
dissolution or winding up of the Company, except that (i) a dividend or
distribution in cash or property on a share of Common Stock may be greater than
any dividend or distribution in cash or property on a share of Class A Common
Stock, and (ii) dividends or other distributions payable on the Common Stock and
Class A Common Stock in shares of capital stock shall be made to all holders of
the Common Stock and Class A Common Stock and may be made (a) in shares of
Common Stock to the holders of Common Stock and to the holders of Class A Common
Stock, (b) in shares of Class A Common Stock to the holders of Class A Common
Stock and in shares of Common Stock to the holders of Common Stock, or (c) in
any other authorized class or series of capital stock to the holders Common
Stock and Class A Common Stock. In no event will either Common Stock or Class A
Common Stock be split, subdivided or combined unless the other is
proportionately split, subdivided or combined.
Although the Board of Directors has authority to pay dividends and make
distributions on the Common Stock in amounts greater than on the Class A Common
Stock, the Board of Directors currently intends to pay dividends on an equal per
share basis.
36
<PAGE>
There are no redemption or sinking fund provisions applicable to the Common
Stock or the Class A Common Stock. Holders of Common Stock and Class A Common
Stock are not subject to further calls or assessments by the Company. All
outstanding shares of Common Stock, when validly issued, will be fully paid and
non-assessable.
Except as otherwise required by the DGCL or as otherwise provided in the
Company's Certificate of Incorporation, each share of Common Stock and each
share of Class A Common Stock have identical powers, preferences and rights in
all other respects.
MERGERS AND CONSOLIDATIONS
Each holder of Common Stock and Class A Common Stock is entitled to receive
the same per share consideration in a merger or consolidation of the Company.
CONVERTIBILITY
Neither the Common Stock nor the Class A Common Stock will be convertible
into another class of common stock or any other security of the Company, except
that in the event that a change of control occurs, (i) all of the then issued
shares of Common Stock will automatically convert into an equal number of shares
of Class A Common Stock, and (ii) all rights, warrants, or options to purchase
shares of Common Stock, or other securities convertible into shares of Common
Stock, will be converted into similar rights, warrants, or options to purchase,
or other securities convertible into, an equal number of shares of Class A
Common Stock. A change of control shall be deemed to have occurred if: (i) any
person or group of persons, other than members of the Swanstrom Family (as
defined below), directly or indirectly, purchases, or otherwise becomes the
beneficial owner of, or has the right to acquire such beneficial ownership of,
or, either solely or with others, acquires the right to vote or direct the
disposition of voting securities of the Company, representing more than 50% of
the combined voting power of all outstanding voting securities of the Company,
or (ii) during any period of two consecutive years, the individuals who at the
beginning of such period constitute the Board of Directors (together with any
new director whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least two-thirds of the directors
then still in office who either were directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute at least a majority of the members of the Board of
Directors then in office. For purposes of this change of control provision, the
'Swanstrom Family' means Kenneth A. Swanstrom, Daryl L. Swanstrom, their
respective spouses, descendants, heirs, estates, trusts in which any such person
has a beneficial interest, and any partnership, corporation or other entity in
which any such person has a controlling interest.
CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS;
DELAWARE ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation and By-laws of the Company and Delaware
law contain certain provisions that may enhance the likelihood of continuity and
stability in the composition of the Board of Directors and may discourage a
future unsolicited takeover of the Company. These provisions could have the
effect of discouraging certain attempts to acquire the Company or remove
incumbent management, including incumbent members of the Board of Directors,
even if some or a majority of the Company's stockholders deemed such an attempt
to be in their best interests.
Article VIII of the Company's Certificate of Incorporation provides that
the Board of Directors may consider any and all of the following in connection
with its determination whether to oppose a tender or other offer for the
Company's securities: (i) whether the offer price is acceptable based upon the
historical and present operating results or financial condition of the Company;
(ii) whether a more favorable price could be obtained for the Company's
securities in the future; (iii) the impact that an acquisition of the Company
would have on the employees and customers of the Company and the communities in
which the Company operates; (iv) the reputation and business practices of the
offeror and its management and affiliates as they would effect the employees and
customers of the Company
37
<PAGE>
and the future value of the Company's securities; (v) the value of the
securities, if any, which the offeror is offering in exchange for the Company's
securities and (vi) any antitrust or other legal and regulatory issues that are
raised by the offer. If the Board of Directors determines that an offer should
be rejected, Article VIII authorizes the Board of Directors to take any lawful
action to accomplish that purpose, including, but not limited to, advising
stockholders not to accept the offer, acquiring the Company's securities,
instituting litigation, selling or otherwise issuing authorized but unissued
securities or treasury stock, acquiring a company to create antitrust or other
regulatory problems, or soliciting a more favorable offer.
Article IX of the Company's Certificate of Incorporation provides that the
Company shall not become a party to a business combination with a related person
unless: (i) the business combination is approved by a majority vote of the Board
of Directors of the Company either at a time prior to the time the related
person became a related person or after such time if the related person obtains
the affirmative vote of at least 80% of the Board of Directors of the
acquisition of the shares that caused such person to become a related person;
(ii) the business combination is approved by the affirmative vote of 80% of the
continuing directors and (a) ratio of the amount of the consideration to be
received per share of Class A Common Stock of the Company to the market price
thereof immediately prior to the announcement of the business combination is at
least as great as the ratio of the highest per share price that the related
person paid in acquiring any shares prior to such business combination to the
market price per share immediately prior to the initial acquisition by the
related person of any shares of Class A Common Stock, (b) the amount of the
consideration to be received per share in the business combination is not less
than the highest price per share paid by the related person in acquiring any
shares of Class A Common Stock and is not less than the book value per share as
reflected on the Company's balance sheet for the immediately preceding fiscal
quarter and (c) the consideration to be received per share other than by the
related person is in the same form and same kind as the consideration paid by
the related person in acquiring Class A Common Stock already owned by the
related person, and (iii) if there is not full compliance with the provisions as
described in clauses (i) and (ii) of this paragraph, the business combination
must be approved by the affirmative vote of the holders of 80% of the issued and
outstanding Class A Common Stock of the Company.
For purposes of Article IX, a 'business combination' includes a sale of all
or substantially all of the assets to the related person, a merger or
consolidation of the Company with the related person or any affiliate of the
related person, any reclassification of securities or other transaction or
series of transactions that has the effect of increasing the proportionate
amount of the shares beneficially owned by the related person or the acquisition
by the Company of all of the assets or business of the related person. A
'related person' includes any person who beneficially owns 10% or more of the
Class A Common Stock of the Company or who had been the beneficial owner of 10%
or more of the Class A Common Stock of the Company at any time within five years
preceding the business combination. A 'continuing director' is defined as an
individual who was first elected a director prior to May 1985, who was first
elected a director prior to the time that the related person became a 10%
beneficial owner or who was elected as a continuing director by a majority of
the then continuing directors.
The By-laws of the Company provide for a classified Board of Directors
consisting of three classes as nearly equal in size as possible. The
classification of the Board of Directors could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Company is a Delaware corporation and consequently is subject to
certain anti-takeover provisions of the DGCL. The business combination provision
contained in Section 203 of the DGCL ('Section 203') defines an interested
stockholder of a corporation as any person that (i) owns, directly or
indirectly, or has the right to acquire, 15% or more of the outstanding voting
stock of the corporation or (ii) is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an interested
stockholder; and the affiliates and the associates of such person. Under Section
203, a Delaware corporation may not engage in any business combination with any
interested stockholder for a period of three years
38
<PAGE>
following the date such stockholder became an interested stockholder, unless (i)
prior to such date the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding, for determining
the number of shares outstanding, (a) shares owned by persons who are directors
and officers and (b) employee stock plans, in certain instances), or (iii) on or
subsequent to such date the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders by at
least 66-2/3% of the outstanding voting stock that is not owned by the
interested stockholder. The restrictions imposed by Section 203 will not apply
to a corporation if the corporation, by the action of its stockholders holding a
majority of the outstanding stock, adopts an amendment to its certificate of
incorporation or by-laws expressly electing not to be governed by Section 203
(such amendment will not be effective until 12 months after adoption and shall
not apply to any business combination between such corporation and any person
who became an interested stockholder of such corporation on or prior to such
adoption).
The Company has not elected to opt out of Section 203, and the restrictions
imposed by Section 203 apply to the Company. Section 203 could, under certain
circumstances, make it more difficult for a third party to gain control of the
Company, deny stockholders the receipt of a premium on their Common Stock and
Class A Common Stock and have a depressive effect on the market price of the
Common Stock and Class A Common Stock.
TRANSFERABILITY; TRADING MARKET
The Class A Common Stock is, and the Common Stock will be freely
transferable and listed on the American Stock Exchange. The Company has applied
to list both classes of Capital Stock on the New York Stock Exchange. It is
anticipated that upon the listing of the Common Stock and the Class A Common
Stock on the New York Stock Exchange, the trading thereof on the American Stock
Exchange will cease.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Capital Stock is Chemical Mellon
Stockholder Services, L.L.C. Its address for such purposes is P.O. Box 590,
Ridgefield Park, New Jersey 07660, and its telephone number at that address is
800-851-9677.
39
<PAGE>
UNDERWRITING
The Underwriters named below, for whom PaineWebber Incorporated is acting
as Representative (the 'Representative'), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement by and among the
Company, the Selling Stockholders and the Representative (the 'Underwriting
Agreement'), to purchase from the Company and the Selling Stockholders, and the
Company and the Selling Stockholders have agreed to sell to the Underwriters,
the respective number of shares of Common Stock set forth opposite their
respective names below:
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
PaineWebber Incorporated...............................
-----------
Total................................................ 2,850,000
===========
In the Underwriting Agreement, the several Underwriters have agreed,
subject to certain conditions, to purchase all of the shares of Common Stock
being sold pursuant to the Underwriting Agreement (other than those covered by
the over-allotment option described below), if any are purchased. The
Underwriting Agreement provides that, in the event of a default by an
Underwriter, in certain circumstances, the purchase commitments of
non-defaulting Underwriters may be increased or the Underwriting Agreement may
be terminated.
The Company and the Selling Stockholders have been advised by the
Representative that the Underwriters propose to offer the Common Stock to the
public initially at the public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $ per share and that the Underwriters may allow and such dealers may
reallow, a concession not in excess of $ per share to other dealers. The public
offering price and other selling terms may be changed by the Representative.
The Company has granted to the Underwriters an over-allotment option
exercisable during the 30-day period after the date of this Prospectus to
purchase up to 285,000 additional shares of Common Stock at the offering price
to the public less the underwriting discounts and commissions shown on the cover
page of this Prospectus. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
to be purchased by each of them, as shown in the foregoing table, bears to the
2,850,000 shares of Common Stock offered hereby. The Underwriters may exercise
the option only to cover over-allotments made in connection with the sales of
the shares of Common Stock offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and any person who controls the Underwriters against certain
liabilities, including certain liabilities under the Securities Act.
The Company and its directors, certain officers and the Swanstrom Family
have agreed that, for a period of 120 days after the date of this Prospectus,
they will not, directly or indirectly, assign, transfer,
40
<PAGE>
offer, sell, hypothecate or otherwise dispose of any shares of Capital Stock or
any securities convertible into or exchangeable for, or any rights to purchase
or acquire, Capital Stock, except pursuant to the Underwriting Agreement or the
granting of stock options and the issuance of shares pursuant to the Company's
stock option and stock purchase plans and bona fide gifts of shares by
directors, officers or members of the Swanstrom Family to family members or to
charities, without the prior written consent of the Representative.
LEGAL MATTERS
Certain legal matters in connection with this Offering, including the
validity of the shares of Common Stock offered hereby, will be passed upon for
the Company and the Selling Stockholders by Duane, Morris & Heckscher, 4200 One
Liberty Place, Philadelphia, Pennsylvania 19103-7396. Certain legal matters
relating to this Offering will be passed upon for the Underwriters by McDermott,
Will & Emery, 227 West Monroe Street, Chicago, Illinois 60606-5096. Thomas M.
Hyndman, Jr., a director of the Company, is Of Counsel to the firm of Duane,
Morris & Heckscher and owns 1,710 shares of Common Stock and 570 shares of Class
A Common Stock. Mr. Hyndman also holds in various fiduciary capacities for
members of the Swanstrom Family an aggregate of 1,262,670 shares of Common Stock
and an aggregate of 420,890 shares of Class A Common Stock.
EXPERTS
The Company's financial statements as of December 31, 1994 and 1995 and for
each of the three years in the period ended December 31, 1995 included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement (which reports express an unqualified opinion and include an
explanatory paragraph referring to a change in the method of accounting for
income taxes), and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1995, the Company's Quarterly Report on form 10-Q for the quarter ended March
31, 1996 and the Company's Proxy Statement dated April 29, 1996, with the
exception of the Compensation Committee Report and Performance Graph included
therein, filed with the Commission are hereby incorporated by reference in this
Prospectus except as superseded or modified herein. Any statement contained in
any document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus. The Company will provide without charge to
each person, including any beneficial owner, to whom this Prospectus is
delivered, upon written or oral request of such person, a copy of any and all of
the documents that have been or may be incorporated by reference herein (other
than exhibits to such documents which are not specifically incorporated by
reference into such documents). Such requests should be directed to the
Company's Corporate Secretary at its principal executive offices at P.O. Box
1000, Danboro, Pennsylvania 18916, or by telephone at (215) 766-8853.
41
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington D.C. 20549, and at the Commission's
following Regional Offices: New York Regional Office, 7 World Trade Center, New
York, New York 10048; and Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may also be obtained at prescribed rates from the Public Reference
Branch of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549-1004. Quotations relating to the Company's Capital Stock appear on
the American Stock Exchange and such reports and other information concerning
the Company can also be inspected at the offices of the American Stock Exchange,
86 Trinity Place, New York, New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-2 under the Securities Act of 1933 (the 'Securities Act') with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete; and with respect to each such contract or document
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matters involved, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Capital Stock, reference is made
to the Registration Statement and exhibits thereto. The information so omitted,
including exhibits, may be obtained from the Commission at its principal office
in Washington, D.C. upon payment of the prescribed fees, or may be inspected
without charge at the public reference facilities of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004.
42
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Audited Financial Statements:
Independent Auditors' Report......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995......................................... F-3
Statements of Consolidated Income and Retained Earnings
for the years ended December 31, 1993, 1994 and 1995.............................................. F-4
Statements of Consolidated Cash Flows for the years ended
December 31, 1993, 1994 and 1995.................................................................. F-5
Notes to Consolidated Financial Statements........................................................... F-6
Unaudited Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1995
and March 31, 1996................................................................................ F-14
Statements of Condensed Consolidated Income and Retained Earnings
for the three months ended March 31, 1995 and 1996................................................ F-15
Statements of Condensed Consolidated Cash Flows for the three months
ended March 31, 1995 and 1996..................................................................... F-16
Notes to Unaudited Condensed Consolidated Financial Statements....................................... F-17
</TABLE>
F-1
<PAGE>
To the Stockholders and Board of Directors
of Penn Engineering & Manufacturing Corp.
