SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 1-5356
PENN ENGINEERING & MANUFACTURING CORP.
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(Exact name of registrant as specified in its charter)
Delaware 23-0951065
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 1000, Danboro, Pennsylvania 18916
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 766-8853
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Class A Common Stock, $.01 par value New York Stock Exchange
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 27, 1997, the aggregate market value based on the closing sales
price on that date of the voting stock held by non-affiliates of the Registrant
was approximately $15,480,118.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date: 1,707,082 shares of Class A
Common Stock and 6,971,246 shares of Common Stock outstanding on March 27, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of Registrant's 1996 Annual Report to Stockholders filed as
Exhibit (13) are incorporated by reference in Items 1, 3, 5, 6, 7, 8
and 14.
2. Portions of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders filed as Exhibit (20) are incorporated by reference in Items
10, 11, 12 and 13.
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PENN ENGINEERING & MANUFACTURING CORP.
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INDEX TO FORM 10-K REPORT
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PAGE
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I. PART I. .................................................... 1
Item 1. Business............................................ 1
Item 2. Properties.......................................... 5
Item 3. Legal Proceedings................................... 6
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 6
Executive Officers of the Registrant................ 6
II. PART II. .................................................... 7
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters................... 7
Item 6. Selected Financial Data............................. 7
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................................... 7
Item 8. Financial Statements and Supplementary Data......... 7
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.............................. 7
III. PART III. .................................................... 7
Item 10. Directors and Executive Officers of
the Registrant.................................... 7
Item 11. Executive Compensation.............................. 8
Item 12. Security Ownership of Certain
Beneficial Owners and Management.................. 8
Item 13. Certain Relationships and Related Transactions...... 8
IV. PART IV. .................................................... 9
Item 14. Exhibits, Financial Statements and
Schedules and Reports on Form 8-K................. 9
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business.
The Registrant, a Delaware corporation, was incorporated in 1942. The
primary businesses of the Registrant have been:
(i) The development, manufacture, and sale of PEM(R) self-clinching
and broaching fasteners, inserts for plastic, and automatic insertion equipment
for such fasteners sold under the name PEMSERTER(R); and
(ii) The development, manufacture, and sale through the Registrant's
Pittman division of permanent magnet field, brush-commutated dc electric motors
under the Pittman(R) and Pitmo(R) trademarks, and electronically commutated
brushless dc servomotors under the Elcom(R) trademark.
During 1996 the Registrant reclassified its existing common stock into
Class A Common Stock and issued a dividend of three shares of non-voting Common
Stock for each outstanding share of Class A Common Stock. This dividend had the
same effect on the total number of shares outstanding as a four-for-one stock
split. The Registrant subsequently completed a public offering of an additional
1,850,000 shares of Common Stock, ceased trading both classes on the American
Stock Exchange and began trading both classes on the New York Stock Exchange.
The Registrant also instituted both an employee stock purchase plan, in which
30% of its employees are now participating, and a stock option plan, which
includes substantially all of the Registrant's employees. These two programs
will further tie the interest of the Registrant's employees to those of the
stockholders.
In early 1997, the Registrant completed its Danboro, Pennsylvania
expansion and renovation program, adding approximately 43,000 square feet of
additional manufacturing and office space. This much needed addition provided
the Registrant the opportunity to reorganize many of its manufacturing
processes. One of the largest capital projects ever undertaken by the
Registrant, this new building allows for the flexibility to reposition a total
of 460 pieces of manufacturing equipment. The Registrant has now converted
approximately 60% of its manufacturing in Danboro to "cells," which the
Registrant believes will result in increased efficiencies and productivity gains
associated with this manufacturing method. The end result of this reorganization
is that lead times for certain fastener product lines have been reduced by
approximately one-half, and the ability to react to customer demand has been
increased.
The Registrant's new 120,000 square foot fastener facility in
Winston-Salem, North Carolina, is scheduled for completion in June 1997. This
new facility will replace the present 58,000 square foot North Carolina plant,
which the Registrant intends to sell. When this new building is completed, the
Registrant's total fastener manufacturing floor space will be approximately
375,000 square feet.
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<PAGE>
In March 1996, the Registrant acquired its previously independent
Singapore distributor and created a master distributor and sales office for its
fastener operations in the Asia-Pacific market. This new facility, functioning
similarly to the Registrant's European master distributor and sales office in
Doncaster, England, provides distribution channels in the important Pacific Rim
market, which the Registrant believes will serve as a staging ground for future
growth in this area.
(b) Financial Information About Industry Segments.
The answer to this Item is incorporated by reference to Note 12 of the
Notes to Consolidated Financial Statements "Financial Reporting for Segments of
the Registrant" on pages 23 and 24 of the Registrant's 1996 Annual Report to
Stockholders which is included as Exhibit (13) to this Form 10-K Report.
(c) Narrative Description of Business.
The Registrant is the world's leading manufacturer of self-clinching
fasteners used by the computer, data communications, telecommunications, general
electronics, automotive, and avionics industries. PEM self-clinching fasteners,
which accounted for approximately 82% of the Registrant's sales in 1996, were
first developed by the Registrant's founder in 1942. 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 Registrant'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 Registrant's Pittman division manufacturers high performance permanent
magnet dc motors used in electronics, medical, and manufacturing applications.
The Registrant's fasteners are primarily used by sheet metal
fabricators which utilize the Registrant's fasteners to produce sub-assemblies
for original equipment manufacturers ("OEMs"). Both OEMs and their
subcontractors seek fastening solutions which provide lower total installed cost
and are highly reliable, thereby lowering production and service costs. The
Registrant's application 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
Registrant's fasteners. Self-cinching fasteners generally compete against loose
hardware, such as nuts and bolts. The Registrant's fasteners typically sell at a
premium to loose hardware. However, the Registrant'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 Registrant's Pittman division produces high-quality,
high-performance, permanent magnet dc motors used in light-weight precision
applications such as archival storage, printing,
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<PAGE>
copying, robotics, and medical diagnostic equipment and centrifuges. Pittman's
broad range of products are typically adapted to the specific requirements of
individual customers.
The manufacture and sale of (i) self-clinching and broaching fasteners
and inserts for plastic and (ii) direct current electric motors are the
Registrant's only lines of business. The following table sets forth information
with respect to the percentage of total sales attributable to each of the
Registrant's principal products which accounted for 10% or more of consolidated
revenues in each of the fiscal years ended December 31, 1994, 1995 and 1996:
Percentage of Total Sales
-----------------------------
Year Ended Electric
December 31 Fasteners Motors
----------- --------- --------
1994 79% 21%
1995 80% 20%
1996 82% 18%
The Company's fastener products are sold through a worldwide network of
approximately 40 authorized distributors located in 30 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 worldwide 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 warehouses
in Doncaster, England and Singapore, in addition to maintaining an inventory at
its Danboro, Pennsylvania facility.
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.
During the year ended December 31, 1996, conditions in the domestic
market for fasteners continued to be highly competitive. It is not possible to
determine with accuracy the relative competitive position of the Registrant in
the market for self-clinching, broaching and insert fasteners. The Registrant
believes that it has maintained its market share during 1996. Approximately ten
other companies are known to be competing with the Registrant in the manufacture
and sale of such fasteners, some of which also manufacture products other than
self-clinching, broaching and insert fasteners.
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<PAGE>
The Registrant also believes its Pittman division maintained its
competitive position in the electric motor market in 1996.
Among the Registrant's principal customers for fasteners and
PEMSERTERS(R) are manufacturers of business machines, personal computers and
computer peripherals, electronic and communications equipment, electrical
equipment, industrial controls instrumentation, vending machines, automotive
subcontractors and other fabricated metal products. The principal customers for
the direct current electric motors and servomotors are manufacturers of
automated production equipment, instruments, computer peripherals, business
machines and medical equipment. In the opinion of the Registrant, no material
part of its business is dependent upon a single customer or a few customers, the
loss of any one or more of which would have a material adverse effect on the
business of the Registrant. However, sales of fasteners to one of the
Registrant's authorized distributors totalled approximately $16,554,000 for the
year ended December 31, 1994, $20,854,000 for the year ended December 31, 1995
and $21,830,000 for the year ended December 31, 1996, or approximately 13.6%,
14.8% and 13.6%, respectively, of the Registrant's consolidated net sales in
such years.
As of December 31, 1996, the Registrant had an order backlog of
$44,359,000 compared with $70,364,000 as of December 31, 1995. The Registrant
estimates that substantially all of its backlog as of December 31, 1996 will be
shipped during its fiscal year ending December 31, 1997.
The raw materials used by the Registrant are generally available in
adequate supply.
The Registrant holds a number of patents, and has patent applications
pending, in the United States and various foreign countries. Management
believes, however, that the Registrant's business is not materially dependent on
any patent or group of patents. The principal trademarks of the Registrant are
registered in the United States and various foreign countries.
Research and development is carried on by the operating personnel of
the Registrant on a continuing basis. The amounts expended for research and
development for the fiscal years ended December 31, 1994, 1995 and 1996 were
approximately $1,136,000, $1,460,000 and $1,520,000, respectively.
The Registrant believes that compliance with federal, state and local
laws and regulations that have been enacted or adopted regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, will not have a material adverse effect upon the earnings or
competitive position of the Registrant.
As of December 31, 1996, 1,330 persons were employed by the Registrant,
119 more than were employed as of December 31, 1995. 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. The Registrant does not consider its business to be seasonal
in any material respect, nor is any material portion of the Registrant's
business
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subject to the renegotiation of profits or termination of contracts at the
election of the Government.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales.
The answer to this Item is incorporated by reference to Note 12
"Financial Reporting for Segments of the Company" on pages 23 and 24 of the
Registrant's 1996 Annual Report to Stockholders, which is included as Exhibit
(13) to this Form 10-K. Also, all foreign sales except for those of PEM
International, Ltd. and PEM International (Singapore) Pte Ltd. are sold F.O.B.,
the Registrant's factory, payable in U.S. dollars. Sales in the United Kingdom
and Western Europe are made through the Registrant's wholly owned subsidiary,
PEM International, Ltd. and are denominated in pounds sterling. Sales in the
Pacific Rim are made through the Registrant's wholly owned subsidiary, PEM
International (Singapore) Pte Ltd. and are denominated in Singapore dollars. All
foreign sales are subject to special risks of exchange controls and restrictions
on the repatriation of funds and also may be affected by the imposition or
increase of taxes and/or tariffs and international instability.
Item 2. Properties.
As of December 31, 1996, the Registrant's principal plants and offices,
all of which (other than the Singapore office) were owned by the Registrant,
were as follows:
<TABLE>
<CAPTION>
Location Size of Facility Use of Facility
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<S> <C> <C>
Danboro, Pennsylvania 230,000 sq. ft. building Executive offices and
on 106.9 acres manufacture of fasteners
Winston-Salem, 58,280 sq. ft. building Manufacture of components
North Carolina on 3.4 acres for fasteners
Harleysville, 58,000 sq. ft. building Manufacture of dc motors
Pennsylvania on 6 acres
Suffolk, Virginia 50,000 sq. ft. building Manufacture of components
on 17.2 acres for fasteners
Doncaster, South 10,500 sq. ft. building Office and warehouse for
Yorkshire, England on 5.25 acres the distribution of fasteners
Singapore 3,700 sq. ft. Office and warehouse for
the distribution of fasteners
</TABLE>
The Registrant considers all of its plants and equipment to be modern
and well maintained. The Registrant has purchased a 16.3 acre commercial plot in
Winston-Salem, North
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Carolina. The Registrant is building a 120,000 square foot facility at this
location, which is scheduled for completion by June 1997. Upon completion of
this new facility, the Registrant intends to sell its existing North Carolina
facility.