We have audited the accompanying consolidated balance sheets of Penn
Engineering & Manufacturing Corp. and subsidiaries (the 'Company') as of
December 31, 1994 and 1995 and the related statements of consolidated income and
retained earnings and of consolidated cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1994 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the
Company changed its method of accounting for income taxes effective January 1,
1993 to conform with Statement of Financial Accounting Standards No. 109.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 6, 1996
(April 17, 1996 as to Note 11)
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS
EXCEPT SHARE
AMOUNTS)
--------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 6,106 $ 1,459
Short-term investments................................................................. 5,303 5,988
Accounts receivable (less allowance for doubtful accounts-
1994, $800; 1995, $900)............................................................. 20,059 20,845
Inventories............................................................................ 17,637 20,275
Deferred income taxes.................................................................. 897 959
Other current assets................................................................... 1,107 2,557
--------- ---------
Total current assets............................................................. 51,109 52,083
--------- ---------
PROPERTY-At cost:
Land and improvements.................................................................. 2,247 3,699
Buildings and improvements............................................................. 14,089 15,843
Machinery and equipment................................................................ 43,416 57,295
--------- ---------
Total............................................................................ 59,752 76,837
Less accumulated depreciation.......................................................... 30,832 34,896
--------- ---------
Total property-net............................................................... 28,920 41,941
--------- ---------
OTHER ASSETS............................................................................. 2,098 2,050
--------- ---------
TOTAL............................................................................ $ 82,127 $ 96,074
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................................................... $ 2,750 $ 4,303
Notes payable.......................................................................... 1,500
Accrued expenses:
Pension and profit sharing.......................................................... 2,736 3,984
Income taxes........................................................................ 813 468
Payroll and commissions............................................................. 2,654 2,426
Other............................................................................... 544 521
--------- ---------
Total current liabilities........................................................ 9,497 13,202
--------- ---------
ACCRUED PENSION COST..................................................................... 5,370 4,715
--------- ---------
DEFERRED INCOME TAXES.................................................................... 1,350 2,066
--------- ---------
STOCKHOLDERS' EQUITY (See Note 11):
Common stock -- authorized 3,000,000 shares of $1.00 par value each; issued 1,772,025
shares.............................................................................. 1,772 1,772
Additional paid-in capital............................................................. 932 932
Retained earnings...................................................................... 64,521 74,905
Unrealized (loss) on investments (net of tax).......................................... (140) (60)
Cumulative foreign currency translation adjustment.................................. (223) (506)
--------- ---------
Total............................................................................ 66,862 77,043
--------- ---------
Less cost of treasury stock -- 64,943 shares........................................... 952 952
--------- ---------
Total stockholders' equity....................................................... 65,910 76,091
--------- ---------
TOTAL............................................................................ $ 82,127 $ 96,074
--------- ---------
--------- ---------
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-3
<PAGE>
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
------------- ------------- -------------
(DOLLARS IN THOUSANDS EXCEPT
SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET SALES........................................................ $ 100,665 $ 121,470 $ 141,268
OTHER INCOME -- Net.............................................. 387 627 1,099
------------- ------------- -------------
Total.................................................... 101,052 122,097 142,367
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of products sold.......................................... 70,979 83,128 96,190
Selling expenses............................................... 10,885 13,634 14,867
General and administrative expenses............................ 7,711 8,208 9,189
------------- ------------- -------------
Total.................................................... 89,575 104,970 120,246
------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF 1993
ACCOUNTING CHANGE.............................................. 11,477 17,127 22,121
PROVISION FOR INCOME TAXES....................................... 4,548 6,686 8,323
------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF 1993 ACCOUNTING CHANGE........ 6,929 10,441 13,798
CUMULATIVE EFFECT OF 1993 ACCOUNTING CHANGE...................... 423
------------- ------------- -------------
NET INCOME....................................................... 7,352 10,441 13,798
RETAINED EARNINGS AT BEGINNING OF YEAR........................... 51,294 56,683 64,521
DIVIDENDS ON COMMON STOCK
(Historical per share -- 1993, $1.15; 1994, $1.525; 1995,
$2.00) (Pro forma per share -- 1993, $.2875; 1994, $.38125;
1995, $.50)................................................. (1,963) (2,603) (3,414)
------------- ------------- -------------
RETAINED EARNINGS AT END OF YEAR................................. $ 56,683 $ 64,521 $ 74,905
------------- ------------- -------------
------------- ------------- -------------
INCOME PER SHARE -- Historical
Weighted average number of shares of common stock outstanding
during the year............................................. 1,707,082 1,707,082 1,707,082
Income before cumulative effect of 1993 accounting change... $ 4.06 $ 6.12 $ 8.08
Cumulative effect of 1993 accounting change................. .25
------------- ------------- -------------
Net income.................................................. $ 4.31 $ 6.12 $ 8.08
------------- ------------- -------------
------------- ------------- -------------
INCOME PER SHARE -- Pro forma (See Note 11)
Weighted average number of shares of common stock outstanding
during the year............................................. 6,828,328 6,828,328 6,828,328
Income before cumulative effect of 1993 accounting change... $ 1.01 $ 1.53 $ 2.02
Cumulative effect of 1993 accounting change................. .07
------------- ------------- -------------
Net income............................................... $ 1.08 $ 1.53 $ 2.02
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-4
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 7,352 $ 10,441 $ 13,798
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 3,180 3,425 4,165
Loss (gain) on disposal of property................................. 5 (2) 17
Loss (gain) on disposal of investments.............................. (6) 34 (41)
Reserve for impairment on short-term investments.................... (100)
Changes in assets and liabilities:
(Increase) in receivables........................................... (792) (4,718) (786)
(Increase) decrease in inventories.................................. (1,150) 3,496 (2,638)
(Increase) decrease in other current assets......................... 646 (523) (1,450)
(Increase) decrease in deferred income taxes-current................ (31) 1 (62)
(Increase) in other assets.......................................... (1,490) (560)
Increase (decrease) in accounts payable............................. (1,119) 385 1,553
Increase in accrued expenses........................................ 701 852 652
Increase (decrease) in accrued pension costs........................ 896 201 (655)
Increase (decrease) in deferred income taxes-noncurrent............. (541) 208 716
--------- --------- ---------
Net cash provided by operating activities........................... 9,041 12,310 14,709
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions........................................................ (8,354) (3,833) (17,213)
Additions to available-for-sale and held-to-maturity
investments............................................................ (13,266) (28,343)
Additions to investments.................................................. (1,400)
Proceeds from disposal of available-for-sale and held-to-maturity
investments............................................................ 12,079 28,440
Proceeds from disposal of investments..................................... 714
Proceeds from disposal of property........................................ 6 13 3
--------- --------- ---------
Net cash used in investing activities............................... (9,034) (5,007) (17,113)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings (repayments).................................... 1,152 (1,152) 1,500
Dividends paid............................................................ (1,963) (2,603) (3,414)
--------- --------- ---------
Net cash used in financing activities............................... (811) (3,755) (1,914)
--------- --------- ---------
Effect of exchange rate changes on cash................................... (58) 358 (329)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...................... (862) 3,906 (4,647)
Cash and cash equivalents at beginning of year............................ 3,062 2,200 6,106
--------- --------- ---------
Cash and cash equivalents at end of year.................................. $ 2,200 $ 6,106 $ 1,459
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the year for:
Income taxes........................................................... $ 5,230 $ 6,008 $ 8,062
Interest............................................................... 181 66 10
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of Penn Engineering & Manufacturing Corp. and its wholly owned subsidiaries, PEM
International Ltd., PEM Investment, Inc., and PEM Management, Inc. All
significant intercompany transactions and balances are eliminated in
consolidation.
INVESTMENTS
The Company adopted as of January 1, 1994, the accounting and disclosure
requirements of the Statement of Financial Accounting Standards No. 115 (SFAS
No. 115), 'Accounting for Certain Investments in Debt and Equity Securities'
(Note 2). For years prior to 1994, the Company accounted for investments under
the provisions of SFAS No. 12. Investments are classified as short-term if the
maturities at December 31 are less than one year.
INVENTORIES
The Company's domestic fastener inventories, are priced on the last-in,
first-out (LIFO) method, at the lower of cost or market. Other inventories,
representing approximately 72% and 70% of total inventories at December 31, 1994
and 1995, respectively, are priced on the first-in, first-out (FIFO) method, at
the lower of cost or market.
PROPERTY
Depreciation is calculated under the straight-line method over the
estimated useful lives of the respective assets, generally 3-5 years for tooling
and computer equipment, 10 years for furniture, fixtures and machinery, and
25-40 years for buildings. Maintenance and repairs are charged to income and
major renewals and betterments are capitalized. At the time properties are
retired or sold, the cost and related accumulated depreciation are eliminated
and any gain or loss is included in income.
INCOME TAXES
The Company adopted as of January 1, 1993, the accounting and disclosure
requirements of the Statement of Financial Accounting Standards No. 109 (SFAS
No. 109), 'Accounting for Income Taxes'. Under SFAS No. 109 the deferred tax
provision is determined using the liability method. Under this method, deferred
tax assets and liabilities are recognized based on differences between financial
statement and tax bases of assets and liabilities using presently enacted tax
rates.
STATEMENT OF CONSOLIDATED CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on deposit, cash in excess of daily requirements which is invested in
overnight repurchase agreements and other interest bearing accounts withdrawable
on a daily basis.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
FOREIGN CURRENCY TRANSACTIONS
The effect of translating the financial statements of PEM International
Ltd. is recorded as a separate component of Stockholders' Equity in the
consolidated financial statements. All assets and liabilities are translated at
the year-end exchange rate while all income and expense accounts are translated
at the weighted average rate for the year.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Gains and losses resulting from transactions of the Company and its
subsidiary which are made in currency different than their own are included in
other income as they occur. Total foreign currency transaction gains (losses) of
($104,000), $109,000, and $174,000 were recorded in 1993, 1994, and 1995,
respectively.
Forward foreign currency exchange contracts are purchased to insulate
revenue streams from the impact of foreign currency exchange rate fluctuations.
The effect of this practice is to minimize variability in the Company's
operating results arising from foreign exchange rate movements. Gains and losses
on forward exchange contracts are recognized currently in income. These
contracts have maturities that do not exceed one year and require the Company to
exchange foreign currency for U.S. dollars at maturity. The Company had foreign
exchange contracts of $9.4 million outstanding at both December 31, 1994 and
1995, which approximated their fair market value. The fair value of these
foreign exchange contracts is the amount the Company would receive or pay to
terminate the contracts using quoted market rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts and balances
to conform with the 1995 presentation.
2. INVESTMENTS
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 115, 'Accounting for Certain Investments
in Debt and Equity Securities' (SFAS No. 115). As discussed in Note 1 (b), the
Company elected to adopt SFAS No. 115 effective January 1, 1994. The cumulative
and current year effect of the accounting change is not considered to be
significant. SFAS No. 115 requires the Company to account for debt and equity
securities as follows:
Trading -- The Company holds no investments that were designated as trading
securities.
Held-to-Maturity -- Securities that management has the positive intent and
ability to hold until maturity. These investments are carried at their remaining
unpaid principal balance net of any unamortized premiums or discounts. The
following is a summary of the net unpaid principal value of held to maturity
securities at December 31, 1994 and 1995.
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
U.S. Treasury securities and securities of U.S. Government agencies:
Short-Term Investments....................................................... $ 2,712 $ 4,466
Long-Term Investments........................................................ 608 0
--------- ---------
TOTAL.................................................................. $ 3,320 $ 4,466
--------- ---------
--------- ---------
</TABLE>
Available-for-Sale -- Securities that will be held for indefinite periods
of time. These investments are carried at market value which is determined using
published quotes as of the close of business on December 31, 1995. Unrealized
gains and losses are excluded from earnings and are reported net of tax as a
separate component of equity until realized. Unrealized losses were $140,000,
net of taxes of
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENTS -- CONTINUED
$93,000, at December 31, 1994 and were $60,000, net of taxes of $39,000, at
December 31, 1995. The following is a summary of the estimated fair value of the
short-term available-for-sale securities at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Mutual Common Stock Funds....................................................... $ 1,075 $ 571
U.S. Government Security Income Fund............................................ 939 759
State and Municipal Bond Funds.................................................. 577 192
--------- ---------
TOTAL...................................................................... $ 2,591 $ 1,522
--------- ---------
--------- ---------
</TABLE>
3. INVENTORIES
At December 31, 1994 and 1995 inventories comprised:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Raw material.................................................................... $ 3,585 $ 4,570
Tooling......................................................................... 2,741 3,610
Work-in-process................................................................. 5,099 6,512
Finished goods.................................................................. 6,212 5,583
--------- ---------
TOTAL...................................................................... $ 17,637 $ 20,275
--------- ---------
--------- ---------
</TABLE>
If the FIFO method of inventory valuation had been used for all inventories
by the Company, inventories at December 31, 1993, 1994, and 1995 would have been
$7.5 million, $7.6 million, and $8.0 million higher and net income would have
been $487,000, $77,000, and $240,000 higher than reported for 1993, 1994, and
1995, respectively.
A reduction in inventory quantities for the year ended December 31, 1994
resulted in the liquidation of LIFO inventory quantities carried at lower
manufacturing costs prevailing in prior years as compared with current year
manufacturing costs. The effect of such a reduction was to increase 1994 net
income by approximately $832,000.
Included in other assets is long-term tooling inventory totaling $1.5
million and $2.1 million at December 31, 1994 and 1995, respectively.
4. LINES OF CREDIT
At December 31, 1995, the Company had available unused short term lines of
credit totaling approximately $36.0 million. Borrowings under these lines
totaled $1.5 million at December 31, 1995, at an effective interest rate of
6.71%. No amounts were outstanding under these lines at December 31, 1994.
5. PENSION AND PROFIT SHARING PLANS
The Company has a defined benefit pension plan covering substantially all
employees in the United States. The benefits are based on years of service and
the employee's earned compensation during any period of the highest 60
consecutive months occurring during the last ten years of employment. The
Company's policy is to fund at least the minimum pension payment required for
federal income tax qualification purposes. Plan provisions and funding meet the
requirements of the Employee Retirement Income Security Act of 1974.
The Company records pension costs in accordance with Statement of Financial
Accounting Standards No. 87. The total pension expense for 1993, 1994 and 1995
was $1.9 million, $1.9 million, and $1.8 million, respectively. The following
table sets forth the plans' funded status and amounts recognized in the
Company's consolidated financial statements for the years ended December 31,
1994 and 1995:
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PENSION AND PROFIT SHARING PLANS -- CONTINUED
<TABLE>
<CAPTION>
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested employees........................................................................ $ 9,897 $ 13,301
Non-vested employees.................................................................... 170 365
--------- ---------
Total................................................................................... $ 10,067 $ 13,666
--------- ---------
--------- ---------
Projected plan benefit obligation for services rendered to date......................... $ 17,313 $ 24,807
Plan assets at fair value (primarily listed stocks, bonds and cash equivalents)......... (12,452) (17,230)
--------- ---------
Excess of projected benefit obligation over plan assets................................. 4,861 7,577
Unrecognized net (gain) loss from past experience different from that assumed and
effects of changes in assumptions..................................................... 762 (2,494)
Unrecognized net asset at January 1, 1987 being recognized over 15 years................ 443 380
--------- ---------
Total accrued pension cost.............................................................. $ 6,066 $ 5,463
--------- ---------
--------- ---------
Current pension cost payable.................................................... $ 696 $ 748
Accrued pension cost -- noncurrent.............................................. $ 5,370 $ 4,715
</TABLE>
Net pension cost for 1993, 1994, and 1995 included the following
components:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period................................ $ 1,486 $ 1,586 $ 1,426
Interest cost on projected benefit obligation................................. 1,263 1,339 1,435
Actual return on plan assets.................................................. (877) 355 (3,261)
Net amortization and deferral................................................. (54) (1,450) 2,132
--------- --------- ---------
Net periodic pension cost..................................................... $ 1,818 $ 1,830 $ 1,732
--------- --------- ---------
--------- --------- ---------
</TABLE>
The assumed discount rate, rate of increase in long-term compensation
levels, and expected long-term rate of return on assets were 7% (7% in 1993 and
8% in 1994), 6%, and 8%, respectively. The increase in the discount rate from 7%
in 1993 to 8% in 1994 caused a decrease in the projected benefit obligation of
approximately $3.9 million. The decrease in the discount rate from 8% in 1994 to
7% in 1995 caused an increase in the projected benefit obligation of
approximately $4.6 million.
The Company has profit sharing plans covering all eligible employees in the
United States. Contributions and costs are determined as the lesser of 25% of
income before income taxes and profit sharing cost or 10% of each covered
employee's salary, and totaled $2.5 million in 1993, $3.0 million in 1994, and
$3.2 million in 1995.
6. INCOME TAXES
As discussed in Note 1 (e), effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, 'Accounting for Income
Taxes' (SFAS No. 109). The adoption of SFAS No. 109 resulted in an increase in
net income of $423,000, or $.25 per share, reflecting the cumulative effect of
the change for periods prior to January 1, 1993. The effect of the change on
1993 income before cumulative effect of accounting change is not considered to
be significant.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- CONTINUED
The income tax (benefit) provision consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal..................................................................... $ 3,826 $ 5,234 $ 6,837
State....................................................................... 870 1,303 863
--------- --------- ---------
Total current tax provision........................................... 4,696 6,537 7,700
--------- --------- ---------
Deferred:
Federal..................................................................... (131) 133 553
State....................................................................... (17) 16 70
--------- --------- ---------
Total deferred tax (benefit).......................................... (148) 149 623
--------- --------- ---------
Total income tax provision............................................ $ 4,548 $ 6,686 $ 8,323
--------- --------- ---------
--------- --------- ---------
</TABLE>
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows:
<TABLE>
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Pension....................................................................... $ 2,152 $ 1,854
Allowance for doubtful accounts............................................... 312 346
Inventory..................................................................... 312 343
Other......................................................................... 278 290
--------- ---------
Total deferred tax asset................................................ 3,054 2,833
--------- ---------
Deferred tax liabilities:
Property...................................................................... 3,437 3,847
Other......................................................................... 70 93
--------- ---------
Total deferred tax liability............................................... 3,507 3,940
--------- ---------
Net deferred tax liability...................................................... $ 453 $ 1,107
--------- ---------
--------- ---------
</TABLE>
A reconciliation between the provision for income taxes, computed by
applying the statutory federal income tax rate to income before taxes, and the
actual provision for income taxes on such income is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax provision at statutory rate..................................... $ 3,902 $ 5,958 $ 7,742
State income taxes, after deducting federal income tax benefit..................... 574 860 606
Interest and dividend income excluded from taxable income.......................... (34) (24) (23)
Other.............................................................................. 106 (108) (2)
--------- --------- ---------
Actual provision for income taxes.................................................. $ 4,548 $ 6,686 $ 8,323
--------- --------- ---------
--------- --------- ---------
</TABLE>
7. CERTAIN TRANSACTIONS
The Company sold fasteners at standard authorized distributor prices to a
corporation, an officer and director of which is also a director of the Company,
in the amounts of $4.0 million, $7.1 million and $7.9 million, and made
purchases from this party in the amounts of $323,000, $356,000, and $320,000 in
1993, 1994, and 1995, respectively. At December 31, 1994 and 1995, the Company
had trade receivable balances due from this party in the amounts of $821,000 and
$778,000, respectively.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS
The Company has operating leases covering certain automobiles and office
equipment. Rental and operating lease expenses charged against earnings were
$416,000, $374,000 and $429,000 in 1993, 1994, and 1995, respectively.
9. CONTINGENCIES
The Company is exposed to asserted and unasserted potential claims
encountered in the normal course of business. Based on the advice of legal
counsel, management believes that the final resolution of these matters will not
materially affect the Company's consolidated financial position or results of
operations.
10. FINANCIAL REPORTING FOR SEGMENTS OF THE COMPANY
Information about the operations of the Company in different industry
segments for 1993, 1994, and 1995 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
--------------------------------------
FASTENERS MOTORS CONSOLIDATED
----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................................. $ 77,192 $ 23,473 $ 100,665
----------- ----------- ------------
Operating profit.......................................................... $ 9,346 $ 1,744 $ 11,090
Other income.............................................................. 387
------------
Income before income taxes................................................ $ 11,477
------------
------------
Identifiable assets....................................................... $ 54,215 $ 12,393 $ 66,608
Corporate assets.......................................................... 6,934
------------
Total assets at December 31, 1995......................................... $ 73,542
------------
------------
Depreciation.............................................................. $ 2,686 $ 494 $ 3,180
Capital expenditures...................................................... $ 7,815 $ 539 $ 8,354
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------------
FASTENERS MOTORS CONSOLIDATED
----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................................. $ 96,067 $ 25,403 $ 121,470
----------- ----------- ------------
Operating profit.......................................................... $ 14,152 $ 2,348 $ 16,500
Other income.............................................................. 627
------------
Income before income taxes................................................ $ 17,127
------------
------------
Identifiable assets....................................................... $ 61,490 $ 12,684 $ 74,174
Corporate assets.......................................................... 7,953
------------
Total assets at December 31, 1994......................................... $ 82,127
------------
------------
Depreciation.............................................................. $ 2,932 $ 493 $ 3,425
Capital expenditures...................................................... $ 3,307 $ 526 $ 3,833
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. FINANCIAL REPORTING FOR SEGMENTS OF THE COMPANY -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------
FASTENERS MOTORS CONSOLIDATED
----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................................. $ 113,323 $ 27,945 $ 141,268
----------- ----------- ------------
Operating profit.......................................................... $ 18,353 $ 2,669 $ 21,022
Other income.............................................................. 1,099
------------
Income before income taxes and cumulative effect of accounting change..... $ 22,121
------------
------------
Identifiable assets....................................................... $ 74,328 $ 13,654 $ 87,982
Corporate assets.......................................................... 8,092
------------
Total assets at December 31, 1993......................................... $ 96,074
------------
------------
Depreciation.............................................................. $ 3,686 $ 479 $ 4,165
Capital expenditures...................................................... $ 16,464 $ 749 $ 17,213
</TABLE>
The Company operates in two industries, fastener products and electric
motors. Operating profit is net sales less costs and expenses. Identifiable
assets by industry are those assets that are used in the Company's operations in
each industry. Sales of fasteners to one customer (an authorized distributor of
the Company) totaled approximately $14.3 million, $16.6 million, and $20.9
million for the years ended December 31, 1993, 1994, and 1995, respectively
(approximately 14% of consolidated net sales in 1993 and 1994, and 15% of
consolidated net sales in 1995).
Sales of PEM International Ltd., totaled approximately $12.0 million, $17.4
million, and $22.9 million for the years ended December 31, 1993, 1994, and
1995, respectively (approximately 12%, 14%, and 16% of consolidated net sales in
1993, 1994, and 1995, respectively). Sales from the parent Company to PEM
International Ltd. result in profit margins which are representative of those
obtained from sales to unaffiliated distributors. PEM International Ltd.'s
income (loss) before taxes totaled $354,000, ($17,000), and $605,000 for the
years ended December 31, 1993, 1994, and 1995, respectively. PEM International
Ltd.'s assets represented approximately 13%, and 12% of consolidated total
assets as of December 31, 1994, and 1995, respectively. Export sales, other than
to PEM International Ltd., totaled approximately $8.6 million, $10.1 million,
and $12.6 million for the years ended December 31, 1993, 1994, and 1995,
respectively, (approximately 8% of consolidated net sales in 1993 and 1994, and
9% of consolidated net sales in 1995).
11. SUBSEQUENT EVENT
On April 17, 1996, the Board of Directors authorized a reclassification of
the Company's existing common stock whereby each share of existing $1.00 par
value voting common stock was exchanged for one share of new $.01 par value
Class A voting common stock (the 'Stock Reclassification'). Immediately after
the Stock Reclassification, the Board authorized a four-for-one stock split,
effected in the form of a stock dividend, payable in shares of $.01 par value
non-voting common stock to shareholders of record on May 3, 1996 (the 'Stock
Dividend'). On the contemplated effective date of the Stock Reclassification and
the issuance of the Stock Dividend, May 23, 1996, stockholders' equity
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENT -- CONTINUED
as of December 31, 1994 and 1995, adjusted to give pro forma effect to the Stock
Reclassification and Stock Dividend, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(DOLLARS IN
THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
STOCKHOLDERS' EQUITY -- PRO FORMA:
Common stock class A -- authorized 3,000,000 shares of $.01 par value each; issued
1,772,025 shares...................................................................... $ 18 $ 18
Common stock -- authorized 20,000,000 shares of $.01 value each; issued 5,316,075
shares................................................................................ 53 53
Additional paid-in capital.............................................................. 2,686 2,686
Retained earnings....................................................................... 64,468 74,852
Unrealized (loss) on investments (net of tax)........................................... (140) (60)
Cumulative foreign currency translation adjustment...................................... (223) (506)
--------- ---------
Total.............................................................................. 66,862 77,043
--------- ---------
Less cost of treasury stock--259,772 shares............................................. 952 952
--------- ---------
Total stockholders' equity......................................................... 65,910 76,091
--------- ---------
TOTAL.............................................................................. $ 82,127 $ 96,074
--------- ---------
--------- ---------
</TABLE>
Accordingly, all references in the financial statements to average numbers
of shares outstanding and per share amounts have been stated at their historical
amounts as well as adjusted to reflect the Stock Reclassification and the Stock
Dividend.
F-13
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 1,459 $ 3,402
Short-term investments.............................................................. 5,988 5,606
Accounts receivable-trade........................................................... 21,745 23,054
Allowance for doubtful accounts..................................................... (900) (900)
Inventories (See Note 2)............................................................ 20,275 25,146
Other current assets................................................................ 2,557 3,262
Deferred income taxes............................................................... 959 961
------------ -----------
Total current assets............................................................. 52,083 60,531
------------ -----------
PROPERTY -- At Cost:
Property, plant & equipment......................................................... 76,837 83,080
Less accumulated depreciation....................................................... 34,896 35,852
------------ -----------
Property -- net.................................................................. 41,941 47,228
------------ -----------
OTHER ASSETS.......................................................................... 2,050 2,186
------------ -----------
TOTAL............................................................................ $ 96,074 $ 109,945
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-trade.............................................................. $ 4,303 $ 5,538
Notes payable....................................................................... 1,500 11,000
Dividends payable................................................................... 469
Accrued expenses:
Pension & profit sharing......................................................... 3,984 1,587
Income taxes..................................................................... 468 1,773
Payroll & commissions............................................................ 2,426 3,512
Other............................................................................ 521 700
------------ -----------
Total current liabilities..................................................... 13,202 24,579
------------ -----------
ACCRUED PENSION COST.................................................................. 4,715 4,715
------------ -----------
DEFERRED INCOME TAXES................................................................. 2,066 2,284
------------ -----------
STOCKHOLDERS' EQUITY (See Note 3)
Common stock........................................................................ 1,772 1,772
Additional paid-in capital.......................................................... 932 932
Retained earnings................................................................... 74,905 77,304
Unrealized (loss) on investments (net of tax)....................................... (60) (64)
Cumulative foreign currency translation adjustment.................................. (506) (625)
Treasury stock...................................................................... (952) (952)
------------ -----------
Total stockholders' equity....................................................... 76,091 78,367
------------ -----------
TOTAL............................................................................ $ 96,074 $ 109,945
------------ -----------
------------ -----------
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
F-14
<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------------
1995 1996
------------- -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT
SHARE AND PER SHARE AMOUNTS)
<S> <C> <C>
NET SALES........................................................................... $ 35,298 $ 39,029
OTHER INCOME -- Net................................................................. 349 135
------------- -------------
Total.......................................................................... 35,647 39,164
------------- -------------
COST AND EXPENSES:
Cost of products sold............................................................. 24,630 27,477
Selling, general & administrative................................................. 6,017 7,113
------------- -------------
Total.......................................................................... 30,647 34,590
------------- -------------
INCOME BEFORE INCOME TAXES.......................................................... 5,000 4,574
PROVISION FOR INCOME TAXES.......................................................... 1,977 1,705
------------- -------------
NET INCOME.......................................................................... 3,023 2,869
RETAINED EARNINGS AT BEGINNING OF PERIOD............................................ 64,520 74,904
DIVIDENDS ON COMMON STOCK
(Historical per share -- 1995, $.275; 1996, $.275) (Pro forma per share -- 1995,
$.069; 1996, $.069)............................................................ (469) (469)
------------- -------------
RETAINED EARNINGS AT END OF PERIOD.................................................. $ 67,074 $ 77,304
------------- -------------
------------- -------------
INCOME PER SHARE -- Historical
Weighted average number of shares of common stock outstanding..................... 1,707,082 1,707,082
Net income........................................................................ $1.77 $1.68
===== =====
INCOME PER SHARE -- Pro forma (See Note 3)
Weighted average number of shares of common stock outstanding..................... 6,828,328 6,828,328
Net income........................................................................ $0.44 $0.42
===== =====
CASH DIVIDEND PER SHARE
Historical........................................................................ $0.275 $0.275
===== =====
As adjusted for stock dividend.................................................... $0.069 $0.069
===== =====
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
F-15
<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------
1995 1996
----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................ $ 3,023 $ 2,869
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation....................................................................... 1,030 1,181
Loss on disposal of property....................................................... 2 27
Changes in assets and liabilities:
(Increase) in receivables.......................................................... (401) (1,309)
(Increase) in inventories.......................................................... (440) (4,871)
(Increase) in prepaid expenses, etc................................................ (78) (705)
(Increase) in deferred income taxes-current........................................ (49) (2)
(Increase) in other assets......................................................... (232) (136)
Increase in accounts payable....................................................... 1,188 1,235
Increase in accrued expenses....................................................... 2,182 173
Increase in accrued pension costs.................................................. 127
Increase (decrease) in deferred income taxes-noncurrent............................ (54) 218
----------- -----------
Net cash provided by (used) in operating activities............................. 6,298 (1,320)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions.................................................................... (2,932) (6,518)
Additions to available-for-sale and held-to-maturity investments...................... (7,353) (829)
Proceeds from disposal of available-for-sale and held-to-maturity investments......... 1,998 1,205
Proceeds from disposal of property.................................................... 7
----------- -----------
Net cash used in investing activities........................................... (8,287) (6,135)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings............................................................. 17,000
Net short-term repayments............................................................. (7,500)
-----------
Net cash provided by financing activities.......................................... 9,500
-----------
Effect of exchange rate and investment reserve changes on cash........................ 174 (102)
----------- -----------
Net increase (decrease) in cash and cash equivalents............................... (1,815) 1,943
Cash and cash equivalents at beginning of period................................... 6,106 1,459
----------- -----------
Cash and cash equivalents at end of period......................................... $ 4,291 $ 3,402
----------- -----------
----------- -----------
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the quarter for:
Income taxes....................................................................... $ 322 $ 181
Interest........................................................................... 13
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
F-16
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying interim financial statements should be read in conjunction
with the annual financial statements and notes thereto included in the Company's
Annual Report to Stockholders. The information contained herein is unaudited and
subject to year-end audit and adjustment. In the opinion of management, all
adjustments (which include only normal recurring adjustments) have been made
which are necessary for a fair presentation of the Company's consolidated
financial position at December 31, 1995 and March 31, 1996 and the consolidated
statements of income and cash flow for the three months ended March 31, 1995 and
1996. The results of operations for the three months ended March 31, 1996 are
not necessarily indicative of the results of operations to be expected for the
year ending December 31, 1996.