The Registrant carries fire, casualty, business interruption, and
public liability insurance for all of its facilities in amounts which are deemed
adequate.
Item 3. Legal Proceedings.
The answer to this Item is incorporated by reference to Note 11 of
Notes to Consolidated Financial Statements "Contingencies" on page 22 of the
Registrant's 1996 Annual Report to Stockholders which is included as Exhibit
(13) to this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Certain information about the executive officers of the Registrant is
as follows:
Name Age Position Held With the Registrant
Kenneth A. Swanstrom 57 Chairman of the Board, Chief
Executive Officer and President
Martin J. Bidart 60 Vice President - Manufacturing
Raymond L. Bievenour 53 Vice President - Sales/Marketing
Joseph F. Lopes 63 Vice President - Quality
Mark W. Simon 58 Vice President - Finance
and Corporate Secretary
Kent R. Fretz 59 Vice President and General
Manager - Pittman division
All of the executive officers of the Registrant have been principally
employed as officers or employees of the Registrant for more than the past five
years. The executive officers of the Registrant are elected each year at the
organization meeting of the Board of Directors of the Registrant which is held
following the Annual Meeting of Stockholders.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
During 1996 the Registrant reclassified its existing common stock into
Class A Common Stock and issued a dividend of three shares of non-voting Common
Stock for each outstanding share of Class A Common Stock. This dividend had the
same effect on the total number of shares outstanding as a four-for-one stock
split. The Registrant subsequently completed a public offering of an additional
1,850,000 shares of Common Stock, ceased trading both classes on the American
Stock Exchange and began trading both classes on the New York Stock Exchange.
Additional information on this Item is incorporated by reference to page 13 of
the Registrant's 1996 Annual Report to Stockholders, which is included as
Exhibit (13) to this Form 10-K Report.
Item 6. Selected Financial Data.
The Five-Year Financial Data and other financial information for the
Registrant is incorporated by reference to page 9 of the Registrant's 1996
Annual Report to Stockholders, which is included as Exhibit (13) to this Form
10-K Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The answer to this Item is incorporated by reference to pages 10
through 12 of the Registrant's 1996 Annual Report to Stockholders, which is
included as Exhibit (13) to this Form 10-K Report.
Item 8. Financial Statements and Supplementary Data.
The answer to this Item is incorporated by reference to pages 14
through 24 of the Registrant's 1996 Annual Report to Stockholders, which is
included as Exhibit (13) to this Form 10-K Report, and the schedules included
herewith.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning directors is incorporated by reference to pages
7 through 9 and pages 15 to 16 of the Registrant's Proxy Statement for its 1997
Annual Meeting of Stockholders, which is
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<PAGE>
included as Exhibit (20) to this Form 10-K Report. Information with respect to
executive officers of the Registrant is included in Part I of this Form 10-K
report.
Item 11. Executive Compensation.
Information concerning this item is incorporated by reference to pages
9 through 11 and page 15 of the Registrant's Proxy Statement for its 1997 Annual
Meeting of Stockholders, which is included as Exhibit (20) to this Form 10-K
Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information concerning this item is incorporated by reference to pages
2 through 6 of the Registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which is included as Exhibit (20) to this Form 10-K Report.
Item 13. Certain Relationships and Related Transactions.
Information concerning this item is incorporated by reference to page
16 of the Registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which is included as Exhibit (20) to this Form 10-K Report.
-8-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Schedules and Reports on Form 8-K.
(a) Financial Statements, Financial Schedules and Exhibits Filed.
1. Consolidated Financial Statements.
The following Consolidated Financial Statements of the Registrant and
its subsidiaries are filed as part of this Form 10-K Report:
Page
----
Consolidated Balance Sheets at December 31, 1996 and 1995 14*
Statements of Consolidated Income for the years ended
December 31, 1996, 1995 and 1994. 15*
Statements of Changes in Consolidated Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994. 16*
Statements of Consolidated Cash Flows for the years ended
December 31, 1996, 1995 and 1994. 17*
Notes to Consolidated Financial Statements. 18-24*
Independent Auditors' Report 24*
2. Financial Schedules.
None.
- -------------------
* Refers to the respective page of the Registrant's 1996 Annual Report to
Stockholders, which is filed as Exhibit (13) to this Form 10-K Report.
With the exception of the portions of such Annual Report specifically
incorporated by reference in this Item, and in Items 1, 3, 5, 6, 7 and 8
hereof, such Annual Report shall not be deemed filed as a part of this
Form 10-K Report or otherwise deemed subject to the liabilities of Section
18 of the Securities Exchange Act of 1934.
3. Exhibits.
Reference is made to the Exhibit Index on page 11 of this
Form 10-K.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1996, the Registrant did
not file any reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENN ENGINEERING & MANUFACTURING CORP.
Date: March 28, 1997 By:/s/ Kenneth A. Swanstrom
-------------------------------
Kenneth A. Swanstrom,
Chairman/CEO/President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Kenneth A. Swanstrom Chairman/CEO/President March 28, 1997
- ----------------------------- (Principal
Kenneth A. Swanstrom Executive Officer)
/s/ Mark W. Simon V.P. Finance, Corporate March 28, 1997
- ----------------------------- Secretary and Director
Mark W. Simon (Principal Financial
and Accounting Officer)
/s/ Willard S. Boothby, Jr. Director March 28, 1997
- -----------------------------
Willard S. Boothby, Jr.
- ----------------------------- Director March , 1997
Frank S. Hermance
/s/ Lewis W. Hull Director March 28, 1997
- -----------------------------
Lewis W. Hull
/s/ Thomas M. Hyndman, Jr. Director March 28, 1997
- -----------------------------
Thomas M. Hyndman, Jr.
Director March , 1997
- -----------------------------
Maurice D. Oaks
/s/ Daryl L. Swanstrom Director March 28, 1997
- -----------------------------
Daryl L. Swanstrom
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PENN ENGINEERING & MANUFACTURING CORP.
EXHIBIT INDEX
Item Description
- ---- -----------
(3)(i) Restated Certificate of Incorporation of the Registrant.
(Incorporated by reference to Exhibit 3.1 of the Registrant's
Form 10-Q Quarterly Report for the period ended June 30,
1996.)
(3)(ii) By-laws of the Registrant, as amended. (Incorporated by
reference to Exhibit 3(ii) of the Registrant's Form 10-K
Annual Report for the fiscal year ended December 31, 1994.)
(10)(i) Right of First Refusal dated as of September 5, 1986 between
the Registrant and Lawrence W. Swanstrom and Daryl E.
Swanstrom. (Incorporated by reference to Exhibit A to the
Company's Form 8-Current Report dated September 5, 1986, the
date of the earliest event reported.)
(10)(ii) 1996 Equity Incentive Plan. (Incorporated by reference to the
Registrant's Form S-8 Registration Statement No. 333-20101
filed with the Commission on January 21, 1997.)
(10)(iii) 1996 Employee Stock Purchase Plan. (Incorporated by reference
to the Registrant's Form S-8 Registration Statement No.
333-13073 filed with the Commission on September 30, 1996.)
(13) 1996 Annual Report to Stockholders. (Only those pages
expressly incorporated by reference in Items 1, 3, 5, 6, 7, 8,
and 14 of this Form 10-K report.)
(17) Letter re Change in Accounting Principles.
(20) Proxy Statement for the Registrant's 1996 Annual Meeting of
Stockholders.
(21) Subsidiaries of the Registrant
(23) Independent Auditors' Consent
(27) Financial Data Schedule
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EXHIBIT 13
Selected Financial Data
(Dollars in thousands except per share amounts)
<TABLE>
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<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales................................................ $160,323 $141,268 $121,470 $100,665 $88,328
Cost of products sold.................................... 111,027 96,190 83,128 70,979 61,127
Income taxes............................................. 8,264 8,323 6,686 4,548 4,219
Income before cumulative effect of 1993 and 1992
accounting changes..................................... 13,858 13,798 10,441 6,929 6,327
Net income............................................... 13,858 13,798 10,441 7,352 8,127
Capital expenditures..................................... 25,266 17,213 3,833 8,354 3,395
Depreciation............................................. 5,343 4,165 3,425 3,180 2,855
Total assets............................................. 138,538 96,074 82,127 73,542 67,132
Stockholders' equity..................................... 121,137 76,091 65,910 57,819 52,498
Working capital.......................................... $ 64,233 $ 38,881 $ 41,612 $ 34,953 $35,112
Number of employees (at year end)........................ 1,330 1,211 1,088 1,008 978
Average number of common shares outstanding used
to compute per share information (in thousands)........ 7,748 6,828* 6,828* 6,828* 6,828*
Per share information:
Income before cumulative effect of 1993 and 1992
accounting changes................................... $ 1.79 $ 2.02* $ 1.53* $ 1.01* $ .93*
Net income............................................. 1.79 2.02* 1.53* 1.08* 1.19*
Stockholders' equity................................... 15.63 11.15* 9.65* 8.47* 7.69*
Dividends.............................................. $ .37 $ .50* $ .38* $ .29* $ .25*
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
9
<PAGE>
Management's Discussion and Analysis of Results
of Operations and Financial Condition
December 31, 1996
The Company's operations consist of two business segments: PEM(R) brand
self-clinching fasteners, including PEMSERTER(R) fastener insertion machines,
and Pittman(R) dc motors. Self-clinching fasteners, which accounted for
approximately 82% of the Company's consolidated net sales in 1996 compared to
80% in 1995 and 79% in 1994, are marketed through a worldwide network of
independent authorized distributors and two Company-owned distributors. In 1996,
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 and commercial
appliances.
Motors accounted for approximately 18% of the Company's consolidated net sales
in 1996 compared to 20% in 1995 and 21% in 1994, and are marketed in the United
States and Europe through independent 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 consists of the traditional brush-commutated motors and
longer lasting brushless motors which have a higher profit margin.
The number of fastener units shipped from the Company's manufacturing facilities
to all customers, including independent and Company owned distributors,
increased 17.0% from 1.57 billion in 1994, to 1.84 billion in 1995, and then
another 10.3% to 2.03 billion in 1996. Motor units shipped increased from
673,000 in 1994, to 680,000 in 1995, to 735,000 in 1996.
In 1996 and 1995, the Company's domestic and foreign customers accounted for 75%
and 25%, respectively, of the Company's sales compared to 78% and 22% in 1994.
The Company's export sales have benefited from the Company's ability to serve
large multi-national computer and electronic manufacturers who have moved some
of their product fabrication offshore. The Company has maintained significant
distribution channels and inventories in Europe and the Pacific Rim for more
than 25 years and 10 years, respectively. In addition, the Company maintains an
inventory of approximately 115 million fastener units at its Danboro 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.
To better meet the Pacific Rim demand for its fasteners, the Company acquired,
through a subsidiary, the assets of its former Singapore distributor and created
a master warehouse in Singapore that will serve the same function as the
existing Company warehouse in England. These warehouse facilities in England and
Singapore allow the Company to ship product in bulk via ocean freight rather
than more costly air shipments directly to the end user. The Company has
established application engineering capabilities in England and plans to do the
same in 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 did not experience any material impact from
these factors in 1996.