2. INVENTORIES
Substantially all of the Company's domestic fastener inventories are priced
on the lower of last-in, first-out (LIFO) cost or market method. The remainder
of the inventories are priced on the first-in, first-out (FIFO) method, at the
lower of cost or market.
Inventories are as follows:
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
Raw material................................. $ 4,570 $ 4,806
Tooling...................................... 3,610 3,851
Work-in-process.............................. 6,512 7,970
Finished goods............................... 5,583 8,519
------------ -----------
TOTAL...................................... $ 20,275 $ 25,146
------------ -----------
------------ -----------
If the FIFO method of inventory valuation had been used for all inventories
by the Company, inventories would have been $8.0 million and $8.3 million higher
than reported at December 31, 1995 and March 31, 1996, respectively, and net
income would have been $55,000 and $192,000 higher than reported for the three
months ended March 31, 1995 and 1996 respectively. Included in other assets is
long-term tooling inventory totaling $2.1 million and $2.2 million at December
31, 1995 and March 31, 1996, respectively.
3. RECLASSIFICATION
On April 17, 1996, the Board of Directors authorized a reclassification of
the Company's existing common stock whereby each share of existing $1.00 par
value voting common stock will be converted into one share of new $.01 par value
Class A voting common stock (the 'Stock Reclassification'). Immediately after
the Stock Reclassification, the Board authorized a four-for-one stock split,
effected in the form of a stock dividend, payable in shares of $.01 par value
non-voting common stock to stockholders of record on May 3, 1996 (the 'Stock
Dividend'). On the contemplated effective date of May 23, 1996, the change in
par value of the Class A common stock as a result of the Stock Reclassification
will result in the transfer of $1.8 million from Class A common stock to
additional paid-in capital, and the Stock Dividend will result in the issuance
of 5.3 million new shares of common stock and in the transfer of $53,161 from
retained earnings to common stock. Accordingly, all references in the quarterly
financial statements to average numbers of shares outstanding and per share
amounts have been stated at their historical amounts as well as adjusted to give
pro forma effect to the Stock Reclassification and the Stock Dividend.
F-17
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Reclassification................................ 9
Price Range of Capital Stock and
Dividends..................................... 10
Dividend Policy................................. 11
Use of Proceeds................................. 11
Capitalization.................................. 12
Selected Consolidated Financial Data............ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 14
Business........................................ 20
Management...................................... 30
Principal and Selling Stockholders.............. 32
Description of Capital Stock.................... 36
Underwriting.................................... 40
Legal Matters................................... 41
Experts......................................... 41
Incorporation of Certain Documents by
Reference..................................... 41
Available Information........................... 42
Index to Consolidated Financial Statements...... F-1
</TABLE>
================================================================================
2,850,000 SHARES
[LOGO]
PENN ENGINEERING
&
MANUFACTURING CORP.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PAINEWEBBER INCORPORATED
------------------------
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee...................................................................... $ 20,810
NASD Filing Fee........................................................................... 6,535
*Blue Sky Qualification Fees and Expenses.................................................. 15,000
*Registrar and Transfer Agent Fees......................................................... 10,000
*Legal Fees and Expenses................................................................... 150,000
*Accountants' Fees and Expenses............................................................ 50,000
*Printing and Engraving.................................................................... 90,000
*Miscellaneous............................................................................. 27,655
-----------
Total................................................................................. $ 370,000
-----------
-----------
</TABLE>
- ------------------
* Estimated.
The Company will bear all of the foregoing expenses.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The form of Underwriting Agreement to be filed by amendment as Exhibit 1
hereto contains certain provisions relating to indemnification. The Delaware
General Corporation Law authorizes the registrant to grant indemnities to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act.
The Company's By-laws provide as follows:
'49. As used in this By-law, the term 'Corporation' means Penn Engineering
& Manufacturing Corp. and the term 'pertinent corporation' means the Corporation
and any other partnership, joint venture, trust or other enterprise of which the
person is or was a director, officer, employee or agent at the request of the
Corporation.
(a) The Corporation shall indemnify any person who was or is a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the pertinent corporation) by reason of the fact that he is or was
a director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, against all expenses, liabilities and losses (including
attorneys' fees), judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
pertinent corporation, and, with respect to any criminal action or proceeding,
has no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of note contenders or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
pertinent corporation, and, with respect to any criminal action or proceeding,
had reasonable cause to believe that his conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a party
or threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the pertinent corporation to procure a judgment in
its favor by reason of the fact that he is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise, against all expenses, liabilities and losses (including
attorneys' fees) actually and reasonably incurred by him in connection
II-1
<PAGE>
with such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the pertinent
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the pertinent corporation unless and only to the extent that the Court
of Chancery of the State of Delaware or the court in which such action or suit
was brought shall determine upon application that despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such Court
of Chancery or such other court shall deem proper.
(c) To the extent that a director or officer has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in sections (a) or (b) of this By-law, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
(d) Any indemnification under sections (a) or (b) of this By-law
(unless ordered by a court) shall be made by the Corporation only upon a
determination that indemnification of the director or officer is proper in the
circumstances because he has met the applicable standards of conduct set forth
in said sections (a) and (b). Such determination shall be made (1) by the Board
of Directors of the Corporation by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable, if a quorum of
disinterested directors so directs, by independent legal counsel (who may be
regular counsel for the Corporation or the pertinent corporation) in a written
opinion or (3) by the stockholders of the Corporation.
(e) Expenses incurred by any person who may have a right of
indemnification under this By-law in defending a civil or criminal action, suit
or proceeding may be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such person to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the Corporation pursuant to this
By-law.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, this By-law are in addition to and independent of and shall
not be deemed exclusive of any other rights to which any person may be entitled
under any certificate of incorporation, articles of incorporation, articles of
association, By-law, agreement, vote of stockholders or disinterested directors,
or otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director or officer and shall inure to the benefit of
heirs, executors and administrators of such a person; provided, that any
indemnification realized other than under this By-law shall apply as a credit
against any indemnification provided by this By-law. The right to
indemnification conferred in this Article VIII shall be a contract right.
(g) The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this By-law or of applicable law, if and
whenever the Board of Directors of the Corporation deems it to be in the best
interests of the Corporation to do so.
(h) For the purposes of this By-law and indemnification hereunder, any
person who is or was a director or officer of any other corporation of which the
Corporation owns or controls or at the time owned or controlled directly or
indirectly a majority of the shares of stock entitled to vote for election of
directors of such other corporation shall be conclusively presumed to be serving
or to have served as such director or officer at the request of the Corporation.
(i) The Corporation may provide indemnification under this By-law to
any employee or agent of the Corporation or of any other corporation of which
the Corporation owns or controls or at the time owned or controlled directly or
indirectly a majority of the shares of stock entitled to vote for
II-2
<PAGE>
election of directors or to any director, officer, employee or agent of any
other corporation, partnership, joint venture, trust or other enterprise in
which the Corporation has or at the time had an interest as an owner, creditor
or otherwise, if and whenever the Board of Directors of the Corporation deems it
in the best interest of the Corporation to do so.
(j) The Corporation may, to the fullest extent permitted by the
Delaware General Corporation Law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted to the Corporation to provide prior to such amendment) indemnify any
and all persons whom the Corporation shall have power to indemnify under said
law from and against any and all of the expenses, liabilities or other matters
referred to in or covered by said law, if and whenever the Board of Directors of
the Corporation deems it to be in the best interest of the Corporation to do so.
(k) If a claim under this Article VIII is not paid in full by the
Corporation within 30 days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action, other than an
action brought to enforce a claim for expense incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required has been tendered to the Corporation, that the claimant has
not met the standards of conduct which make it permissible under the Delaware
General Corporation Law for the Corporation to indemnify the claimant for the
amount claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation, including its Board of
Directors, independent legal counsel, or its stockholders, to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the Corporation, including its Board of Directors,
independent legal counsel, or its stockholders, that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.'
The Company provides liability insurance for each director and officer for
certain losses arising from claims or charges made against them while acting in
their capacities as directors or officers of the Company up to an aggregate of
$15,000,000 inclusive of defense costs, expenses and charges.
Additionally, as permitted by the General Corporation Law of the State of
Delaware, Article X of the Company's Certificate of Incorporation provides that
no director of the Company shall incur personal liability to the Company or its
stockholders for monetary damages for breach of his or her fiduciary duty as a
director; provided, however, that the provision does not eliminate or limit the
liability of a director for (i) any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) the
unlawful payment of dividends or unlawful purchase or redemption of stock under
Section 174 of the General Corporation Law of the State of Delaware; or (iv) any
transaction from which the director derived an improper personal benefit.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
<S> <C> <C>
1.1 Form of Underwriting Agreement. (To be filed by amendment.)
4.1 Specimen Certificate for Common Stock. (Incorporated by reference to Exhibit 4 to the Company's Form
8-A Registration Statement filed on May 15, 1996.)
5.1 Opinion of Duane, Morris & Heckscher. (To be filed by amendment)
10.1 Right of First Refusal dated as of September 5, 1986 between the Company and Lawrence W. Swanstrom
and Daryl L. Swanstrom. (Incorporated by reference to the Company's Form 8-K Current Report dated
September 5, 1986, the date of the earliest event reported.)
13.1 The Company's Form 10-Q Quarterly Report for the quarter ended March 31, 1996.
13.2 The Company's 1996 Annual Report to Stockholders. (Only those portions incorporated
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
by reference in the Company's Form 10-K/A Annual Report for the year ended December 31, 1995.)
23.1 Consent of Duane, Morris & Heckscher. (To be included in their opinion filed as Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
24 Power of Attorney. (Included on Page II-5.)
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Danboro, Pennsylvania on May 22, 1996.
PENN ENGINEERING & MANUFACTURING CORP.
By: /s/ KENNETH A. SWANSTROM
--------------------------------
Kenneth A. Swanstrom, Chairman
of the Board, President and
Chief Executive Officer
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Kenneth A. Swanstrom and Mark W. Simon, and each
or any of them, as true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him, and in his name, place and stead,
in any and all capacities, to sign any or all amendments (including post-
effective amendments) to this Registration Statement, as well as any related
registration statement (or amendment thereto) filed pursuant to Rule 462
promulgated under the Securities Act of 1933, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------------------- ----------------
<S> <C> <C>
/s/KENNETH A. SWANSTROM Chairman of the Board, President, May 22, 1996
- ----------------------- Chief Executive Officer and Director
Kenneth A. Swanstrom (principal executive officer)
/s/MARK W. SIMON Vice President-Finance, Corporate Secretary, May 22, 1996
- ----------------------- and Director (principal financial and
Mark W. Simon accounting officer)
/s/WILLARD S. BOOTHBY, JR. Director May 22, 1996
- -----------------------
Willard S. Boothby, Jr.
/s/FRANK S. HERMANCE Director May 22, 1996
- -----------------------
Frank S. Hermance
/s/LEWIS W. HULL Director May 22, 1996
- -----------------------
Lewis W. Hull
/s/THOMAS M. HYNDMAN, JR. Director May 22, 1996
- -----------------------
Thomas M. Hyndman, Jr.
/s/MAURICE D. OAKS Director May 22, 1996
- -----------------------
Maurice D. Oaks
/s/DARYL L. SWANSTROM Director May 22, 1996
- -----------------------
Daryl L. Swanstrom
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT PAGE
---------- -----
<S> <C> <C> <C>
1.1 Form of Underwriting Agreement. (To be filed by amendment.)
4.1 Specimen Certificate for Class A Common Stock. (Incorporated by reference
to Exhibit 4 to the Company's Form 8-A Registration Statement filed with
the Commission on May 15, 1996.)
5.1 Opinion of Duane, Morris & Heckscher. (To be filed by amendment.)
10.1 Right of First Refusal dated on September 5, 1986 between the Company and
Lawrence W. Swanstrom and Daryl L. Swanstrom. (Incorporated by reference
to the Company's Form 8-K Current Report dated September 5, 1986, the
date of the earliest event reported.)
13.1 The Company's Form 10-Q Quarterly Report for the quarter ended March 31,
1996.
13.2 The Company's 1996 Annual Report to Stockholders. (Only those portions
incorporated by reference in the Company's Form 10-K/A Report for the
year ended December 31, 1995.)
23.1 Consent of Duane, Morris & Heckscher (to be included in their opinion
filed as Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
24 Power of Attorney. (Included on Page II-5.)
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from_________to______
Commission file number 1-5356
PENN ENGINEERING & MANUFACTURING CORP.
(Exact name of registrant as specified in its charter)
Delaware 23-0951065
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 1000, Danboro, Pennsylvania 18916
(Address of principal executive offices) (Zip Code)
(215)766-8853
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all documents and
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 1,707,082 shares of common stock,
$1.00 par value, outstanding on May 5, 1996.