Prior to 1996, the Company had been able to sustain its fastener profit margins
and achieve steady improvements in fastener profitability largely as a result of
(i) increased customer demand for its product, (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 fastener gross profit margins increased from 32.7%
in 1994 to 32.9% in 1995 primarily because of the Company's ability to increase
the production and shipment of fasteners without a proportional increase in
fixed costs and overhead. However, in the first half of 1996, the Company's
fastener operation worked at full or near full capacity to meet strong demand
for the Company's products. Overtime and higher than planned outside
supplemental screw machine support increased manufacturing costs at the
Company's fastener operation. This increase, along with an inability to pass on
raw material price increases, caused fastener gross profit margins to decline
from 32.7% in 1995 to 31.8% in 1996 and contributed to consolidated gross profit
margins declining from 31.9% in 1995 to 30.7% in 1996.
Price increases on the Company's fastener products have averaged 2.5% to 3.0%
annually since 1994. On January 1, 1996, the Company announced a 2.8% price
increase on most fastener products, which became effective April 1, 1996. This
increase partially offset the cost increases mentioned above and contributed to
increased fastener and consolidated gross profit margins in the second, third,
and fourth quarters of 1996.
The Company has incurred approximately $42 million in capital expenditures in
the last two years primarily to increase production capacity in the fastener
segment of its business. The Company's objective is to reduce current overtime
levels and delivery lead times of the Company's products 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 ordering of equipment and
its full inclusion into the manufacturing process because of equipment
manufacturers' lead times and the training of new employees.
The motor division's gross profit margins increased from 27.2% in 1994 to 28.0%
in 1995 before declining to 26.1% in 1996. An emphasis on demand-flow technology
allowed Pittman to move away from batch size manufacturing and reduce work-in-
process inventory. These actions improved process flow and component assembly
productivity and were a major contributor to improved gross profits in 1995.
However, a shift to less profitable brush-type motors and higher fixed costs,
in 1996 compared to 1995, led to lower gross profits at the motor division
in 1996.
10
<PAGE>
Results of Operations
The following table 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:
<TABLE>
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
----------------------------------------------------------------------
(Dollars in Thousands)
NET SALES
<S> <C> <C> <C> <C> <C> <C>
Fasteners................................................ $130,721 81.5 $113,323 80.2 $ 96,067 79.1
Motors................................................... 29,602 18.5 27,945 19.8 25,403 20.9
----------------------------------------------------------------------
Total.................................................. $160,323 100.0 $141,268 100.0 $121,470 100.0
======================================================================
Domestic................................................. $119,640 74.6 $105,831 74.9 $ 93,979 77.4
Foreign.................................................. 40,683 25.4 35,437 25.1 27,491 22.6
----------------------------------------------------------------------
Total.................................................. $160,323 100.0 $141,268 100.0 $121,470 100.0
======================================================================
</TABLE>
<TABLE>
Years Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
----------------------------------------------------------------------
(Dollars in Thousands)
GROSS PROFIT BY SEGMENT
<S> <C> <C> <C> <C> <C> <C>
Fasteners................................................ $ 41,557 31.8 $ 37,258 32.9 $ 31,427 32.7
Motors................................................... 7,739 26.1 7,820 28.0 6,914 27.2
----------------------------------------------------------------------
TOTAL COMPANY
Gross profit............................................. $ 49,296 30.7 $ 45,078 31.9 $ 38,342 31.6
Selling, general & administrative expenses............... 28,177 17.6 24,056 17.0 21,842 18.0
Operating profit......................................... 21,119 13.2 21,022 14.9 16,500 13.6
Net income............................................... 13,858 8.6 13,798 9.8 10,441 8.6
----------------------------------------------------------------------
</TABLE>
Year Ended December 31, 1996 vs.
Year Ended December 31, 1995
Consolidated net sales for 1996 were $160.3 million, versus $141.3 million in
1995, a 13.5% increase. This growth in sales was largely the result of the
growth of the personal computer and electronics markets over the same period.
Sales to customers outside the United States for 1996 were $40.7 million, versus
$35.4 million in 1995, a 14.8% increase. Net sales for the fastener operation
for 1996 were $130.7 million, versus $113.3 million in 1995, a 15.4% increase.
Motor sales increased 5.9% from the $27.9 million recorded in 1995 to $29.6
million for the year ended December 31, 1996.
The Company's average selling price for fasteners shipped in 1996 increased
approximately 4.6% from $57.95 per thousand fasteners sold in 1995 to $60.59 per
thousand fasteners sold in 1996 mainly due to a change in product mix and a 2.8%
price increase effective in the second quarter of 1996. The average selling
price of Pittman motors declined 2.1% from $41.15 per motor in 1995 to $40.29
per motor in 1996 as a result of a change in product mix toward lower profit
brush type 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 21.4% in
1996 compared to 22.5% in 1995.
The number of fasteners sold to independent customers increased approximately
10.2% from 1995 to 1996. The number of fasteners sold within North America
increased approximately 12.3% from 1995 to 1996, and represented approximately
74.4% of total fasteners sold in 1996 compared to 72.1% in 1995. The number of
fasteners sold into the Europe and Asia-Pacific markets increased 3.4% and 9.3%,
respectively, from 1995 to 1996 and represented approximately 19.9% and 5.7%,
respectively, of total fasteners sold in 1996. The continued strong demand for
personal computers as well as other electronic equipment was the main cause of
the increased sales volume. However, the rate at which sales volume grew slowed
from prior years because of excess distributor inventory in some fastener
product lines. The number of motors sold increased approximately 8.1% from
679,183 in 1995 to 734,741 in 1996.
Consolidated gross profit was $49.3 million in 1996, versus $45.1 million in
1995, a 9.4% increase. Fastener gross profit margins increased 11.5% from $37.3
million in 1995 to $41.6 million in 1996 mainly as a result of a greater number
of fasteners manufactured and sold in 1996 compared to 1995. However, as a
percent of sales, fastener gross profit decreased from 32.9% in 1995 to 31.8% in
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. The fastener division also incurred
additional one-time expenses associated with the moving of equipment into its
new manufacturing facility in Danboro.
Motor gross profit decreased 1.0% from $7.8 million in 1995 to $7.7 million in
1996 due to higher fixed costs in the manufacturing engineering departments and
a shift, dictated by customer demand, toward the manufacture and shipment of
less profitable brush type motors. Motor gross profit margins declined from
28.0% in 1995 to 26.1% in 1996.
Consolidated selling, general, and administrative expenses ("SG&A") for 1996
were $28.2 million, versus $24.1 million for 1995, a 17.1% increase. SG&A, as a
percent of sales, increased from 17.0% in 1995 to 17.6% in 1996. Additional SG&A
staff, wage increases for current staff, the establishment of a Singapore
distribution center, and increased legal, investor relations and other
professional fees related to the Company's 1996 public offering contributed to
the increased SG&A.
11
<PAGE>
Consolidated net income for 1996 was $13.9 million, versus $13.8 million for
1995. Other income, which includes investment income and realized currency
translation gains, decreased 8.7% as a result of decreased investment income
during the first six months of 1996, related to capital equipment expenditures
and less favorable foreign currency exchange rates in 1996 compared to 1995.
In the fourth quarter of 1996, the Company changed its method of calculating
the index on its domestic fastener LIFO inventory from the unit cost method to
the components of cost method. Management believes that this change in its LIFO
method of application better reflects the effects of inflation and results in a
more representative LIFO cost index for product mix changes. The effect of this
change was to increase net income for 1996 by $910,000.
Year Ended December 31, 1995 vs.
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. 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 fasteners sold to independent customers increased approximately
17.7% from 1994 to 1995. Shipment of fasteners within North America increased
approximately 12.2% from 1994 to 1995, and represented approximately 72.1% of
total fasteners sold in 1995. The number of fasteners sold into the Europe and
Asia-Pacific markets increased 37.2% and 26.4%, respectively, from 1994 to 1995
and represented approximately 21.9% and 6.0%, respectively, of total fasteners
sold 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, was the main cause of the increased shipment volume. The
number of motors sold increased approximately 1.0% from 1994 to 1995.
Average selling prices for fasteners shipped in 1995 increased approximately
0.5% from $57.70 per thousand fasteners sold in 1994 to $57.95 per thousand
fasteners sold in 1995. The average selling price of motors increased 8.9% from
$37.76 in 1994 per motor to $41.12 per motor in 1995 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 profit,
comprised 21.7% of total motor sales compared to 16.8% in 1994.
Consolidated gross profit was $45.1 million in 1995, versus $38.3 million for
1994, a 17.8% increase. Fastener gross profit increased 18.6% from $31.4 million
in 1994 to $37.3 million in 1995. As a percent of sales, fastener gross profit
margin increased from 32.7% in 1994 to 32.9% in 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. Motor gross profit increased from $6.9 million in
1994 to $7.8 million in 1995 and gross profit as a percent of sales increased
from 27.2% in 1994 to 28.0% in 1995.
Consolidated 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 are effected through
its subsidiary and independent distributors and 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 32.7% 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.
Liquidity and Capital Resources
Liquidity needs for the year ended December 31, 1996 consisted primarily of
$25.3 million of capital expenditures which included the completion of a 43,000
square foot addition to the Company's Danboro facility and for producing
inventories to support the European and Asia-Pacific markets. The inventory
increase included $3.0 million of finished goods inventory acquired in
connection with the acquisition of the Company's distributor in Singapore. The
Company's primary sources of cash in 1996 came from the public offering of
1,850,000 shares of non-voting common stock, for which the Company received net
proceeds of $33.3 million.
Part of the proceeds of the public offering were used to repay all outstanding
short-term borrowings and to fund the $25.3 million 1996 capital expenditure
program. The remainder of the proceeds will be used primarily to finance 1997
capital expenditures including approximately $8.5 million for the construction
of a new fastener manufacturing facility in Winston-Salem, N.C. and new
equipment for that facility.
At December 31, 1996, the Company also had approximately $27.5 million available
under its short-term lines of credit. Working capital increased to $64.2 million
in 1996 from $38.9 million in 1995 and $41.6 million in 1994 as a result of the
public offering proceeds and the increased accounts receivable and inventory
both from increased sales and the purchase of the Singapore distributor.
Accordingly, the Company anticipates that its existing capital resources and
cash flow generated from future operations will enable it to maintain its
current level of operations and its planned growth for the foreseeable future.
Stockholders' equity per share at the end of 1996 was $15.63 compared to $11.15
at year-end 1995 and $9.65 at year-end 1994. The 1995 and 1994 amounts have been
restated to adjust for a 4-for-1 stock split, effected by a stock dividend,
distributed to stockholders in May 1996.
The Company, along with a large number of other entities, has been designated a
potentially responsible party (PRP) subject to joint and several liability for
the cost of two superfund sites by the US Environmental Protection Agency under
the Comprehensive Environmental Response, Compensation and Liability Act. Based
on the Company's assessment of the costs associated with its environmental
responsibilities, compliance with federal, state and local laws regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, have not had and in the opinion of Company's
management, will not have, a material effect on the Company's financial
condition.
12
<PAGE>
Selected Quarterly Financial Data
(Unaudited, in thousands except per share amounts and prices)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Total Year
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales................................................ $39,029 $41,482 $38,714 $41,098 $160,323
Gross profit............................................. 11,617o 13,444o 12,250o 11,985o 49,296
Net income............................................... 2,908o 3,970o 3,660o 3,320o 13,858
Net income per share..................................... .42*o .58*o .42o .37o 1.79
Dividends declared per share............................. .07* .10* .10 .10 .37
----------------------------------------------------------------------
Market prices per share:
Class A Common Stock (PNNA)
High................................................... 24* 27 1/8* 19 1/8 20 5/8 27 1/8
Low.................................................... 21 1/4* 18 1/8* 15 16 7/8 15
Common Stock (PNN)
High................................................... N/A 26 7/8 23 7/8 20 3/4 26 7/8
Low.................................................... N/A 18 3/8 16 7/8 17 1/4 16 7/8
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
oRestated to reflect LIFO method accounting change (See Note 3).
*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 on May 3, 1996.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
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*.................................... .44 .51 .50 .57 2.02
Dividends declared per share*............................ .07 .07 .07 .29+ .50
----------------------------------------------------------------------
Market prices per share:
Class A Common Stock
High*.................................................. 14 3/4 18 7/8 25 1/8 24 1/4 25 1/8
Low*................................................... 10 5/8 13 1/2 18 3/8 19 1/4 10 5/8
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+Includes a regular dividend of $.07 per share and an extra dividend of $.22 per
share 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 on May 3, 1996.
The common stock of Penn Engineering & Manufacturing Corp. is traded on the
New York Stock Exchange.
Symbols: PNN & PNNA
Lines of Business
The manufacture and sale of fastener products and electric motors are the
Company's only lines of business. Certain information on percent of net sales
and percent of operating profits attributable to these lines of business for the
last three years is as follows:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales
<S> <C> <C> <C>
Fastener products............................................................................. 82% 80% 79%
Electric motors............................................................................... 18 20 21
Operating Profit
Fastener products............................................................................. 89 87 86
Electric motors............................................................................... 11 13 14
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.......................................................................... $ 4,208 $ 1,459
Short-term investments............................................................................. 10,858 5,988
Accounts receivable (less allowance for doubtful accounts--1996, $1,000; 1995, $900)............... 28,580 20,845
Refundable income taxes............................................................................ 246 --
Inventories........................................................................................ 27,533 20,275
Deferred income taxes.............................................................................. 391 959
Other current assets............................................................................... 2,125 2,557
--------------------------
Total current assets............................................................................. 73,941 52,083
--------------------------
PROPERTY--At cost:
Land and improvements.............................................................................. 4,358 3,699
Buildings and improvements......................................................................... 22,417 15,843
Machinery and equipment............................................................................ 74,486 57,295
--------------------------
Total............................................................................................ 101,261 76,837
Less accumulated depreciation...................................................................... 39,429 34,896
--------------------------
Total property--net.............................................................................. 61,832 41,941
--------------------------
OTHER ASSETS......................................................................................... 2,765 2,050
--------------------------
TOTAL............................................................................................ $138,538 $96,074
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................................... $ 3,741 $ 4,303
Notes payable...................................................................................... -- 1,500
Accrued expenses:
Pension and profit sharing....................................................................... 2,140 3,984
Income taxes..................................................................................... -- 468
Payroll and commissions.......................................................................... 2,810 2,426
Other............................................................................................ 1,017 521
--------------------------
Total current liabilities........................................................................ 9,708 13,202
--------------------------
ACCRUED PENSION COST................................................................................. 4,793 4,715
--------------------------
DEFERRED INCOME TAXES................................................................................ 2,900 2,066
--------------------------
STOCKHOLDERS' EQUITY (See Note 14):
Class A common stock--authorized 3,000,000 shares of $.01 par value each
($1.00 par value each at December 31, 1995); issued 1,772,025 shares............................. 18 1,772
Common stock--authorized 20,000,000 shares of $.01 value each;
issued--7,166,075 shares......................................................................... 72 --
Additional paid-in capital......................................................................... 35,421 932
Retained earnings.................................................................................. 85,822 74,905
Unrealized loss on investments (net of tax)........................................................ (62) (60)
Cumulative foreign currency translation adjustment................................................. 818 (506)
--------------------------
Total............................................................................................ 122,089 77,043
--------------------------
Less cost of treasury stock--259,772 shares........................................................ 952 952
--------------------------
Total stockholders' equity....................................................................... 121,137 76,091
--------------------------
TOTAL............................................................................................ $138,538 $96,074
====================================================================================================================================
</TABLE>
See the accompanying notes to the consolidated financial statements.
14
<PAGE>
Statements of Consolidated Income
(Dollars in thousands except share and per share amounts)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES......................................................................... $160,323 $141,268 $121,470
COST OF PRODUCTS SOLD (Note 3).................................................... 111,027 96,190 83,128
------------------------------------------
GROSS PROFIT...................................................................... 49,296 45,078 38,342
OTHER EXPENSES:
Selling expenses................................................................ 16,347 14,867 13,634
General and administrative expenses............................................. 11,830 9,189 8,208
------------------------------------------
TOTAL......................................................................... 28,177 24,056 21,842
------------------------------------------
OPERATING PROFIT.................................................................. 21,119 21,022 16,500
OTHER INCOME--NET................................................................. 1,003 1,099 627
------------------------------------------
INCOME BEFORE INCOME TAXES........................................................ 22,122 22,121 17,127
PROVISION FOR INCOME TAXES........................................................ 8,264 8,323 6,686
------------------------------------------
NET INCOME (Note 3)............................................................... $ 13,858 $ 13,798 $ 10,441
==========================================
NET INCOME PER SHARE (Note 14).................................................... $ 1.79 $ 2.02 $ 1.53
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING DURING THE YEAR (Note 14)........................................... 7,748,273 6,828,328 6,828,328
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See the accompanying notes to the consolidated financial statements.
15
<PAGE>
Statements of Changes in Consolidated Stockholders' Equity
(Dollars in thousands)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign
Class A Additional Unrealized Currency Total
For the years ended Common Common Paid-in Retained Loss on Translation Treasury Stockholders'
December 31, 1996, 1995, and 1994 Stock Stock Capital Earnings Investments Adjustment Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994........... $ 1,772 $ 932 $56,683 $ (616) $(952) $ 57,819
Net income........................... 10,441 10,441
Cash dividends declared--
$.38125 per share.................. (2,603) (2,603)
Reserve for unrealized
investment loss.................... (140) (140)
Foreign currency translation
adjustment......................... 393 393
---------------------------------------------------------------------------------------------
Balance at December 31, 1994......... 1,772 932 64,521 (140) (223) (952) 65,910
Net income........................... 13,798 13,798
Cash dividends declared--
$.50 per share..................... (3,414) (3,414)
Decrease in unrealized
investment loss reserve............ 80 80
Foreign currency translation
adjustment......................... (283) (283)
---------------------------------------------------------------------------------------------
Balance at December 31, 1995......... 1,772 932 74,905 (60) (506) (952) 76,091
Net income........................... 13,858 13,858
Cash dividends declared--
$.36875 per share.................. (2,888) (2,888)
Reclassification of stock............ (1,754) 1,754 --
Stock dividend declared.............. 53 (53) --
Stock offering--1,850,000
shares issued...................... 19 32,735 32,754
Increase in unrealized
investment loss reserve............ (2) (2)
Foreign currency translation
adjustment......................... 1,324 1,324
---------------------------------------------------------------------------------------------
Balance at December 31, 1996......... $ 18 $72 $35,421 $85,822 $ (62) $ 818 $(952) $121,137
=============================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See the accompanying notes to the consolidated financial statements.
16
<PAGE>
Statements of Consolidated Cash Flows
(Dollars in thousands)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income............................................................................. $ 13,858 $ 13,798 $ 10,441
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation......................................................................... 5,343 4,165 3,425
Loss (gain) on disposal of property.................................................. 38 17 (2)
Loss (gain) on disposal of investments............................................... -- (41) 34
Changes in assets and liabilities:
(Increase) in accounts receivables................................................... (7,735) (786) (4,718)
(Increase) in refundable income taxes................................................ (246) -- --
(Increase) decrease in inventories................................................... (7,258) (2,638) 3,496
(Increase) decrease in deferred income taxes--current................................ 568 (62) 1
(Increase) decrease in other current assets.......................................... 432 (1,450) (523)
(Increase) in other assets........................................................... (715) (560) (1,490)
Increase (decrease) in accounts payable.............................................. (562) 1,553 385
Increase (decrease) in accrued expenses.............................................. (1,432) 652 852
Increase (decrease) in accrued pension costs......................................... 78 (655) 201
Increase in deferred income taxes--noncurrent........................................ 834 716 208
--------------------------------------
Net cash provided by operating activities.......................................... 3,203 14,709 12,310
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions..................................................................... (25,266) (17,213) (3,833)
Additions to available-for-sale investments............................................ (14) -- (1,479)
Additions to held-to-maturity investments.............................................. (106,415) (28,343) (11,787)
Proceeds from disposal of available-for-sale investments............................... 217 1,202 1,080
Proceeds from disposal of held-to-maturity investments................................. 101,340 27,238 10,999
Proceeds from disposal of property..................................................... 79 3 13
--------------------------------------
Net cash used in investing activities.............................................. (30,059) (17,113) (5,007)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term (repayments) borrowings................................................. (1,500) 1,500 (1,152)
Issuance of common stock............................................................... 32,754 -- --
Dividends paid......................................................................... (2,888) (3,414) (2,603)
--------------------------------------
Net cash provided by (used in) financing activities................................ 28,366 (1,914) (3,755)
--------------------------------------
Effect of exchange rate changes on cash................................................ 1,239 (329) 358
--------------------------------------
Net increase (decrease) in cash and cash equivalents................................... 2,749 (4,647) 3,906
Cash and cash equivalents at beginning of year......................................... 1,459 6,106 2,200
--------------------------------------
Cash and cash equivalents at end of year............................................... $ 4,208 $ 1,459 $ 6,106
======================================
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the year for:
Income taxes......................................................................... $ 7,429 $ 8,062 $ 6,008
Interest............................................................................. 218 10 66
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See the accompanying notes to the consolidated financial statements.
17
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1996, 1995, and 1994
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 International Singapore Pte. Ltd., PEM World Sales Ltd.,
PEM Investments, 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). 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 69% and 70% of total inventories at December 31, 1996
and 1995, respectively, are priced on the first-in, first-out (FIFO) method, at
the lower of cost or market. As further discussed in Note 3, the Company changed
its method of accounting for its LIFO inventories from the unit cost method to
the components of cost method during 1996.
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. In 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires review for possible impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The effect of the adoption was not material.
e. Income Taxes
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.
& PEM International Singapore Pte. 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.
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. Fair Values of Financial Instruments
Fair values of cash equivalents, short-term investments, trade receivables, and
payables approximate their carrying value. The estimated fair values of other
financial instruments have been determined using available market information
and valuation methodologies. These estimates require considerable judgment in
interpreting market data, and changes in assumptions or estimation methods may
significantly affect the fair value estimates.
k. Capital Stock
The Company's capital stock consists of $.01 par value Class A Common Stock and
$.01 par value Common Stock. Holders of Class A Common Stock have one vote per
share, while holders of Common Stock have no votes. All other rights of the
Class A Common Stock and Common Stock, including rights with respect to stock
splits, the consideration payable in a merger or consolidation, and distribution
upon liquidation, are the same.
l. Reclassifications
Certain reclassifications have been made to prior year amounts and balances to
conform with the 1996 presentation.