1
<PAGE>
PART 1. FINANCIAL INFORMATION
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
(unaudited)
CURRENT ASSETS March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Cash and cash equivalents $3,402,245 $1,459,370
Short-term investments 5,606,434 5,987,981
Accounts receivable-trade 23,054,087 21,744,900
Allowance for doubtful accounts (900,000) (900,000)
Inventories (Note 2) 25,145,904 20,274,571
Prepaid expenses 3,261,661 2,556,893
Deferred income taxes 961,031 958,888
------- -------
Total current assets 60,531,362 52,082,603
---------- ----------
PROPERTY
Property, plant & equipment 83,080,434 76,837,686
Less accumulated depreciation 35,852,266 34,896,199
---------- ----------
Property - net 47,228,168 41,941,487
---------- ----------
OTHER ASSETS 2,186,000 2,050,000
--------- ---------
TOTAL $109,945,530 $96,074,090
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $11,000,000 $1,500,000
Accounts payable-trade 5,537,673 4,302,773
Dividends payable 469,447
Accrued expenses:
Pension & profit sharing 1,586,554 3,983,621
Income taxes 1,772,866 468,268
Payroll & commissions 3,512,480 2,426,097
Other 700,474 521,559
------- -------
Total current liabilities 24,579,494 13,202,318
---------- ----------
ACCRUED PENSION COST 4,714,701 4,714,701
--------- ---------
DEFERRED INCOME TAXES 2,284,058 2,066,179
--------- ---------
STOCKHOLDERS' EQUITY (See Note 3)
Common stock 1,772,025 1,772,025
Additional paid-in capital 932,143 932,143
Retained earnings 77,304,324 74,904,584
Unrealized (loss) on investments
(net of tax) (63,655) (60,303)
Cumulative foreign currency translation
adjustment (625,603) (505,600)
Treasury stock (951,957) (951,957)
------- -------
Total stockholders' equity 78,367,277 76,090,892
---------- ----------
TOTAL $109,945,530 $96,074,090
============ ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
2
<PAGE>
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(unaudited)
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
REVENUES:
Net sales $39,028,866 $35,298,559
Other income 135,712 348,727
------- -------
39,164,578 35,647,286
---------- ----------
COST AND EXPENSES:
Cost of products sold 27,477,361 24,630,385
Selling, general & administrative 7,113,030 6,016,457
--------- ---------
34,590,391 30,646,842
---------- ----------
INCOME BEFORE INCOME TAXES 4,574,187 5,000,444
PROVISION FOR INCOME TAXES 1,705,000 1,977,000
--------- ---------
NET INCOME 2,869,187 3,023,444
RETAINED EARNINGS - BEGINNING 74,904,584 64,520,460
CASH DIVIDEND (469,447) (469,447)
------- -------
RETAINED EARNINGS - ENDING $77,304,324 $67,074,457
=========== ===========
INCOME PER SHARE - Historical
Weighted average number of
shares of common stock outstanding 1,707,082 1,707,082
Net income $1.68 $1.77
===== =====
INCOME PER SHARE - As adjusted for stock dividend
Weighted average number of
shares of common stock outstanding 6,828,328 6,828,328
Net income $0.42 $0.44
===== =====
CASH DIVIDEND PER SHARE
Historical $0.275 $0.275
====== ======
As adjusted for stock dividend $0.069 $0.069
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
(unaudited)
March 31,1996 March 31, 1995
------------- --------------
<C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,869,187 $3,023,444
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,181,301 1,030,029
Loss on disposal of property 27,296 2,206
Changes in assets and liabilities:
(Increase) in receivables (1,309,187) (400,853)
(Increase) in inventories (4,871,333) (672,821)
(Increase) in prepaid expenses,etc. (704,768) (78,072)
(Increase) in deferred income taxes-current (2,143) (48,889)
(Increase) in other assets (136,000) (232,000)
Increase in accounts payable 1,234,900 1,187,843
Increase in accrued expenses 172,829 2,182,204
Increase in accrued pension cost 0 126,547
Increase (decrease)in deferred income taxes-noncurrent 217,879 (53,866)
--------- ---------
Net cash provided (used) in operating activities (1,320,039) 6,297,772
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (6,517,784) (2,932,551)
Additions to available-for-sale & held-to-maturity
investments (828,948) (7,353,526)
Proceeds from disposal of available-for sale & held-to-
maturity investments 1,205,000 1,998,574
Proceeds from disposal of property 7,125 55
--------- --
Net cash used in investing activities (6,134,607) (8,287,448)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings 17,000,000
Net short-term repayments (7,500,000)
----------
Net cash provided by financing activities 9,500,000
----------
Effect of exchange rate and investment reserve
changes on cash (102,479) 174,371
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,942,875 (1,815,305)
Cash and cash equivalents at beginning of period 1,459,370 6,106,565
--------- ---------
Cash and cash equivalents at end of period $3,402,245 $4,291,260
========== ==========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the quarter for:
Income taxes $180,850 $321,715
Interest 12,832 0
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
Note 1. Condensed Consolidated Financial Statements (Unaudited)
The accompanying interim financial statements should be read in conjunction
with the annual financial statements and notes thereto included in the
Registrant's Annual Report. The information contained in this report is
unaudited and subject to year-end audit and adjustment. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
have been made which are necessary for a fair presentation of Registrant's
consolidated financial position at March 31, 1996 and 1995 and the consolidated
statements of income and cash flow for the three-month periods then ended. The
results of operations for the three months ended March 31, 1996 are not
necesarily indicative of the results of operations to be expected for the year
ending December 31, 1996.
Note 2. Inventories
Substantially all of Registrant's domestic fastener inventories are priced
on the lower of last-in, first-out (LIFO) cost or market method. The remainder
of the inventories are priced on the first-in, first-out (FIFO) method, at the
lower of cost or market.
Inventories are as follows:
(unauditd)
March 31, 1996 December 31, 1995
-------------- -----------------
Raw material $4,806,178 $4,569,522
Tooling 3,850,530 3,610,307
Work-in-process 7,970,213 6,511,667
Finished goods 8,518,983 5,583,075
----------- -----------
TOTAL $25,145,904 $20,274,571
=========== ===========
If the FIFO method of inventory valuation had been used for all inventories
by Registrant, inventories would have been $8,334,201 and $8,027,875 higher than
reported at March 31, 1996 and December 31, 1995, respectively, and net income
would have been $192,000 and $55,000 higher than reported for the three months
ended March 31, 1996 and 1995 respectively. Included in other assets is
long-term tooling inventory totaling $2,186,000 and $2,050,000 at March 31, 1996
and December 31, 1995, respectively.
Note 3. Reclassification
On April 17, 1996, the Board of Directors authorized a reclassification of
the Company's existing common stock whereby each share of existing $1.00 par
value voting common stock will be exchanged for one share of new $.01 par value
Class A voting common stock (the "Stock Reclassification"). Immediately after
the Stock Reclassification, the Board authorized a 4-for-1 stock split, effected
in the form of a stock dividend, payable in shares of $.01 par value non-voting
common stock to shareholders of record on May 3, 1996 (the "Stock Dividend"). On
the contemplated effective date of May 23, 1996, the change in par value of the
Class A common stock as a result of the Stock Reclassification will result in
the transfer of $1,754,305 from Class A common stock to additional paid In
capital, and the Stock Dividend will result in the issuance of 5,316,075 new
common shares and in the transfer of $53,161 from retained earnings to common
stock. Accordingly, all references in the quarterly financial statements to
average numbers of shares outstanding and per share amounts have been stated at
their historical amounts as well as adjusted to give effect to the Stock
Reclasssification and Stock Dividend.
5
<PAGE>
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
March 31, 1996
MANAGEMENT'S ANALYSIS OF THE
QUARTERLY INCOME STATEMENT
AND FINANCIAL CONDITION
Quarter Ended: March 31, 1996 vs. March 31, 1995
Consolidated net sales for the quarter ended March 31, 1996 were $39.0
million, versus $35.3 million for the quarter ended March 31, 1995, a 10.5%
increase. Sales to customers outside the United States for the quarter ended
March 31, 1996 were $9.8 million, versus $9.6 million for the quarter ended
March 31, 1995, a 2.1% increase.
Net sales for the fastener operation for the quarter ended March 31, 1996
were $31.5 million, versus $28.3 million for the the quarter ended March 31,
1995, an 11.3% increase. The number of fastener units shipped within North
America (including Canada) increased approximately 19.6% from the first quarter
of 1995 to the first quarter of 1996, and represented approximately 70.9% of
total fasteners shipped in the first quarter of 1996. The number of fastener
shipments to Europe increased approximately 22.3% from the first quarter of 1995
compared to the first quarter of 1996, while the number of units shipped to the
Asia-Pacific region decreased 18.9% from the first quarter of 1995 to the first
quarter of 1996. The continued strong demand for personal computers as well as
other electronic equipment, which accounted for approximately 84% of fastener
sales in the first quarters of 1995 and 1996, were the main cause of the
increased shipment volume in North America and Europe. However, this was offset
by the decline in the Asia-Pacific region, which was caused by high retail
personal computer inventory levels resulting from a 1995 sales surge after the
release of "Windows 95" . Unsold computer and peripherals inventory at the end
of 1995 caused a temporary slowdown in fastener requirements in the first
quarter of 1996. Average selling price for fasteners shipped in the first
quarter of 1996 decreased approximately 5.3% compared to the first quarter of
1995 because of a short-term change in product mix toward lower margin
fasteners.
Net sales of the motor operation for the first quarter of 1996 were $7.6
million, versus $7.0 million for the first quarter of 1995, an 8.0% increase.
The number of motors sold increased approximately 12.7% from the first quarter
of 1995 to the first quarter of 1996 while the average selling price declined
3.6% as a result of a temporary change in product mix toward lower margin
motors.
Consolidated gross margin for the first quarter of 1996 was $11.6 million,
versus $10.7 million for the first quarter of 1995, an 8.3% increase. Fastener
gross margin increased 8.3% from the first quarter of 1995 to the first quarter
of 1996 as a result of the increased number of units sold without a
proportionate increase in cost. As a percent of sales, however, fastener gross
margin decreased from 31.1% in the first quarter of 1995 to 30.3% in the first
quarter of 1996 because cost increases incurred for raw material, outside screw
machine services, and tooling were not fully offset by price increases,
production efficiencies, and cost containment. It is anticipated a price
increase, effective April 1, 1996, will partially offset these cost increases
for the remainder of 1996. Motor gross margin increased approximately 8.0% from
the first quarter of 1995 to the first quarter of 1996 and remained constant at
26.5% of sales in both quarters.
Selling, general, and administrative expenses ("SG&A") for the first
quarter of 1996 were $7.1 million, versus $6.0 million recorded for the first
quarter of 1995, an 18.2% increase. SG&A, as a percent of sales, increased from
17.0% in the first quarter of 1995 to 18.2% in the first quarter of 1996.
Additional SG&A staff, wage increases for current staff, and the establishment
of a Singapore distribution center all contributed to the increased SG&A
expense.
Consolidated net income for the first quarter of 1996 was $2.9 million,
versus $3.0 million for the first quarter of 1995. Other income decreased 61.1%
as a result of decreased investment income. This decrease as well as the
increased cost of SG&A expenses were partially offset by a Pennsylvania income
tax rate reduction that lowered the effective tax rate from 39.5% in 1995 to
37.3% in 1996.
6
PENN ENGINEERING & MANUFACTURING CORP. & SUBSIDIARIES
March 31, 1996
MANAGEMENT'S ANALYSIS OF THE
QUARTERLY INCOME STATEMENT
AND FINANCIAL CONDITION
Liquidity and Capital Resources
Liquidity needs for the quarter ended March 31, 1996 were primarily for the
acquisition of approximately $3.0 million of finished goods inventory and other
assets purchased from the Company's distributor in Singapore and for $6.5
million of capital expenditures including the construction of a 43,000 square
foot addition to the Company's Danboro facility which is nearing completion.
Short-term borrowings increased $9.5 million to finance the above expenditures.
As a result of this, working capital decreased from $38.9 million at December
31, 1995 to $36.0 million at March 31, 1996. Cash and short-term investments
increased approximately 21.0% from $7.4 million at December 31, 1995 to $9.0
million at March 31, 1996 as internally generated funds continued to finance
current working capital needs.
On a historical basis, stockholders' equity per share increased from $44.58
at December 31, 1995 to $45.91 at March 31, 1996.
7
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Part 1, Item 3 of Registrant's Form 10-K Annual Report
for the year ended December 31, 1995.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
On May 22, 1996, the Company intends to file an amendment to its
Certificate of Incorporation (the "Amendment") with the Delaware Secretary of
State, which will (i) increase the number of authorized shares of Capital Stock
of the Company from 3,000,000 shares to 23,000,000 shares, consisting of
20,000,000 shares of Common Stock and 3,000,000 shares of Class A Common Stock,
(ii) reclassify the Prior Common Stock as Class A Common Stock, (iii) authorize
a new class of non-voting capital stock designated as Common Stock, and (iv)
establish the rights, powers, and limitations of the Common Stock and the Class
A Common Stock. In addition, the Board of Directors declared a dividend of three
shares of the new non-voting Common Stock for each share of the Company's issued
Common Stock held of record on May 3, 1996. The Stock Dividend will have the
same effect on the total number of shares of Capital Stock outstanding as a
four-for-one stock split. Each of these actions is subject to approval by
stockholders at the Company's annual meeting of stockholders on May 22, 1996. It
is anticipated that the distribution of the shares of the new non-voting Common
Stock will be made on May 23, 1996.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
None
b) Reports on Form 8-K
None
8
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Penn Engineering & Manufacturing Corp.
Dated: May 14, 1996 By: /s/ Kenneth A. Swanstrom
---------------------------
Kenneth A. Swanstrom
Chairman/CEO/President
Dated: May 14, 1996 By: /s/ Mark W. Simon
---------------------------
Mark W. Simon
Vice President -- Finance
9
<PAGE>
EXHIBIT 13.2 Financial Highlights
Financial Highlights
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $141,268 $121,470 $100,665 $88,328 $70,845
Cost of products sold 96,190 83,128 70,979 61,127 51,045
Income taxes 8,323 6,686 4,548 4,219 2,394
Income before cumulative effect of
1993 and 1992 accounting changes 13,798 10,441 6,929 6,327 3,912
Net income 13,798 10,441 7,352 8,127 3,912
Capital expenditures 17,213 3,833 8,354 3,395 2,435
Depreciation 4,165 3,425 3,180 2,855 2,819
Total assets 96,074 82,127 73,542 67,132 57,486
Stockholders' equity 76,091 65,910 57,819 52,498 46,939
Working capital $ 38,881 $ 41,612 $ 34,953 $ 35,112 $ 29,665
Number of stockholders of record
(at year end) 540 580 607 650 670
Number of employees (at year end) 1,211 1,088 1,008 978 806
Average number of common shares
outstanding used to compute
per share information (in thousands)
- Historical 1,707 1,707 1,707 1,707 1,707
- Restated* 6,828 6,828 6,828 6,828 6,828
Per share information: - Historical
Income before cumulative effect of
1993 and 1992 accounting changes $8.08 $6.12 $4.06 $3.71 $2.29
Net income 8.08 6.12 4.31 4.76 2.29
Dividends 2.00 1.525 1.15 1.00 .90
Stockholders' equity $44.58 $38.61 $33.87 $30.75 $27.50
Per share information: - Restated*
Income before cumulative effect of
1993 and 1992 accounting changes $2.02 $1.53 $1.01 $.93 $.57
Net income 2.02 1.53 1.08 1.19 .57
Dividends .50 .38125 .2875 .25 .225
Stockholders' equity $11.15 $9.65 $8.47 $7.69 $6.88
</TABLE>
* Share and per share amounts have been restated to give effect to a 4-for-1
split of the Company's common stock, effected through a stock dividend, to
shareholders of record on May 3, 1996.