18
<PAGE>
NOTE 2: INVESTMENTS
As discussed in Note 1 (b), the Company elected to adopt SFAS No. 115 effective
January 1, 1994. SFAS No. 115 requires the Company to account for debt and
equity securities as follows:
a) Trading--The Company holds no investments that were designated as trading
securities.
b) 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 short-term held to
maturity securities at December 31, 1996 and 1995.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
U.S. Treasury securities and securities of U.S. Government agencies.......................................... $8,303 $4,466
Commercial paper............................................................................................. 1,238 --
-----------------------
Total...................................................................................................... $9,541 $4,466
=======================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
c) 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, 1996. 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 $62,000, net
of taxes of $40,000, at December 31, 1996 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, 1996 and
1995:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Mutual Common Stock Funds.................................................................................... $ 580 $ 571
U.S. Government Security Income Fund......................................................................... 549 759
State and Municipal Bond Funds............................................................................... 188 192
-----------------------
Total...................................................................................................... $1,317 $1,522
=======================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 3: INVENTORIES
At December 31, 1996 and 1995 inventories comprised:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Raw material................................................................................................ $ 4,470 $ 4,570
Tooling..................................................................................................... 3,882 3,610
Work-in-process............................................................................................. 7,648 6,512
Finished goods.............................................................................................. 11,533 5,583
-----------------------
Total..................................................................................................... $27,533 $20,275
=======================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
If the FIFO method of inventory valuation had been used for all inventories by
the Company, inventories at December 31, 1996, 1995, and 1994 would have been
$8,117,000, $8,028,000, and $7,642,000 higher and net income would have been
$56,000, $240,000, and $77,000 higher than reported for 1996, 1995, and 1994,
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.
In the fourth quarter of 1996, the Company changed the method of calculating its
domestic fastener LIFO inventory from the unit cost method to the components of
cost method. Management believes that this change in its LIFO method better
reflects the effect of inflation and results in a more representative LIFO cost
index for product mix changes. The effect of this change was to increase 1996
net income by $910,000 ($.12 per share). The cumulative effect of this
accounting change and the pro forma effect on prior years' income have not been
disclosed because such effects are not reasonably determinable.
Included in other assets is long-term tooling inventory totaling $2,765,000 and
$2,050,000 at December 31, 1996 and 1995, respectively.
19
<PAGE>
Notes to Consolidated Financial Statements (continued)
For the years ended December 31, 1996, 1995, and 1994
NOTE 4: LINES OF CREDIT
At December 31, 1996, the Company had available unused short term lines of
credit totaling approximately $27,500,000. No amounts were outstanding under
these lines at December 31, 1996. Borrowings under these lines totaled
$1,500,000 at December 31, 1995 at an effective interest rate of 6.71%.
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, "Employers Accounting for Pensions." The total
pension expense for 1996, 1995 and 1994 was $2,348,000, $1,767,000, and
$1,860,000, 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, 1996 and 1995:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested employees........................................................................................... $ 13,563 $ 13,301
Non-vested employees....................................................................................... 379 365
------------------------
Total.................................................................................................... $ 13,942 $ 13,666
========================
Projected plan benefit obligation for services rendered to date............................................ $ 24,937 $ 24,807
Plan assets at fair value (primarily listed stocks, bonds and cash equivalents)............................ (20,324) (17,230)
------------------------
Excess of projected benefit obligation over plan assets.................................................... 4,613 7,577
Unrecognized net (gain) from past experience different from that assumed and effects
of changes in assumptions ............................................................................... (136) (2,494)
Unrecognized net asset at January 1, 1987 being recognized over 15 years................................... 316 380
------------------------
Total accrued pension cost................................................................................. $ 4,793 $ 5,463
========================
Current pension cost payable............................................................................. $ 0 $ 748
Accrued pension cost--noncurrent..........................................................................$ 4,793 $ 4,715
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net pension cost for 1996, 1995, and 1994 included the following components:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the period................................................ $ 2,081 $ 1,426 $ 1,586
Interest cost on projected benefit obligation.................................................. 1,756 1,435 1,339
Actual return on plan assets................................................................... (1,581) (3,261) 355
Net amortization and deferral.................................................................. 51 2,132 (1,450)
---------------------------------
Net periodic pension cost...................................................................... $ 2,307 $ 1,732 $ 1,830
=================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed discount rate, rate of increase in long-term compensation levels,
and expected long-term rate of return on assets were 7.5% (7% in 1995 and 8% in
1994), 6%, and 8%, respectively. The increase in the discount rate from 7% in
1995 to 7.5% in 1996 caused a decrease in the projected benefit obligation of
approximately $2,693,000. 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 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 $3,631,000 in 1996, $3,225,000 in 1995, and
$3,043,000 in 1994.
NOTE 6: STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company currently has one stock option plan, the 1996 Equity Incentive Plan
(the "Plan"). The Plan provides for the granting of options to eligible
employees of all participating subsidiaries of the Company. The Plan permits the
granting of both options that qualify as incentive stock options under Section
422(b) of the Internal Revenue Code of 1986 (the "Code") and options that do not
qualify as incentive stock options under the Code (Non-Qualified Stock Options).
The Company is authorized under the Plan to grant options for shares not to
exceed in the aggregate 500,000 shares of the Company's non-voting Common Stock.
The Plan provides for the granting of both
20
<PAGE>
types of options with an exercise price equal to the greater of par value or
the closing market price of the Company's non-voting Common Stock on the date
of the grant and a maximum term of ten years. All options granted under this
Plan shall vest in four equal cumulative installments commencing on the first,
second, third, and fourth anniversaries of the grant date of the option. The
Company had no options outstanding at the beginning of the year and had granted
approximately 133,300 options as of December 31, 1996, all of which are
currently unexercisable, with an aggregate fair market value of approximately
$784,000. The grant date and exercise price of the initial grant under the Plan
were December 4, 1996 and $18.375 per share, respectively. The fair value of
each option granted was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: risk free interest rate of
5.93%; dividend yield of 2.25% for all years; expected life of 6 years; and
volatility of 30%.
The Company also has one stock purchase plan, the 1996 Employee Stock Purchase
Plan (the "Purchase Plan") which provides for the purchase of the Company's
non-voting Common Stock by eligible employees of all participating subsidiaries
of the Company. The Purchase Plan commenced on October 1, 1996 and has a term of
ten years with 20 semi-annual subscription periods. During its term the Purchase
Plan permits employees to purchase the Company's non-voting Common Stock on a
regular basis, through payroll deductions not exceeding 10% of base wages, at a
10% discount from the lowest of the market price on the last trading day before
the first day of enrollment period with respect to the subscription period or on
the last trading day of such subscription period. The maximum number of shares
to be issued under the Purchase Plan is 150,000 shares of the Company's
non-voting Common Stock. Shares under the Purchase Plan are subscribed during
each subscription period and purchased on the last business day of such
subscription period. The Company had no shares subscribed for at the beginning
of the year and had collected approximately $68,400 for the initial subscription
period at December 31, 1996. The Company utilized the same valuation assumptions
in this plan as it had in the stock option plan.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation,"
which requires expanded disclosures of stock-based compensation arrangements
with employees. SFAS 123 encourages, but does not require, compensation cost to
be measured based on the fair value of the equity instrument awarded. It allows
the Company to continue to measure compensation cost for these plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees."
The Company has elected to continue to recognize compensation cost based on the
intrinsic value of the equity instrument awarded as promulgated in APB No. 25.
Had compensation costs for 1996 for the Company's plans been determined based on
the fair value at the grant date for awards under these plans consistent with
the method of SFAS No. 123, there would have been no material effect on the
Company's financial position or results of its operations.
NOTE 7: FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company hedges the potential effect of currency fluctuations on foreign
operating activities by entering into foreign currency forward contracts. Gains
or losses on qualifying hedges of firm commitments are recognized in income when
the hedged transaction occurs. Forward contracts that do not qualify for hedge
accounting are marked to market, and the resulting gains or losses are reflected
in income. Total foreign currency transaction gains (losses) of ($224,000),
$174,000, and $109,000 were recorded in 1996, 1995, and 1994, respectively. The
forward contracts outstanding at December 31, 1996 mature in 1997 and require
the Company to exchange foreign currency for U.S. dollars at maturity. The
Company had foreign exchange contracts of $13.9 million outstanding at December
31, 1996 with a fair market value of approximately $12.7 million. At December
31, 1995 there were $9.4 million foreign exchange contacts outstanding with a
fair market value which approximated cost. 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.
NOTE 8: INCOME TAXES
The income tax provision consists of the following:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Current:
<S> <C> <C> <C>
Federal........................................................................................ $6,239 $6,837 $5,234
State.......................................................................................... 644 863 1,303
--------------------------------
Total current tax provision.................................................................. 6,883 7,700 6,537
--------------------------------
Deferred:
Federal........................................................................................ 1,236 553 133
State.......................................................................................... 145 70 16
--------------------------------
Total deferred tax........................................................................... 1,381 623 149
--------------------------------
Total income tax provision....................................................................... $8,264 $8,323 $6,686
================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Notes to Consolidated Financial Statements (continued)
For the years ended December 31, 1996, 1995, and 1994
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets:
<S> <C> <C>
Pension..................................................................................................... $1,871 $1,854
Allowance for doubtful accounts............................................................................. 382 346
Inventory................................................................................................... 378 343
Other....................................................................................................... 341 290
---------------------
Total deferred tax asset.................................................................................. 2,972 2,833
---------------------
Deferred tax liabilities:
Property.................................................................................................... 4,771 3,847
LIFO reserve................................................................................................ 592 --
Other....................................................................................................... 118 93
---------------------
Total deferred tax liability.............................................................................. 5,481 3,940
---------------------
Net deferred tax liability.................................................................................... $2,509 $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>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Federal income tax provision at statutory rate................................................. $7,743 $7,742 $5,958
State income taxes, after deducting federal income tax benefit................................. 513 606 860
Interest and dividend income excluded from taxable income...................................... (2) (23) (24)
Other.......................................................................................... 10 (2) 108
--------------------------------
Actual provision for income taxes.............................................................. $8,264 $8,323 $6,686
================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 9: 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 $6,512,000, $7,932,000, and $7,061,000 and made purchases from
this party in the amounts of $289,000, $320,000, and $356,000 in 1996, 1995, and
1994, respectively. At December 31, 1995 the Company had a trade receivable
balance due from this party in the amount of $778,000. In November, 1996 this
corporation was sold to an unrelated party.
NOTE 10: COMMITMENTS
The Company has operating leases covering certain automobiles, office space, and
office equipment. The future minimum annual payments on these non-cancelable
operating leases which were in effect at December 31, 1996, having initial or
remaining terms of more than one year are $546,000 for 1997, $498,000 for 1998,
$114,000 for 1999 and $0 for 2000 and 2001, respectively.
Rental and operating lease expenses charged against earnings were $586,000,
$429,000, and $374,000 in 1996, 1995, and 1994 respectively.
NOTE 11: 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.
22
<PAGE>
NOTE 12: FINANCIAL REPORTING FOR SEGMENTS OF THE COMPANY
Information about the operations of the Company in different industry segments
for 1996, 1995, and 1994 follows:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 Fasteners Motors Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Net sales.............................................................................. $130,721 $29,602 $160,323
----------------------------------------
Operating profit....................................................................... 18,754 2,365 $ 21,119
Other income........................................................................... 1,003
-----------
Income before income taxes............................................................. $ 22,122
===========
Identifiable assets.................................................................... $110,999 $14,899 $125,898
Corporate assets....................................................................... 12,640
-----------
Total assets at December 31, 1996...................................................... $138,538
===========
Depreciation........................................................................... $ 4,815 $ 528 $ 5,343
Capital expenditures................................................................... $ 24,083 $ 1,183 $ 25,266
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 Fasteners Motors Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
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
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 Fasteners Motors Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
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>
The Company operates in two business segments, fastener products and electric
motors. Operating profit is net sales less costs and expenses. Identifiable
assets by segment are those assets that are used in the Company's operations in
each segment. Sales of fasteners to one customer (an authorized distributor of
the Company) totaled approximately $21,830,000, $20,854,000, and $16,554,00 for
the years ended December 31, 1996, 1995, and 1994, respectively (approximately
14%, 15%, and 14% of consolidated net sales in 1996, 1995, and 1994,
respectively).
Sales of PEM International Ltd. and PEM International Singapore Pte. Ltd., (the
"Foreign Subsidiaries") totaled approximately $30,989,000, $22,852,000, and
$17,374,000 for the years ended December 31, 1996, 1995, and 1994, respectively
(approximately 19%, 16%, and 14% of consolidated net sales in 1996, 1995, and
1994, respectively). Sales from the parent Company to the Foreign Subsidiaries
result in profit margins which are representative of those obtained from sales
to unaffiliated distributors. Income (loss) before taxes of the Foreign
Subsidiaries
23
<PAGE>
Notes to Consolidated Financial Statements (continued)
For the years ended December 31, 1996, 1995, and 1994
totaled $989,000, $605,000, and ($17,000) for the years ended December 31,
1996, 1995, and 1994, respectively. Assets of the Foreign Subsidiaries
represented approximately 17%, and 12% of consolidated total assets as of
December 31, 1996, and 1995, respectively. Export sales, other than to the
Foreign Subsidiaries totaled approximately $9,694,000, $12,585,000, and
$10,118,000 for the years ended December 31, 1996, 1995, and 1994, respectively,
(approximately 6%, 9%, and 8% of consolidated net sales in 1996, 1995, and 1994,
respectively).
NOTE 13: ACQUISITIONS
On March 1, 1996 the Company purchased, for approximately $2,900,000, certain
inventory and other assets from a former authorized distributor and created a
new wholly-owned subsidiary. This new, wholly-owned subsidiary, PEM
International Singapore Pte. Ltd., operates similar to the Company's other
wholly-owned subsidiary, PEM International Ltd.
NOTE 14: STOCK RECLASSIFICATION AND STOCK DIVIDEND
On May 22, 1996, the Company effected a reclassification of its common stock
whereby each share of existing $1.00 par value voting common stock became one
share of new $.01 par value Class A voting common stock (the "Stock
Reclassification"). On May 23, 1996, the Company effected a 4-for-1 stock split,
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").
The change in par value of the Class A common stock as a result of the Stock
Reclassification resulted in the transfer of $1,754,305 from Class A common
stock to additional paid-in capital, and the Stock Dividend resulted in the
issuance of 5,316,075 new common shares and in the transfer of $53,161 from
retained earnings to common stock. In the foregoing consolidated financial
statements, all per share amounts and number of shares have been restated to
reflect the Stock Reclassification and the Stock Dividend.
Auditors' Report
To the Stockholders and Board of Directors of
Penn Engineering & Manufacturing Corp.
Danboro, Pennsylvania
We have audited the accompanying consolidated balance sheets of Penn Engineering
& Manufacturing Corp. and subsidiaries (the "Company") as of December 31, 1996
and 1995 and the related statements of consolidated income, changes in
consolidated stockholders' equity and consolidated cash flows for each of the
three years in the period ended December 31, 1996. These consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, during 1996 the
Company changed its method of accounting for last-in, first-out inventories.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 29, 1997
24
<PAGE>
EXHIBIT 17
Penn Engineering & Manufacturing Corp.
Old Easton Road
Danboro, Pennsylvania
Board of Directors:
We have audited the consolidated financial statements of Penn Engineering &
Manufacturing Corp. and subsidiaries as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, included in your
Annual Report on Form 10-K to the Securities and Exchange Commission and have
issued our report thereon dated January 29, 1997. Note 3 to such consolidated
financial statements contains a description of your adoption during the year
ended December 31, 1996 of a change in the method of accounting for certain LIFO
inventories from the unit cost method to the components of cost method. In our
judgment, such change is to an alternative accounting principle that is
preferable under the circumstances.
Your truly,
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
January 29, 1997
<PAGE>
EXHIBIT 20
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2)
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
PENN ENGINEERING & MANUFACTURING CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
PENN ENGINEERING & MANUFACTURING CORP.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
-----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
5) Total fee paid:
-----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
-----------------------------------------------------------------------
2) Form, Schedule or Registration Statement no.:
-----------------------------------------------------------------------
3) Filing Party:
-----------------------------------------------------------------------
4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
PENN ENGINEERING & MANUFACTURING CORP.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, APRIL 30, 1997
TO THE STOCKHOLDERS OF PENN ENGINEERING & MANUFACTURING CORP.:
The Annual Meeting of Stockholders of Penn Engineering & Manufacturing
Corp. (hereinafter called the "Company") will be held on Wednesday, April 30,
1997 at 2:00 p.m., local time, at the offices of the Company, Building #3, Old
Easton Road, Danboro, Pennsylvania 18916, for the following purposes:
1. To elect three Class C Directors of the Company to hold office
until the Annual Meeting of Stockholders to be held in 2000 and until their
successors are duly elected;
2. To consider and vote upon a proposal to elect Deloitte & Touche LLP
as auditors for the Company for its 1997 fiscal year;
3. To transact such other business as may properly come before the
Annual Meeting and any adjournment, postponement or continuation thereof.
The Board of Directors has fixed the close of business on March 14, 1997 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Annual Meeting.
A copy of the Company's Annual Report for the year ended December 31, 1996
is being mailed to the stockholders together with this Notice.
If you do not expect to attend the Annual Meeting in person, please fill
in, sign, date, and return the enclosed form of proxy in the enclosed envelope
to Chase Mellon Shareholder Services, L.L.C.
By Order of the Board of Directors,
Kenneth A. Swanstrom
Chairman of the Board
Date: March 31, 1997
<PAGE>
PENN ENGINEERING & MANUFACTURING CORP.
---------------------------
PROXY STATEMENT
---------------------------
This Proxy Statement and the form of proxy enclosed herewith, which are
first being mailed to stockholders on or about March 31, 1997, are furnished in
connection with the solicitation by the Board of Directors of Penn Engineering &
Manufacturing Corp. (the "Company") of proxies to be voted at the Annual Meeting
of Stockholders (the "Annual Meeting") to be held on Wednesday, April 30, 1997
at 2:00 p.m., local time, and at any adjournment, postponement or continuation
thereof, at the offices of the Company, Building #3, Old Easton Road, Danboro,
Pennsylvania 18916. The Company's principal executive offices are located at
Building #1, Old Easton Road, Danboro, Pennsylvania 18916.
Shares represented by proxies in the accompanying form, if properly signed
and returned, will be voted in accordance with the specifications made thereon
by the stockholders. Any proxy not specifying to the contrary will be voted for
the election of the nominees for Class C Director named below and in favor of
the election of Deloitte & Touche LLP as auditors of the Company for its 1997
fiscal year. A stockholder who signs and returns a proxy in the accompanying
form may revoke it at any time before it is voted by giving written notice of
revocation or a duly executed proxy bearing a later date to the Secretary of the
Company or by attending the Annual Meeting and voting in person.
The cost of solicitation of proxies in the accompanying form will be borne
by the Company, including expenses in connection with preparing and mailing this
Proxy Statement. Such solicitation will be made by mail and may also be made on
behalf of the Company by the Company's regular officers and employees, none of
whom will receive special compensation for such services. The Company, upon
request therefor, will reimburse brokers, nominees, fiduciaries and custodians
and persons holding shares in their names or in the names of nominees for their
reasonable expenses in sending proxies and proxy material to beneficial owners.
The Company has two classes of common stock: Common Stock, par value $.01
per share ("Common Stock"), and Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"). Holders of record of both classes at the close of
business on March 14, 1997 will be entitled to notice of the Annual Meeting, but
only holders of Class A Common Stock of record at the close of business on March
14, 1997 will be entitled to vote at the Annual Meeting. As of March 14, 1997,
the Company had outstanding 1,707,082 shares of Class A Common Stock, each of
which is entitled to one vote. Cumulative voting rights do not exist with
respect to the election of directors. The holders of Common Stock will have no
voting rights at the Annual Meeting. For purposes of the Annual Meeting, a
quorum means a majority of the outstanding shares of Class A Common Stock
represented in person or by proxy at the Annual Meeting.
As of March 14, 1997, certain stockholders listed in the table herein under
"Beneficial Ownership of Common Stock and Class A Common Stock" beneficially
owned in the aggregate 894,890 shares, or approximately 52.4%, of the Company's
outstanding Class A Common Stock. Such stockholders have advised the Company
that they will vote their shares for the election of Willard S. Boothby, Jr.,
Thomas M. Hyndman, Jr., and Daryl L. Swanstrom as Class C Directors and for the
election of Deloitte & Touche LLP as the Company's auditors for 1997.
Accordingly, Messrs. Boothby and Hyndman and Mrs. Swanstrom will be elected as
Class C Directors, and Deloitte & Touche will be elected as auditors for the
Company for 1997 regardless of the votes of the Company's stockholders other
than those listed in such table.
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK AND
CLASS A COMMON STOCK
The following table sets forth, as of February 28, 1997, the amount and
percentage of the Company's outstanding Common Stock and Class A Common Stock
beneficially owned by (i) each person who is known by the Company to own
beneficially more than 5% of its outstanding Common Stock or Class A Common
Stock, (ii) each director and nominee for director, (iii) each executive officer
named in the Summary Compensation Table, and (iv) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
TITLE OF NUMBER OF
CLASS OF SHARES
CAPITAL BENEFICIALLY PERCENT
NAME OF INDIVIDUAL OR IDENTITY OF GROUP STOCK OWNED(1) OF CLASS
- -------------------------------------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
5% HOLDERS:
Kenneth A. Swanstrom
P.O. Box 1000
Danboro, PA 18916
Individually (2) Common 633,923 9.1%
Class A 244,641 14.3%
Trust under the Will of Gladys Swanstrom (3) Common 91,425 1.3%
Class A 62,975 3.7%
Trusts under the Will of Klas A. Swanstrom (3) Common 197,916 2.8%
Class A 98,472 5.8%
Daryl L. Swanstrom
P.O. Box 2309
Peachtree City, GA 30269
Individually (4) Common 297,077 4.3%
Class A 209,448 12.3%
Trust under Item Fourth of the Will of Common 62,720 *
Lawrence W. Swanstrom (5) Class A 54,240 3.2%
Trust under Item Fifth of the Will of Common 216,649 3.1%
Lawrence W. Swanstrom (5) Class A 111,794 6.5%
Thomas M. Hyndman, Jr. (6)
c/o Duane, Morris & Heckscher
4200 One Liberty Place
Philadelphia, PA 19103-7396
Individually Common 2,110 *
Class A 570 *
Trust under the Will of Gladys Swanstrom (3) Common 91,425 1.3%
Class A 62,975 3.7%
Trusts under the Will of Klas A. Swanstrom (3) Common 197,916 2.8%
Class A 98,472 5.8%
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
TITLE OF NUMBER OF
CLASS OF SHARES
CAPITAL BENEFICIALLY PERCENT
NAME OF INDIVIDUAL OR IDENTITY OF GROUP STOCK OWNED(1) OF CLASS
- -------------------------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
Trust under Item Fourth of the Will of Common 62,720 *
Lawrence W. Swanstrom (5) Class A 54,240 3.2%
Trust under Item Fifth of the Will of Common 216,649 3.1%
Lawrence W. Swanstrom (5) Class A 111,794 6.5%
Trust under Deed of Klas A. Swanstrom dated 1/12/73 (7) Common 95,750 1.4%
Class A 57,750 3.4%
PNC Bank, National Association
398 North Main Street
Doylestown, PA 18901
Trust under the Will of Gladys Swanstrom (3) Common 91,425 1.3%
Class A 62,975 3.7%
Trusts under the Will of Klas A. Swanstrom (3) Common 197,916 2.8%
Class A 98,472 5.8%
Trust under Deed of Klas A. Swanstrom dated 1/12/73 (7) Common 95,750 1.4%
Class A 57,750 3.4%
Trust under Deed of Klas A. Swanstrom dated 9/26/66 (8) Common 61,250 *
Class A 38,500 2.3%
Trust under Deed of Gladys Swanstrom dated 9/26/66 (8) Common 26,250 *
Class A 16,500 *
Quest Advisory Corp. (9) Common 608,550 8.7%
Quest Management Company Class A 156,350 9.2%
1414 Avenue of the Americas
New York, NY 10019
Dimensional Fund Advisors Inc. (10) Common 258,900 3.7%
1299 Ocean Avenue Class A 84,400 5.0%
11th Floor
Santa Monica, CA 90401
Morgan Stanley Group Inc. (11) Common 459,800 6.6%
1585 Broadway
New York, NY 10036
DIRECTORS: (12)
Willard S. Boothby, Jr. Common 1,200 *
Class A 400 *
Frank S. Hermance Common 1,000 *
Class A -- *
Lewis W. Hull (13) Common 6,000 *
Class A 2,000 *
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
TITLE OF NUMBER OF
CLASS OF SHARES
CAPITAL BENEFICIALLY PERCENT
NAME OF INDIVIDUAL OR IDENTITY OF GROUP STOCK OWNED(1) OF CLASS
- -------------------------------------------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
Maurice D. Oaks Common 500 *
Class A -- *
Mark W. Simon (14) Common 525 *
Class A 100 *
EXECUTIVE OFFICERS: (15)
Richard B. Ernest (16) Common 16,140 *
Class A 5,230 *
Martin Bidart (17) Common 400 *
Class A 100 *
Raymond L. Bievenour Common 550 *
Class A 100 *
All Executive Officers and Directors as a Group (15 persons) Common 1,711,935 24.6%
Class A 902,920 52.9%
</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.