4
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
Overview
The Company's operations consist of two business segments: PEM(R) brand
self-clinching fasteners, including fastener insertion machines and Pittman(R)
electric dc motors. Self-clinching fasteners, which accounted for approximately
80% of the Company's consolidated sales in 1995 compared to 75% in 1991, are
marketed through a worldwide network of distributors. In 1995, sales to the
computer/electronics and automotive industries accounted for approximately 90%
and 5% of fastener sales, respectively, with the balance distributed among other
industries such as recreational equipment, commercial appliances, and gaming
machines.
Electric motors accounted for approximately 20% of the Company's
consolidated sales in 1995 compared to 25% in 1991, and are marketed in the
United States and Europe through regional sales representatives. The Company
primarily designs and manufactures its motors on a custom basis. End users of
the Company's motors include manufacturers of computer and electronics
equipment, hospital emergency/surgery equipment, and industrial equipment. The
Company's motor segment has benefited from a gradual shift to longer lasting
"brushless" motors which enjoy higher margins than brush-commutated motors. The
Company's brushless motors have an average price of approximately $210 per unit,
reflecting more expensive materials and higher labor content, and are used in
equipment requiring a high degree of reliability, while brush-commutated motors
have an average price of $40 per unit and are typically used in less
critical/demanding volume related equipment. The percentage of total motor sales
represented by brushless motors was 21.7% in 1995 compared to 8.1% in 1991.
The Company's consolidated net sales increased from $ 70.8 million in
1991 to $141.3 million in 1995. The number of fastener units increased 105.9%
from 896 million in 1991 to 1.8 billion in 1995. Motor unit sales increased
21.9% from 557,000 in 1991 to 680,000 in 1995. This growth in sales is largely
the result of the growth of the personal computer and electronics markets.
[GRAPHIC]
In the printed document there is a bar graph illustrating the following:
STOCK PERFORMANCE
(Annual High/Low)
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
High $28.875 $39.25 $47.875 $52.5 $100.50
Low $18.50 $29.00 $36.875 $40.625 $ 42.50
In 1995, the Company's domestic and foreign customers accounted for
74.9% and 25.1%, respectively, of the Company's sales compared to 77.2% and
22.8% in 1991. The Company's export sales have benefited from the Company's
ability to serve large multi-national computer and electronic manufacturers who
have moved much of their product fabrication to offshore labor markets. The
Company has maintained significant distribution channels and inventories in
Europe and the Pacific Rim for more than 25 years and 10 years, respectively.
Between 1991 and 1995, the Company's distributors increased their inventories of
the Company's fasteners nearly 500% in the European market and over 800% in the
Pacific Rim market. In addition, the Company maintains an inventory of more than
100 million fasteners at its Pennsylvania facility. As a result of increasing
the availability of its products, the Company has supported growth in its sales
and positioned itself to meet the needs of its customers in the North American,
European, and Pacific Rim markets.
The Company has strengthened its program of providing product in those
areas that would best serve the electronics and computer manufacturers. As part
of increasing the worldwide availability of its
6
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
products, the Company recently established a subsidiary in Singapore through the
acquisition of the assets of the Company's distributor in Singapore. To better
meet the Pacific Rim demand for its fasteners, the Company intends to create a
master warehouse in Singapore that will serve the same function as the existing
Company warehouse in England. The ownership of warehouse facilities in England
and Singapore allows the Company to ship product in bulk via ocean freight
rather than the more costly air shipments directly to the end user. The Company
also plans to establish application engineering capabilities in England and
Singapore. While the Company's international pricing is consistent with its
domestic pricing, the Company's profits from export sales may be affected to
some extent by freight costs, currency fluctuations, duties and local
administrative costs. The Company has not experienced any material impact from
these factors to date.
Historically, the Company has been able to sustain its margins and
achieve steady improvements in fastener profitability largely as a result of (i)
increased customer demand for its products, (ii) focus on cost containment and
improved productivity, and (iii) the general ability to provide the right
product at the right time and at the right location to support customer
applications. The Company's gross margin increased from 28.0% in 1991 to 31.9%
in 1995 because of the ability to increase the production and shipment of
fasteners without a proportional increase in fixed costs and overhead. As an
example, fixed manufacturing costs of fasteners (i.e., depreciation and
supervisory expenses) as a percentage of sales declined from 11.6% in 1991 to
7.6% in 1995. In addition, process improvement techniques, including focused
work centers and product cells where fasteners are essentially complete when
they leave the work center, have led to cost reductions within the manufacturing
departments. The Company is not always able to pass raw material price increases
along to its customers, but through cost reduction programs and by keeping
control of the indirect and fixed costs of operations, the Company increased the
operating profit margins of its fastener operations from 7.6% in 1991 to 16.2%
in 1995. Price increases on the Company's fastener products since 1991 have
averaged 2.0% to 2.5% annually.
[GRAPHIC]
In the printed document there is a bar graph illustrating the following:
STOCKHOLDERS' EQUITY
Millions of Dollars
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Stockholders' Equity $46.9 $52.5 $57.8 $65.9 $76.1
[GRAPHIC]
In the printed document there is a bar graph illustrating the following:
CORPORATE NET SALES
Before Accounting
Change
-----------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Net Sales
(Millions of Dollars) $70.8 $88.3 $100.7 $121.5 $141.3
The motor operation's gross margin increased 41.8% from $5.5 million in
1991 to $ 7.8 million
7
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
in 1995. Continued emphasis on demand-flow technology has allowed Pittman
to move away from batch size manufacturing and reduce work-in-process inventory
by approximately 61%. The resulting improved process flow has led to increased
gross margins. Several of Pittman's key productivity and cycle time reduction
projects have increased some component assembly productivity by as much as 50%
and thereby contributed to improved gross margins.
Currently the Company's fastener operation is working at near full
capacity to meet strong demand for the Company's products. Overtime and higher
than planned outside supplemental screw machine support have impacted negatively
the costs of the Company's fastener operation recently; however, the Company has
incurred approximately $20 million in capital expenditures in the last two years
to increase machine capacity. The Company's objective is to reduce current
overtime levels and delivery lead times of the Company's product and enhance the
Company's ability to respond to new growth opportunities. The Company typically
experiences a period of six to nine months between the purchase of equipment and
its full inclusion into the manufacturing process because of equipment
manufacturers' lead times.
In the past the Company has experienced a surge in order volume during
the first two months of the calendar year as distributors build inventory to
meet customer demand. In addition, the first quarter of the year is negatively
impacted by relatively higher payroll costs which precede the effectiveness of
price increases. The Company's profits in the fourth quarter have typically been
negatively affected by holiday related labor inefficiencies. Contracts with
major customers are generally negotiated on an annual basis and as a result
there is no guarantee that the Company's product pricing will support historical
profit margins. As a result, the Company targets 5% annual gains in productivity
and closely monitors its return on equity. The Company also targets, at a
minimum, a 15% return on equity. In 1994 and 1995 the Company achieved a return
on equity of 16.9% and 19.4%, respectively.
Results of Operations
The following tables sets forth for the periods indicated certain
information derived from the Company's consolidated statements of income
expressed in dollars and as a percentage of total net sales and segment sales.
There can be no assurance that the trends in operating results will continue in
the future:
8
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Year Ended December 31, 1995 1994 1993
---- ---- ----
Amount % Amount % Amount %
------- --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
NET SALES
Fasteners $113,323 80.2 $ 96,067 79.1 $ 77,192 76.7
Motors 27,945 19.8 25,403 20.9 23,473 23.3
-------- ----- -------- ----- -------- -----
TOTAL $141,268 100.0 $121,470 100.0 $100,665 100.0
======== ===== ======== ===== ======== =====
Domestic $105,831 74.9 $ 93,979 77.4 $ 80,106 79.6
Foreign 35,437 25.1 27,491 22.6 20,559 20.4
-------- ---- -------- ----- -------- -----
TOTAL $141,268 100.0 $121,470 100.0 $100,665 100.0
======== ===== ======== ===== ======== =====
GROSS MARGIN BY SEGMENT
Fasteners $ 37,258 32.9% $ 31,427 32.7% $ 23,350 30.3%
Motors 7,820 28.0 6,914 27.2 6,336 27.0%
TOTAL COMPANY
Gross margin $ 45,078 31.9% $ 38,342 31.6% $ 29,686 29.5%
Selling, general & administrative expenses 24,056 17.0 21,842 18.0 18,596 18.5
Operating profit 21,022 14.9 16,500 13.6 11,090 11.0
Net income 13,798 9.8 10,441 8.6 7,352 7.3
</TABLE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Consolidated net sales for 1995 were $141.3 million, versus $121.5
million in 1994, a 16.3% increase. Sales to customers outside the United States
for 1995 were $35.4 million, versus $27.5 million in 1994, a 28.9% increase.
Net sales of the fastener operation for 1995 were $113.3 million, versus
$96.1 million in 1994, a 17.9% increase. The number of fasteners sold increased
approximately 17.7% from 1994 to 1995. Shipment of fasteners within North
America (including Canada) increased approximately 12.2% from 1994 to 1995, and
represented approximately 72.1% of total fasteners shipped in 1995. Shipments of
fasteners to Europe and the Asia-Pacific region increased 37.2% and 26.4%,
respectively, from 1994 to 1995 and represented approximately 21.9% and 6.0%,
respectively, of total fasteners shipped in 1995. The continued strong demand
for personal computers as well as other electronic equipment, which accounted
for approximately 90.0% of fastener sales in 1994 and 1995, has been the main
cause of the increased shipment volume. Average selling prices for fasteners
shipped in 1995 increased less than 1% from 1994 to 1995 as a result of
selective price increases effective in the second quarter of 1995.
Motor sales increased 10.0% from the $25.4 million recorded in 1994 to
$27.9 million for the year ended December 31, 1995. The number of motors sold
increased approximately 1.0% from 1994 to 1995, while the average selling price
increased 8.9% due to a shift in product mix towards higher-priced brushless
motors and motors with additional features and options. During 1995, brushless
motor sales, which carry a higher margin, comprised 21.7% of total motor sales
compared to 16.8% in 1994.
9
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
Consolidated gross margin for 1995 was $45.1 million, versus $38.3
million for 1994, a 17.8% increase. Fastener gross margin increased 18.6% from
1994 to 1995 as a result of the increased number of units sold without a
proportionate increase in cost. As a result of the continuing increase in demand
for the Company's fasteners, manufacturing operations were nearly at full
capacity, allowing the Company to realize economies of scale with regard to its
fixed expenses. In addition, increases in raw material costs were offset by cost
reductions within the manufacturing departments.
Selling, general, and administrative expenses ("SG&A") for 1995 were
$24.1 million, versus $21.8 million in 1994, a 10.1% increase. However, as a
percentage of sales, SG&A declined from 18.0% in 1994 to 17.0% in 1995. Selling
expenses, as a percentage of sales, declined because sales on which the Company
does not pay commissions increased in 1995 compared to 1994. The Company's sales
to the Common Market and to the Pacific Rim are through subsidiaries and
distributors and consequently carry no commission-related expenses. These sales
increased approximately 29% in 1995 compared to 1994. In addition, growth in the
Company's general and administrative staff was less than the increase in the
Company's sales.
Consolidated net income for 1995 was $13.8 million, versus $10.4 million
in 1994, a 32.2% increase. Increased investment income and favorable exchange
rates in 1995 contributed $.5 million to other income in 1995. The Company's
effective tax rate decreased from 39.0% in 1994 to 37.6% in 1995. This
reduction was caused primarily by a Pennsylvania state income tax rate reduction
that was retroactive to the beginning of 1995. These factors, combined with the
operating efficiencies associated with increased capacity utilization, and the
increased sales volume, all contributed to the increase in net income in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Consolidated net sales for 1994 were $121.5 million, versus $100.7
million in 1993, a 20.7% increase. Sales to customers outside the United States
were $27.5 million for 1994, versus $20.6 million for 1993, a 33.7% increase.
Net sales of the fastener operation for 1994 were $96.1 million, versus
$77.2 million in 1993, a 24.5% increase. The number of fasteners sold increased
approximately 22.3% from 1993 to 1994. Shipments of fasteners within North
America (including Canada) increased approximately 17.7% while shipments of
fasteners to Europe and the Asia-Pacific region increased 37.5% and 43.5%,
respectively, from 1993 to 1994. This volume increase resulted from the
continuing demand for telecommunications and data communications equipment and
personal computers. The remainder of the fastener revenue increase was due to an
effective selling price increase of approximately 3% implemented during the
second quarter of 1994.
Net sales of the motor operation for 1994 were $25.4 million, versus
$23.5 million in 1993, an 8.2% increase. The number of motors sold increased
approximately 1.4% from 1993 to 1994, while the average selling price increased
6.8% from 1993 to 1994 due to a shift in product mix towards more higher-priced
brushless motors and motors with additional features and options. Domestic motor
sales increased 12.1% from 1993 to 1994, while foreign sales decreased 17.5% due
to a product phase-out by an overseas customer. During 1994, brushless motor
sales, which carry a higher margin, comprised 16.8% of total motor net sales
compared to 14.3% in 1993.
Consolidated gross margin for 1994 was $38.3 million, versus $29.7
million for 1993, a 29.3% increase. Fastener gross margin increased 34.6% from
1993 to 1994 as a result of the increased number of units sold without a
proportionate increase in costs. As a result of the continuing increase in
10
<PAGE>
Management's Discussion & Analysis of Results of Operations
& Financial Condition.
demand for the Company's fasteners, manufacturing operations were nearly at full
capacity, allowing the Company to realize economies of scale with regard to its
fixed expenses. In addition, increases in raw material costs were offset by cost
reductions within the manufacturing departments.
SG&A for 1994 were $21.8 million, versus $18.6 million in 1993, a 17.5%
increase. However, as a percentage of sales, SG&A declined from 18.5% in 1993 to
18.0% in 1994 as sales volume increases more than offset the labor and benefit
increases comprising SG&A. Cost of products sold, as a percentage of sales, also
decreased from 70.5% in 1993 to 68.4% in 1994 due to economies of scale
resulting from increased production volume, better factory utilization, and
continued emphasis on cost containment.
Consolidated net income for 1994 was $10.4 million, versus $7.4 million
in 1993, a 42.0% increase. Adoption of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", resulted in an increase in net
income of $.4 million in 1993. Other income totaled $.6 million in 1994, an
increase of 62.2% over 1993. This increase was primarily caused by favorable
currency exchange rates as well as increased investment income.
Liquidity and Capital Resources
The Company's liquidity needs are primarily for capital expenditures and
working capital. Cash flow from operations continues to be the primary source of
financing for the Company's growth. The Company generated cash from operations
of $14.7 million in 1995 compared to $12.3 million in 1994 and $9.0 million in
1993. Working capital decreased in 1995 to $38.9 million from $41.6 million in
1994 primarily due to the increase in notes and accounts payable needed to
finance capital expenditures and raw material inventory. Working capital
increased to $41.6 million in 1994 from $35.0 million in 1993 primarily due to
increased receivables resulting from increased sales volume.