(2) Under the rules of the Commission, the maximum beneficial ownership of the
Company's outstanding Class A Common Stock which Kenneth A. Swanstrom could
be deemed to have is 23.8%. Mr. Swanstrom has sole voting and dispositive
power with respect to 633,923 shares of Common Stock and 244,641 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 91,425 shares of Common Stock and
62,975 shares of Class A Common Stock held by the Trust under the Will of
Gladys Swanstrom and 197,916 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, N.A. ("PNC").
(4) Under the rules of the Commission, the maximum beneficial ownership of the
Company's outstanding Class A Common Stock which Daryl L. Swanstrom could
be deemed to have is 22.0%. Mrs. Swanstrom has sole voting and dispositive
power with respect to 297,077 shares of Common Stock and 209,448 shares of
Class A Common Stock and shared voting and dispositive power with respect
to 62,720 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
and 216,649 shares of Common Stock and 111,794 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
4
<PAGE>
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 Class A Common Stock which Thomas M. Hyndman, Jr.
could be deemed to have is 22.6%. Mr. Hyndman has sole voting and
dispositive power with respect to 2,110 shares of Common Stock and 570
shares of Class A Common Stock, of which totals 400 shares of Common Stock
are owned by Mr. Hyndman's wife. Mr. Hyndman disclaims beneficial ownership
of the shares held by his wife. Mr. Hyndman has shared voting and
dispositive power with respect to the 62,720 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, 216,649 shares of Common Stock and
111,794 shares of Class A Common Stock held by the Trust under Item Fifth
of the Will of Lawrence W. Swanstrom, 91,425 shares of Common Stock and
62,975 shares of Class A Common Stock held by the Trust under the Will of
Gladys Swanstrom, 77,500 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
1/12/73, and 197,916 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 PNC.
(8) Under the rules of the Commission, the maximum beneficial ownership of the
Company's outstanding Class A Common Stock which PNC could be deemed to
have is 6.7%. Of these shares, (i) 91,425 shares of Common Stock and 62,975
shares of Class A Common Stock are held by the Trust under the Will of
Gladys Swanstrom and 197,916 shares of Common Stock and 98,472 shares of
Class A Common Stock are held by the Trusts under the Will of Klas A.
Swanstrom, with voting power shared with Kenneth A. Swanstrom and Thomas M.
Hyndman; (ii) 95,750 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 1/12/73 with voting power shared with Mr. Hyndman; and (iii) 61,250
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 26,250
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, with voting
power shared with Stephen D. Teaford.
(9) According to Amendment No. 8 to a Schedule 13G dated February 4, 1997,
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, Quest has sole voting and dispositive power
with respect to 590,950 shares of Common Stock and 147,150 shares of Class
A Common Stock, and QMC has sole voting and dispositive power with respect
to 17,600 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.
(10) According to Amendment No. 3 to a Schedule 13G dated February 5, 1997,
Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
adviser, is deemed to have beneficial ownership of 258,800 shares of Common
Stock and 84,400 shares of Class A Common Stock as of December 31, 1996,
all of
5
<PAGE>
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.
(11) According to a Schedule 13G dated February 14, 1996, filed by Morgan
Stanley Group Inc. and Miller Anderson & Sherrerd LLP, such persons may be
deemed the beneficial owners of an aggregate of 459,800 shares of Common
Stock held in accounts managed on a discretionary basis by wholly owned
subsidiaries of Morgan Stanley Group Inc., including Miller Anderson &
Sherrerd LLP.
(12) Excludes directors listed under "5% Holders."
(13) Of these shares, 3,000 shares of Common Stock and 1,000 shares of Class A
Common Stock are owned by Mr. Hull's wife. Mr. Hull disclaims beneficial
ownership of the shares held by his wife.
(14) Of these shares, 25 shares of Common Stock are owned by Mr. Simon's
daughter. Mr. Simon disclaims beneficial ownership of the shares held by
his daughter.
(15) Excludes executive officers listed under "5% Holders" and executive
officers listed under "Directors."
(16) Of these shares, 4,500 shares of Common Stock and 1,500 shares of Class A
Common Stock are held jointly with Mr. Ernest's sister.
(17) Of these shares, 100 shares of Common Stock are owned by Mr. Bidart's wife
and 100 shares of Class A Common Stock and 300 shares of Common Stock are
owned jointly with Mr. Bidart's wife. Mr. Bidart disclaims beneficial
ownership of the 100 shares of Common Stock owned by his wife.
6
<PAGE>
ELECTION OF DIRECTORS
At the Annual Meeting, three Class C Directors will be elected for a term
expiring at the 2000 Annual Meeting of Stockholders and when their successors
have been duly elected. The Class A Directors and the Class B Directors will
continue in office for the remainder of their respective terms shown below.
Under the Company's By-laws, the number of directors constituting the entire
Board of Directors is determined by the Board of Directors, but such number may
not be less than three nor more than twelve. The Board of Directors has
currently fixed the number of members of the Board of Directors at eight.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them for the election of the nominees for Class C Directors listed
below, each of whom is currently a director of the Company. If any nominee
becomes unavailable for any reason, it is intended that votes will be cast for a
substitute nominee designated by the Board of Directors. The Board of Directors
believes that the nominees named will be able to serve if elected. Any vacancy
on the Board of Directors for any reason may be filled by the affirmative vote
of 80% of the directors then in office. The three nominees for Class C Director
receiving the highest number of votes cast at the Annual Meeting will be
elected. Shares held by brokers or nominees as to which the broker or nominee
does not have discretionary voting power, i.e., broker non-votes, will be
treated as not present and not entitled to vote with respect to the election of
directors. Abstentions and broker non-votes on the election of the directors
will have no effect since they will not represent votes cast at the Annual
Meeting for the purpose of electing directors.
Certain information with respect to each nominee for Class C Director, and
each Class A Director and Class B Director continuing in office following the
Annual Meeting is as follows:
NOMINEES FOR CLASS C DIRECTORS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DIRECTOR
NAME AGE FOR PAST FIVE YEARS SINCE CLASS
- ------------------------------------------- ----------- ---------------------------- ----------- ----------------------------
<S> <C> <C> <C> <C>
Willard S. Boothby, Jr. (1)(2)(4).......... 75 Former Managing Director, 1984 Class C; Term expires 2000*
PaineWebber Incorporated,
brokerage services
Thomas M. Hyndman, Jr. (1)(2)(5)........... 72 Of Counsel since 1993, 1974 Class C; Term expires 2000*
Partner, from 1957 to
1992, Duane, Morris &
Heckscher, Attorneys and
Counsel to the Company
Daryl L. Swanstrom (2)(6).................. 50 President, Spyraflo, Inc., 1987 Class C; Term expires 2000*
manufacturer of miniature
self-aligning sleeve
bearings and linear
slides; formerly President
of Engineered Components,
Inc., distributor of
electric components
</TABLE>
- ----------
* If elected at the Annual Meeting
7
<PAGE>
DIRECTORS CONTINUING IN OFFICE
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DIRECTOR
NAME AGE FOR PAST FIVE YEARS SINCE CLASS
- ------------------------------------------- ----------- ---------------------------- ----------- ----------------------------
<S> <C> <C> <C> <C>
CLASS A DIRECTORS
Maurice D. Oaks(1)......................... 63 Former Vice President of 1994 Class A; Term expires 1998
Worldwide Operations
Planning of Bristol-Myers
Squibb
Frank S. Hermance.......................... 48 President and Chief 1996 Class A; Term Expires 1998
Operating Officer of
Ametek, Inc. from November
1996 to present; formerly
held other executive
positions at Ametek, Inc.,
including, most recently,
Executive Vice President
and Chief Operating
Officer of Ametek, Inc.
and President of its
Precision Instrument Group
CLASS B DIRECTORS
Kenneth A. Swanstrom....................... 57 Chairman, President, and 1970 Class B; Term expires 1999
Chief Executive Officer of
the Company since August
1993; President and Chief
Operating Officer of the
Company from 1979 until
August 1993
Lewis W. Hull(1)(2)(3)..................... 80 Chairman, Hull Corporation, 1974 Class B; Term expires 1999
manufacturer of freeze-
dryer and injection
molding equipment
Mark W. Simon.............................. 58 Vice President-Finance, 1983 Class B; Term expires 1999
Chief Financial Officer and
Corporate Secretary of the
Company
</TABLE>
- ------------------
(1) Member of the Audit Committee. The Audit Committee is appointed annually by
the Board of Directors to recommend the selection of independent auditors,
review the scope and results of the audit, review the adequacy of the
Company's accounting, financial and operating controls, and supervise
investigations. During 1996, the Audit Committee held three meetings.
(2) Member of the Compensation Committee. The Compensation Committee is
appointed annually by the Board of Directors to recommend to the Board of
Directors remuneration for senior management, adoption of compensation plans
in which officers are eligible to participate, and related matters. The
Compensation
8
<PAGE>
Committee also administers the Company's 1996 Equity Incentive Plan and the
Company's 1996 Employee Stock Purchase Plan. During 1996, the Compensation
Committee held two meetings.
(3) Mr. Hull is also a director of Willow Grove Bank.
(4) Mr. Boothby is also a director of The Glenmede Fund, Inc.
(5) Mr. Hyndman is also a director of Rochester & Pittsburgh Coal Company.