The Company annually invests in capital assets primarily to increase
production capacity and efficiency. In 1995, the Company spent a record $17.2
million for capital expenditures in response to the continuing demand for the
Company's products. These expenditures included construction of a 43,000 square
foot addition to the Company's Danboro facility, which is expected to be
completed in the spring of 1996. Capital expenditures in 1994 and 1993 were $3.8
million and $8.4 million, respectively. In addition to the working capital
described above, the Company has available unused short-term lines of credit
totaling approximately $36.0 million as of December 31, 1995. The Company
expects to utilize a portion of these credit lines in 1996 to supplement cash
flow from operations to finance capital expenditures of approximately $25
million, including a new 120,000 square foot facility to replace the Company's
58,000 square foot facility in Winston-Salem, North Carolina. The Company's
five-year plan includes $100 million in capital expenditures to increase
capacity by 25% during this period. The Company expects to use internally
generated earnings and external financing to fund these expenditures.
On a historical basis, stockholders' equity per share at the end of 1995
was $44.58 compared to $38.61 at year-end 1994 and $33.87 at year-end 1993.
Stockholders' equity per share amounts as adjusted for a 4-for-1 stock split,
effected by a stock dividend, that was authorized by the Board of Directors on
April 17, 1996 for stockholders of record on May 3, 1996, were $11.15 at the end
of 1995 compared to $9.65 at the end of 1994 and $8.47 at the end of 1993. The
Company's total dividends paid increased 31.1% from $2.6 million in 1994 to $3.4
million in 1995 after having increased 32.6% from $2.0 million in 1993 to $2.6
million in 1994. On April 17, 1996, the Company declared a quarterly cash
dividend of $.10 per share, on total shares outstanding after the stock
dividend, payable on July 9, 1996, to stockholders of record on June 14, 1996.
11
<PAGE>
Selected Quarterly Financial Data
(Unaudited) (In thousands except per share amounts and prices)
<TABLE>
<CAPTION>
1995 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31 Total Year
--------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $35,299 $36,898 $34,080 $34,991 $141,268
Gross profit.......................................... 10,669 11,753 10,403 12,253 45,078
Net income............................................ 3,023 3,457 3,384 3,934 13,798
Net income per share-historical/restated*............. 1.77/.44 2.03/.51 1.98/.50 2.30/.57 8.08/2.02
Dividends declared per share-historical/restated*..... .275/.07 .275/.07 .275/.07 1.175/.29+ 2.00/.50
--------- --------- -------- ---------- ----------
Market prices per share:
High............................................... 59 75 1/2 100 1/2 97 100 1/2
Low................................................ 42 1/2 54 73 1/2 77 42 1/2
</TABLE>
+ Includes a regular dividend of $.275 per share and an extra dividend of
$.90 per share ($0.07 per share and $.22 per share on a restated basis).
<TABLE>
<CAPTION>
1994 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31 Total Year
--------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............................................. $28,408 $31,021 $30,836 $31,205 $121,470
Gross profit.......................................... 8,013 9,555 10,060 10,714 38,342
Net income............................................ 1,637 2,509 2,828 3,467 10,441
Net income per share-historical/restated*............. .96/.24 1.47/.37 1.60/.41 2.03/.51 6.12/1.53
Dividends declared per share-historical/restated*..... .25/.063 .25/.063 .25/.063 .775/.194+ 1.525/.381
--------- --------- -------- ---------- ----------
Market prices per share:
High............................................... 52 1/2 52 1/8 47 43 52 1/2
Low................................................ 47 47 1/8 42 1/2 40 5/8 40 5/8
</TABLE>
+ Includes a regular dividend of $.275 per share and an extra dividend of
$.50 per share ($.07 per share and $.125 per share on a restated basis). The
regular dividend was increased from $.25 to $.275 in the fourth quarter of 1994
(increased from $.063 to $.07 on a restated basis).
* Per share data has been restated to give effect to a 4-for-1 stock split,
effected by a stock dividend, to shareholders of record May 3, 1996
The common stock of Penn Engineering & Manufacturing Corp. is traded on the
American Stock Exchange. Symbol: PNN. As of January 31, 1996 the number
of stockholders of record was approximately 540.
Lines of Business
The manufacture and sale of fastener products and dc motors are the Company's
only lines of business. Certain information on percent of sales and percent
of operating profits attributable to these lines of business for the last
three years is as follows:
Year Ended December 31, 1995 1994 1993
---- ---- ----
Sales
Fastener products................................ 80% 79% 77%
Electric motors.................................. 20 21 23
Operating Profit
Fastener products................................ 87 86 84
Electric motors.................................. 13 14 16
See Note 10 to consolidated financial statements.
12
<PAGE>
Consolidated Balance Sheets
At December 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,459 $ 6,106
Short-term investments 5,988 5,303
Accounts receivable (less allowance for doubtful accounts-
1995, $900; 1994, $800) 20,845 20,059
Inventories 20,275 17,637
Deferred income taxes 959 897
Other current assets 2,557 1,107
------- -------
Total current assets 52,083 51,109
------- -------
PROPERTY-At cost:
Land and improvements 3,699 2,247
Buildings and improvements 15,843 14,089
Machinery and equipment 57,295 43,416
------- -------
Total 76,837 59,752
Less accumulated depreciation 34,896 30,832
------- -------
Total property-net 41,941 28,920
------- -------
OTHER ASSETS 2,050 2,098
------- -------
TOTAL $96,074 $82,127
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,303 $ 2,750
Notes payable 1,500
Accrued expenses:
Pension and profit sharing 3,984 2,736
Income taxes 468 813
Payroll and commissions 2,426 2,654
Other 521 544
------- ------
Total current liabilities 13,202 9,497
------- ------
ACCRUED PENSION COST 4,715 5,370
------- ------
DEFERRED INCOME TAXES 2,066 1,350
------- ------
STOCKHOLDERS' EQUITY (See Note 11):
Common stock - authorized 3,000,000 shares of $1.00 par value each;
issued 1,772,025 shares 1,772 1,772
Additional paid-in capital 932 932
Retained earnings 74,905 64,521
Unrealized (loss) on investments (net of tax) (60) (140)
Cumulative foreign currency translation adjustment (506) (223)
------- ------
Total 77,043 66,862
------- ------
Less cost of treasury stock-64,943 shares 952 952
------- ------
Total stockholders' equity 76,091 65,910
------- ------
TOTAL $96,074 $82,127
======= =======
</TABLE>
See the accompanying notes to the consolidated financial statements.
13
<PAGE>
Statements of Consolidated Income & Retained Earnings
For the years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
(Dollars in thousands except share and per share amounts) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 141,268 $ 121,470 $ 100,665
OTHER INCOME - Net 1,099 627 387
---------- ---------- ----------
Total 142,367 122,097 101,052
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of products sold 96,190 83,128 70,979
Selling expenses 14,867 13,634 10,885
General and administrative expenses 9,189 8,208 7,711
---------- ---------- ----------
Total 120,246 104,970 89,575
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF 1993 ACCOUNTING CHANGE 22,121 17,127 11,477
PROVISION FOR INCOME TAXES 8,323 6,686 4,548
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF 1993
ACCOUNTING CHANGE 13,798 10,441 6,929
CUMULATIVE EFFECT OF 1993
ACCOUNTING CHANGE 423
---------- ---------- ----------
NET INCOME 13,798 10,441 7,352
RETAINED EARNINGS AT
BEGINNING OF YEAR 64,521 56,683 51,294
DIVIDENDS ON COMMON STOCK
(Historical per share - 1995, $2.00; 1994, $1.525; 1993, $1.15)
(Restated per share - 1995, $.50; 1994, $.38125; 1993, $.2875) (3,414) (2,603) (1,963)
---------- ---------- ----------
RETAINED EARNINGS AT
END OF YEAR $ 74,905 $ 64,521 $ 56,683
========== ========== ==========
INCOME PER SHARE - Historical
Weighted average number
of shares of common stock
outstanding during the year 1,707,082 1,707,082 1,707,082
Income before cumulative effect of 1993
accounting change $ 8.08 $ 6.12 $ 4.06
Cumulative effect of 1993 accounting change .25
---------- ---------- ----------
Net income $ 8.08 $ 6.12 $ 4.31
========== ========== ==========
INCOME PER SHARE - Restated (See Note 11)
Weighted average number
of shares of common stock
outstanding during the year 6,828,328 6,828,328 6,828,328
Income before cumulative effect of 1993
accounting change $ 2.02 $ 1.53 $ 1.01
Cumulative effect of 1993 accounting change .07
---------- ---------- ----------
Net income $ 2.02 $ 1.53 $ 1.08
========== ========== ==========
See the accompanying notes to the consolidated financial statements
</TABLE>
14
<PAGE>
Statements of Consolidated Cash Flows
For the years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- ---------- --------
<S> <C> <C> <C>
(Dollars in thousands)
Cash Flows from Operating Activities:
Net income $ 13,798 $ 10,441 $ 7,352
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 4,165 3,425 3,180
Loss (gain) on disposal of property 17 (2) 5
Loss (gain) on disposal of investments (41) 34 (6)
Reserve for impairment on short-term investments (100)
Changes in assets and liabilities:
(Increase) in receivables (786) (4,718) (792)
(Increase) decrease in inventories (2,638) 3,496 (1,150)
(Increase) decrease in other current assets (1,450) (523) 646
(Increase) decrease in deferred income taxes-current (62) 1 (31)
(Increase) in other assets (560) (1,490)
Increase (decrease) in accounts payable 1,553 385 (1,119)
Increase in accrued expenses 652 852 701
Increase (decrease) in accrued pension costs (655) 201 896
Increase (decrease) in deferred income taxes-noncurrent 716 208 (541)
-------- ---------- --------
Net cash provided by operating activities 14,709 12,310 9,041
-------- ---------- --------
Cash Flows from Investing Activities:
Property additions (17,213) (3,833) (8,354)
Additions to available-for-sale and
held-to-maturity investments (28,343) (13,266)
Additions to investments (1,400)
Proceeds from disposal of available-for-sale and
held-to-maturity investments 28,440 12,079
Proceeds from disposal of investments 714
Proceeds from disposal of property 3 13 6
-------- ---------- --------
Net cash used in investing activities (17,113) (5,007) (9,034)
-------- ---------- --------
Cash Flows from Financing Activities:
Net short-term borrowings (repayments) 1,500 (1,152) 1,152
Dividends paid (3,414) (2,603) (1,963)
-------- ---------- --------
Net cash used in financing activities (1,914) (3,755) (811)
-------- ---------- --------
Effect of exchange rate changes on cash (329) 358 (58)
-------- ---------- --------
Net increase (decrease) in cash and cash equivalents (4,647) 3,906 (862)
Cash and cash equivalents at beginning of year 6,106 2,200 3,062
-------- ---------- --------
Cash and cash equivalents at end of year $ 1,459 $ 6,106 $ 2,200
======== ========== ========
Supplemental Cash Flow Data:
Cash paid during the year for:
Income taxes $ 8,062 $ 6,008 $ 5,230
Interest 10 66 181
</TABLE>
See the accompanying notes to the consolidated financial statements
15
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 1: Significant Accounting Policies
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
Penn Engineering & Manufacturing Corp. and its wholly owned subsidiaries, PEM
International Ltd., PEM Investment, Inc., and PEM Management, Inc. All
significant intercompany transactions and balances are eliminated in
consolidation.
b. INVESTMENTS
The Company adopted as of January 1, 1994, the accounting and disclosure
requirements of the Statement of Financial Accounting Standards No. 115 (SFAS
No. 115), "Accounting for Certain Investments in Debt and Equity Securities"
(Note 2). For years prior to 1994, the Company accounted for investments under
the provisions of SFAS No. 12. Investments are classified as short-term if the
maturities at December 31 are less than one year.
c. INVENTORIES
The Company's domestic fastener inventories, are priced on the last-in,
first-out (LIFO) method, at the lower of cost or market. Other inventories,
representing approximately 70% and 72% of total inventories at December 31, 1995
and 1994, respectively, are priced on the first-in, first-out (FIFO) method, at
the lower of cost or market.
d. PROPERTY
Depreciation is calculated under the straight-line method over the estimated
useful lives of the respective assets, generally 3-5 years for tooling and
computer equipment, 10 years for furniture, fixtures and machinery, and 25-40
years for buildings. Maintenance and repairs are charged to income and major
renewals and betterments are capitalized. At the time properties are retired or
sold, the cost and related accumulated depreciation are eliminated and any gain
or loss is included in income.
e. INCOME TAXES
The Company adopted as of January 1, 1993, the accounting and disclosure
requirements of the Statement of Financial Accounting Standards No. 109 (SFAS
No. 109), "Accounting for Income Taxes". Under SFAS No. 109 the deferred tax
provision is determined using the liability method. Under this method, deferred
tax assets and liabilities are recognized based on differences between financial
statement and tax bases of assets and liabilities using presently enacted tax
rates.
f. STATEMENT OF CONSOLIDATED CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on deposit, cash in excess of daily requirements which is invested in
overnight repurchase agreements and other interest bearing accounts withdrawable
on a daily basis.
g. RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
h. FOREIGN CURRENCY TRANSACTIONS
The effect of translating the financial statements of PEM International Ltd. is
recorded as a separate component of Stockholders' Equity in the consolidated
financial statements. All assets and liabilities are translated at
the year-end exchange rate while all income and expense accounts are translated
at the weighted average rate for the year.
Gains and losses resulting from transactions of the Company and its
subsidiary which are made in currency different than their own are included in
other income as they occur. Total foreign currency transaction gains (losses) of
$174,000, $109,000, and ($104,000) were recorded in 1995, 1994, and 1993,
respectively.
Forward foreign currency exchange contracts are purchased to insulate
revenue streams from the impact of foreign currency exchange rate fluctuations.
The effect of this practice is to minimize variability in the Company's
operating results arising from foreign exchange rate movements. Gains and losses
on forward exchange contracts are recognized currently in income. These
contracts have maturities that do not exceed one year and require the Company to
exchange foreign currency for U.S. dollars at maturity. The Company had foreign
exchange contracts of $9.4 million outstanding at both December 31, 1995 and
1994, which approximated their fair market value. The fair value of these
foreign exchange contracts is the amount the Company would receive or pay to
terminate the contracts using quoted market rates.
16
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 1: Significant Accounting Policies (continued)
i. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
j. RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts and balances to
conform with the 1995 presentation.
Note 2: Investments
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS No. 115). As discussed in Note 1 (b), the
Company elected to adopt SFAS No. 115 effective January 1, 1994. The cumulative
and current year effect of the accounting change is not considered to be
significant. SFAS No. 115 requires the Company to account for debt and equity
securities as follows:
Trading - The Company holds no investments that were designated as trading
securities.
Held-to-Maturity - Securities that management has the positive intent and
ability to hold until maturity. These investments are carried at their remaining
unpaid principal balance net of any unamortized premiums or discounts. The
following is a summary of the net unpaid principal value of held to maturity
securities at December 31, 1995 and 1994.