(6) Mrs. Swanstrom is the widow of Kenneth A. Swanstrom's brother, Lawrence W.
Swanstrom.
During 1996, the Company's Board of Directors held nine meetings. None of
the directors attended fewer than 75% of the aggregate of the total number of
meetings of the Board of Directors plus the total number of meetings of all
committees of the Board of Directors on which such director served during 1996.
The Company's Board of Directors does not have a nominating committee.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid or accrued by the Company in each of the last three years to
the Company's Chief Executive Officer and the four other most highly compensated
executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
AWARDS
---------------
ANNUAL COMPENSATION SECURITIES
--------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS(#) COMPENSATION (1)
- -------------------------------------------------- --------- ----------- --------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Kenneth A. Swanstrom, Chairman, President, and 1996 $ 280,000 $ 104,142 15,000 $ 18,300
Chief Executive Officer......................... 1995 270,000 129,416 -- 17,680
1994 250,000 122,662 -- 17,100
Mark W. Simon, Vice President -- Finance, Chief 1996 $ 164,320 $ 38,198 10,000 $ 18,300
Financial Officer and Corporate Secretary....... 1995 158,000 47,281 -- 16,672
1994 146,000 43,841 -- 15,764
Martin Bidart, Vice President -- Manufacturing.... 1996 $ 145,600 $ 33,846 10,000 $ 14,560
1995 140,000 41,825 -- 14,810
1994 130,000 37,794 -- 13,720
Raymond L. Bievenour, Vice President -- 1996 $ 145,600 $ 33,846 10,000 $ 14,560
Marketing/Sales................................. 1995 140,000 41,825 -- 14,518
1994 130,000 37,794 -- 13,461
Richard B. Ernest, Vice President -- Quality(2)... 1996 $ 135,200 $ 31,429 -- $ 13,520
1995 130,000 38,838 -- 14,123
1994 127,500 33,083 -- 13,838
</TABLE>
9
<PAGE>
- ----------
(1) Includes amounts of Company contributions for 1996 to the Company's
Profit-Sharing Plan, as follows: Kenneth A. Swanstrom, $15,000; Mark W.
Simon, $15,000; Martin Bidart, $14,560; Raymond L. Bievenour, $14,560; and
Richard B. Ernest, $13,520. The amounts set forth were expensed during the
Company's 1996 fiscal year for financial reporting purposes under the
Company's Profit-Sharing Plan, which covers all of its United States
eligible employees, including officers, whose length of employment qualified
them to participate. The Company's contribution to the Profit-Sharing Plan
for each year is allocated among the participants in proportion to their
compensation for that year. Also included in these amounts are directors
fees of $3,300 paid to Mr. Swanstrom and Mr. Simon for meetings attended
during 1996.
(2) Mr. Ernest retired on December 31, 1996.
The following table sets forth information with respect to options granted
to the persons named in the Summary Compensation Table above during the fiscal
year ended December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES % OF TOTAL OPTIONS EXERCISE OR GRANT DATE
UNDERLYING OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION PRESENT
GRANTED(#)(1) IN FISCAL YEAR ($/SH) DATE VALUE($)(2)
--------------------- ----------------------- --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Kenneth A. Swanstrom....... 15,000 11.25% $ 18.375 12/04/06 $ 88,200
Mark W. Simon.............. 10,000 7.5 18.375 12/04/06 58,800
Martin Bidart.............. 10,000 7.5 18.375 12/04/06 58,800
Raymond L. Bievenour....... 10,000 7.5 18.375 12/04/06 58,800
Richard B. Ernest.......... -- -- -- -- --
</TABLE>
- ----------
(1) All shares underlying options are shares of Common Stock. Each option
becomes exercisable in increments of 25% of the shares underlying such
options commencing on the first, second, third and fourth anniversaries of
the date of the option grant.
(2) The Black-Scholes model, a widely used and accepted formula for valuing
traded stock options, was used to determine the grant date present value of
the executive stock options. The Black-Scholes value used in this table is
the same value used to report the expense associated with stock options in
the Company's audited financial statements in accordance with FAS 123. The
following assumptions were used to calculate the Black-Scholes value: a
six-year option term, 30% stock price volatility, 5.93% risk-free rate of
return, annual dividend yield of 2.25% and an exercise price equal to stock
price on the date of grant. The Company has used the historical annual
dividend yield and stock price volatility rate as assumptions for the
Black-Scholes model. These are not projections, and therefore there is no
guarantee that these assumptions will be the actual annual dividend yield or
stock price volatility rate over the next six years. There is no gain to
executives, however, if the per share market price of the Company's Common
Stock does not increase or declines.
10
<PAGE>
The following table sets forth information with respect to options held at
December 31, 1996 by the persons named in the Summary Compensation Table above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END (#) AT FY-END ($)(2)
-------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------- ----------------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Kenneth A. Swanstrom....................................... 0 15,000 -- $ 38,875
Mark W. Simon.............................................. 0 10,000 -- 21,250
Martin Bidart.............................................. 0 10,000 -- 21,250
Raymond L. Bievenour....................................... 0 10,000 -- 21,250
Richard B. Ernest.......................................... -- -- -- --
</TABLE>
- ----------
(1) No options were exercised by the named executive officers during the year
ended December 31, 1996.
(2) Represents the difference between the aggregate exercise price and the
aggregate market value of the Company's Common Stock as of December 31,
1996.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Company's executive compensation policies are intended to focus the
executive's attention and efforts on the attainment of Company goals, reward the
executive for the successful attainment of those goals, provide a total
compensation package that is competitive with the market for similar talent, and
create a feeling of shared destiny between the executives, all the other
employees and the Company's stockholders.
Prior to the Company's fiscal year ended December 31, 1996, the
Compensation paid to the Company's executive officers, including its Chief
Executive Officer and the four other highest paid officers (the "Named Executive
Officers") consisted of a base salary and an annual bonus determined in
accordance with the provisions of a formal incentive plan (the "Executive Bonus
Plan") originally adopted for the year 1992 and amended thereafter from time to
time. The executive officers also are participants in the Company's profit
sharing plan, its pension plan, the 1996 Employee Stock Purchase Plan, the 1996
Equity Incentive Plan, and its various fringe benefit programs.
In 1996, the Board of Directors and Stockholders adopted the 1996 Equity
Incentive Plan. The 1996 Equity Incentive Plan was approved by the stockholders
of the Company at their annual meeting in May 1996. The 1996 Equity Incentive
Plan covers all employees and officers of the Company, including the Named
Executive Officers.
The 1996 Equity Incentive Plan provides for the grant of options to
purchase up to 500,000 shares of the Company's Common (Non-Voting) Stock at a
price not less than 100% of the fair market value of such stock on the date the
option is granted (except, in the case of an incentive stock option grant, if
the optionee owns more than 10% of the combined voting power of all classes of
stock of the Company, the option price must be at least 110% of the fair market
value of the stock on the date of grant). The 1996 Equity Incentive Plan is
administered by the Compensation Committee of the Board which has the authority
to determine the officers and employees to
11
<PAGE>
whom options shall be granted and the type, amount, size, and terms of each such
grant (subject always to all of the requirements of the 1996 Equity Incentive
Plan). The purposes of the 1996 Equity Incentive Plan are to provide longer term
incentives to the officers and employees of the Company by enabling them to
participate in the growth in value of the capital stock of the Company and to
better align their long-term interests with those of the Company's stockholders.
The annual salaries of the Named Executive Officers for fiscal year 1996
were determined in the month of December 1995. In determining the annual salary
for each of the executive officers of the Company, including the Named Executive
Officers, the Compensation Committee sought to establish salaries that were fair
and competitive with those paid by comparable organizations and that fairly
reward the executive officers for their performance and the Company's
performance. In determining the annual salary of each of the Named Executive
Officers, other than the Chief Executive Officer, the evaluation of the Chief
Executive Officer of their performance is considered, and each position is
measured against the knowledge and problem-solving ability required to fulfill
the assigned duties and responsibilities of such position and the officer's
impact upon the operations and profitability of the Company.
The same considerations were taken into account in fixing the Chief
Executive Officer's salary for 1996, except that the Committee did not have the
recommendation of the Chief Executive Officer.
The salary increases of the Named Executive Officers, other than the Chief
Executive Officer, for 1996 approximated 4%. The Chief Executive Officer's
salary increase for 1996 was approximately 3.7%.
Payments to the Named Executive Officers under the Executive Bonus Plan are
determined by five factors, which combined are used to determine the amount of
the annual bonus. The first and second factors, each with a weighting factor of
25%, compared the Company's 1996 net income with 1995 net income and the 1996
Business Plan net income. The third and fourth factors, each with a weighting
factor of 10%, compared the Company's 1996 consolidated net sales with 1995
consolidated net sales and the 1996 Business Plan consolidated net sales. The
fifth factor, with a weighting factor of 30%, compared 1996 return on equity, as
defined in the 1996 Business Plan, with 1995 return on equity. The target bonus
for each officer, other than the Chief Executive Officer, the Treasurer, and the
Corporate Controller, is 25% of the individual's base salary. The target bonus
for the Chief Executive Officer is 40% of base salary, and for the Treasurer,
and Corporate Controller, is 20% of base salary. The relationship of the
Company's 1996 results for each factor to the prior year or the 1996 Business
Plan, as approved by the Board of Directors, can cause the annual bonus to range
from zero to 150% of the targeted amount. The consideration of earnings before
interest and taxes is the most significant factor in determining the annual
bonuses paid to all other salaried and hourly workers under the employee
incentive plan. Consolidated net income is the most significant factor in
determining the annual bonuses paid to the executive officers. These two
measures of earnings extend a common thread in the standard of measure for both
executive officers' and other employees' annual bonuses.
Both the fastener and motor operations failed to meet the overall targets
established by the Board of Directors for 1996, and, therefore, the bonuses
under the incentive plans were less than the targeted awards for all
participants.
The bonus paid to the Chief Executive Officer for the year 1996 was
determined in accordance with the current provisions of the Executive Bonus Plan
and reflects, in the opinion of the Committee, appropriate rewards for the
Company's current performance. The portion of the Chief Executive Officer's
bonus as compared to his 1996 target bonus for each factor was as follows: 1996
net income as compared to 1995 net income was 100.42% of target; 1996 net income
as compared to the 1996 Business Plan net income was 84.34% of target; 1996 net
sales as compared to 1995 net sales were 113.48% of target; 1996 net sales as
compared to the 1996 Business
12
<PAGE>
Plan net sales were 96.42% of target and 1996 return on equity as compared to
1995 return on equity was 86.09% of target. Therefore, the total bonus paid to
the Chief Executive Officer for 1996 was $104,142. This bonus was $7,858 or
7.02% less than the target amount.
In determining the grants of stock options under the 1996 Equity Incentive
Plan, the Compensation Committee took into account the various factors
(described above) considered in determining the annual salaries of the Named
Executive Officers, as well as the recommendations of the independent consultant
which assisted in the creation of the Plan. In 1996, the Chief Executive Officer
was granted non-qualified options to purchase up to 15,000 shares of the
Company's Non-Voting Common Stock and each of the other Named Executive Officers
was granted non-qualified options to purchase up to 10,000 shares of the
Company's Non-Voting Common Stock.
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to a public company for compensation over $1 million paid to each of
the company's chief executive officer and the four other most highly compensated
executive officers. Qualifying performance-based compensation will not be
subject to the deduction limit if certain requirements are met. The Committee
did not consider the deductibility for federal tax purposes of the compensation
paid to the Chief Executive