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
---- ----
<S> <C> <C>
U.S. Treasury securities and securities of U.S. Government agencies:
Short-Term Investments................................. $4,466 $2,712
Long-Term Investments ................................. 0 608
------- ------
TOTAL ......................................... $4,466 $3,320
======= =======
</TABLE>
Available-for-Sale - Securities that will be held for indefinite periods of
time. These investments are carried at market value which is determined using
published quotes as of the close of business on December 31, 1995. Unrealized
gains and losses are excluded from earnings and are reported net of tax as a
separate component of equity until realized. Unrealized losses were $60,000, net
of taxes of $39,000, at December 31, 1995 and were $140,000, net of taxes of
$93,000, at December 31, 1994. The following is a summary of the estimated fair
value of the short-term available-for-sale securities at December 31, 1995 and
1994:
(Dollars in thousands) 1995 1994
------- --------
Mutual Common Stock Funds ............... $ 571 $1,075
U.S. Government Security Income Fund..... 759 939
State and Municipal Bond Funds........... 192 577
------- --------
TOTAL.................... $1,522 $2,591
======= =======
Note 3: Inventories
At December 31, 1995 and 1994 inventories comprised:
(Dollars in thousands) 1995 1994
------- -------
Raw material ......... $ 4,570 $ 3,585
Tooling .............. 3,610 2,741
Work-in-process ...... 6,512 5,099
Finished goods ....... 5,583 6,212
------- -------
TOTAL ........ $20,275 $17,637
======= =======
17
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 3: Inventories (continued)
If the FIFO method of inventory valuation had been used for all inventories by
the Company, inventories at December 31, 1995, 1994, and 1993 would have been
$8,028,000, $7,642,000, and $7,516,000 higher and net income would have been
$240,000, $77,000, and $487,000 higher than reported for 1995, 1994, and 1993,
respectively.
A reduction in inventory quantities for the year ended December 31, 1994
resulted in the liquidation of LIFO inventory quantities carried at lower
manufacturing costs prevailing in prior years as compared with current year
manufacturing costs. The effect of such a reduction was to increase 1994 net
income by approximately $832,000.
Included in other assets is long-term tooling inventory totaling $2,050,000
and $1,490,000 at December 31, 1995 and 1994, respectively.
Note 4: Lines of Credit
At December 31, 1995, the Company had available unused short term lines of
credit totaling approximately $36,000,000. Borrowings under these lines totaled
$1,500,000 at December 31, 1995, at an effective interest rate of 6.71%. No
amounts were outstanding under these lines at December 31, 1994.
Note 5: Pension and Profit Sharing Plans
The Company has a defined benefit pension plan covering substantially all
employees in the United States. The benefits are based on years of service and
the employee's earned compensation during any period of the highest 60
consecutive months occurring during the last ten years of employment. The
Company's policy is to fund at least the minimum pension payment required for
federal income tax qualification purposes. Plan provisions and funding meet the
requirements of the Employee Retirement Income Security Act of 1974.
The Company records pension costs in accordance with Statement of Financial
Accounting Standards No. 87. The total pension expense for 1995, 1994 and 1993
was $ 1,767,000, $1,860,000, and $1,851,000, respectively. The following table
sets forth the plans' funded status and amounts recognized in the Company's
consolidated financial statements for the years ended December 31, 1995 and
1994:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested employees ............................................... $ 13,301 $ 9,897
Non-vested employees ........................................... 365 170
-------- --------
Total .......................................................... $ 13,666 $ 10,067
======== ========
Projected plan benefit obligation for services rendered to date $ 24,807 $ 17,313
Plan assets at fair value (primarily listed stocks, bonds and
cash equivalents) ...................................... (17,230) (12,452)
-------- --------
Excess of projected benefit obligation over plan assets ........ 7,577 4,861
Unrecognized net (gain) loss from past experience different from
that assumed and effects of changes in assumptions ..... (2,494) 762
Unrecognized net asset at January 1, 1987 being
recognized over 15 years ............................... 380 443
-------- --------
Total accrued pension cost ..................................... $ 5,463 $ 6,066
======== ========
Current pension cost payable ........................... $ 748 $ 696
Accrued pension cost - noncurrent ...................... $ 4,715 $ 5,370
</TABLE>
18
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 5: Pension and Profit Sharing Plans (continued)
Net pension cost for 1995, 1994, and 1993 included the following components:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the period...... $1,426 $1,586 $1,486
Interest cost on projected benefit obligation....... 1,435 1,339 1,263
Actual return on plan assets ....................... (3,261) 355 (877)
Net amortization and deferral ...................... 2,132 (1,450) (54)
------ ------- ------
Net periodic pension cost .......................... $1,732 $1,830 $1,818
====== ====== ======
</TABLE>
The assumed discount rate, rate of increase in long-term compensation levels,
and expected long-term rate of return on assets were 7% (8% in 1994 and 7% in
1993), 6%, and 8%, respectively. The decrease in the discount rate from 8% in
1994 to 7% in 1995 caused an increase in the projected benefit obligation of
approximately $4,630,000. The increase in the discount rate from 7% in 1993 to
8% in 1994 caused a decrease in the projected benefit obligation of
approximately $3,884,000.
The Company has profit sharing plans covering all eligible employees in the
United States. Contributions and costs are determined as the lesser of 25% of
income before income taxes and profit sharing cost or 10% of each covered
employee's salary, and totaled $3,225,000 in 1995, $3,043,000 in 1994, and
$2,514,000 in 1993.
Note 6: Income Taxes
As discussed in Note 1 (e), effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). The adoption of SFAS No. 109 resulted in an increase in
net income of $423,000, or $.25 per share, reflecting the cumulative effect of
the change for periods prior to January 1, 1993. The effect of the change on
1993 income before cumulative effect of accounting change is not considered to
be significant.
The income tax (benefit) provision consists of the following:
(Dollars in thousands)
1995 1994 1993
---- ---- ----
Current:
Federal ................................. $ 6,837 $ 5,234 $ 3,826
State ................................... 863 1,303 870
------- ------- -------
Total current tax provision ..... 7,700 6,537 4,696
------- ------- -------
Deferred:
Federal ................................. 553 133 (131)
State ................................... 70 16 (17)
------- ------- -------
Total deferred tax (benefit) .... 623 149 (148)
------- ------- -------
Total income tax provision ...................... $ 8,323 $ 6,686 $ 4,548
======= ======= =======
19
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 6: Income Taxes (continued)
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows:(in thousands):
1995 1994
---- ----
Deferred tax assets:
Pension ...................................... $1,854 $2,152
Allowance for doubtful accounts .............. 346 312
Inventory .................................... 343 312
Other ........................................ 290 278
------ ------
Total deferred tax asset ............. 2,833 3,054
------ ------
Deferred tax liabilities:
Property ..................................... 3,847 3,437
Other ........................................ 93 70
------ ------
Total deferred tax liability ......... 3,940 3,507
------ ------
Net deferred tax liability ........................... $1,107 $ 453
====== ======
A reconciliation between the provision for income taxes, computed by
applying the statutory federal income tax rate to income before taxes, and the
actual provision for income taxes on such income is as follows:
(Dollars in thousands) 1995 1994 1993
---- ---- ----
Federal income tax provision at statutory rate $ 7,742 $ 5,958 $ 3,902
State income taxes, after deducting federal
income tax benefit ................... 606 860 574
Interest and dividend income excluded from
taxable income ....................... (23) (24) (34)
Other ........................................ (2) 108 106
------- ------- -------
Actual provision for income taxes ............ $ 8,323 $ 6,686 $ 4,548
======= ======= =======
Note 7: Certain Transactions
The Company sold fasteners at standard authorized distributor prices to a
corporation, an officer and director of which is also a director of the Company,
in the amounts of $7,932,000, $7,061,000, and $3,964,000 and made purchases from
this party in the amounts of $320,000, $356,000, and $323,000 in 1995, 1994, and
1993, respectively. At December 31, 1995 and 1994, the Company had trade
receivable balances due from this party in the amounts of $778,000 and $821,000,
respectively.
Note 8: Commitments
The Company has operating leases covering certain automobiles and office
equipment. Rental and operating lease expenses charged against earnings were
$429,000, $374,000 and $416,000 in 1995, 1994, and 1993, respectively.
Note 9: Contingencies
The Company is exposed to asserted and unasserted potential claims
encountered in the normal course of business. Based on the advice of legal
counsel, management believes that the final resolution of these matters will not
materially affect the Company's consolidated financial position or results of
operations.
20
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 10: Financial Reporting For Segments of the Company
Information about the operations of the Company in different industry segments
for 1995, 1994, and 1993 follows:
(Dollars in thousands)
Year Ended December 31, 1995 Fasteners Motors Consolidated
--------- -------- ------------
Net sales ............................... $113,323 $ 27,945 $141,268
-------- -------- --------
Operating profit ........................ $ 18,353 $ 2,669 $ 21,022
Other income ............................ 1,099
--------
Income before income taxes .............. $ 22,121
========
Identifiable assets ..................... $ 74,328 $ 13,654 $ 87,982
Corporate assets ........................ 8,092
--------
Total assets at December 31, 1995 ....... $ 96,074
========
Depreciation ............................ $ 3,686 $ 479 $ 4,165
Capital expenditures .................... $ 16,464 $ 749 $ 17,213
(Dollars in thousands)
Year Ended December 31, 1994 Fasteners Motors Consolidated
--------- -------- ------------
Net sales ............................... $ 96,067 $ 25,403 $121,470
-------- -------- --------
Operating profit ........................ $ 14,152 $ 2,348 $ 16,500
Other income ............................ 627
--------
Income before income taxes .............. $ 17,127
========
Identifiable assets ..................... $ 61,490 $ 12,684 $ 74,174
Corporate assets ........................ 7,953
--------
Total assets at December 31, 1994 ....... $ 82,127
========
Depreciation ............................ $ 2,932 $ 493 $ 3,425
Capital expenditures .................... $ 3,307 $ 526 $ 3,833
(Dollars in thousands)
Year Ended December 31, 1993 Fasteners Motors Consolidated
--------- -------- ------------
Net sales ............................... $ 77,192 $ 23,473 $100,665
-------- -------- --------
Operating profit ........................ $ 9,346 $ 1,744 $ 11,090
Other income ............................ 387
--------
Income before income taxes and cumulative
effect of accounting change ............. $ 11,477
========
Identifiable assets ..................... $ 54,215 $ 12,393 $ 66,608
Corporate assets ........................ 6,934
--------
Total assets at December 31, 1993 ....... $ 73,542
========
Depreciation ............................ $ 2,686 $ 494 $ 3,180
Capital expenditures .................... $ 7,815 $ 539 $ 8,354
21
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1995, 1994, and 1993
Note 10: Financial Reporting For Segments of the Company (continued)
The Company operates in two industries, fastener products and electric motors.
Operating profit is net sales less costs and expenses. Identifiable assets by
industry are those assets that are used in the Company's operations in each
industry. Sales of fasteners to one customer (an authorized distributor of the
Company) totaled approximately $20,854,000, $16,554,000, and $14,322,00 for the
years ended December 31, 1995, 1994, and 1993, respectively (approximately 15%
of consolidated net sales in 1995 and 14% of consolidated net sales in 1994 and
1993).
Sales of PEM International Ltd., totaled approximately $22,852,000, $17,374,000,
and $12,007,000 for the years ended December 31, 1995, 1994, and 1993,
respectively (approximately 16%, 14%, and 12% of consolidated net sales in 1995,
1994, and 1993, respectively). Sales from the parent Company to PEM
International Ltd. result in profit margins which are representative of those
obtained from sales to unaffiliated distributors. PEM International Ltd.'s
income (loss) before taxes totaled $605,000, ($17,000), and $354,000 for the
years ended December 31, 1995, 1994, and 1993, respectively. PEM International
Ltd.'s assets represented approximately 12%, and 13% of consolidated total
assets as of December 31, 1995, and 1994, respectively. Export sales, other than
to PEM International Ltd., totaled approximately $12,585,000, $10,118,000, and
$8,552,000 for the years ended December 31, 1995, 1994, and 1993, respectively,
(approximately 9% of consolidated net sales in 1995 and 8% of consolidated net
sales in 1994 and 1993).
Note 11: Subsequent Event
On April 17, 1996, the Board of Directors authorized a reclassification of the
Company's existing common stock whereby each share of existing $1.00 par value
voting common stock was exchanged for one share of new $.01 par value Class A
voting common stock (the "Stock Reclassification"). Immediately after the Stock
Reclassification, the Board authorized a 4-for-1 stock split, effected in the
form of a stock dividend, payable in shares of $.01 par value non-voting common
stock to shareholders of record on May 3, 1996 (the "Stock Dividend"). On the
contemplated issuance date, May 23, 1996, stockholders' equity as of December
31, 1995 and 1994, restated to give effect to the Stock Reclassification and
Stock Dividend, is as follows:
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY - RESTATED: 1995 1994
---- ----
<S> <C> <C>
Common stock class A - authorized 3,000,000 shares of $.01 par value each;
issued 1,772,025 shares .......................................... $ 18 $ 18
Common stock - authorized 20,000,000 shares of $.01 value each;
issued 5,316,075 shares .......................................... 53 53
Additional paid-in capital ............................................... 2,686 2,686
Retained earnings ........................................................ 74,852 64,468
Unrealized (loss) on investments (net of tax) ............................ (60) (140)
Cumulative foreign currency translation adjustment ....................... (506) (223)
------ ------
Total ............................................................ 77,043 66,862
------ ------
Less cost of treasury stock-259,772 shares ............................... 952 952
------ ------
Total stockholders' equity ....................................... 76,091 65,910
------ ------
TOTAL ............................................................ $96,074 $82,127
====== ======
</TABLE>
Accordingly, all references in the financial statements to average numbers of
shares outstanding and per share amounts have been stated at their historical
amounts as well as restated to reflect the Stock Reclassification and the Stock
Dividend.
22
<PAGE>
To the Stockholders and Board of Directors
of Penn Engineering & Manufacturing Corp.
We have audited the accompanying consolidated balance sheets of Penn Engineering
& Manufacturing Corp. and subsidiaries (the "Company") as of December 31, 1995
and 1994 and the related statements of consolidated income and retained earnings
and of consolidated cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1995
and 1994, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective January 1, 1993 to
conform with Statement of Financial Accounting Standards No. 109.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 6, 1996
(April 17, 1996 as to Note 11)
23
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Penn Engineering &
Manufacturing Corp.on Form S-2 of our report dated February 6, 1996, (April 17,
1996 as to Note 11) included and incorporated by reference in the Annual Report
on Form 10-K of Penn Engineering & Manufacturing Corp. for the years ended
December 31, 1995 and 1994, and to the use of our report dated February 6, 1996
(April 17, 1996 as to Note 11), appearing in the Prospectus, which is part of
this Registration Statement. We also consent to the reference to us under the
headings "Selected Consolidated Financial Data" and "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
May 21, 1996
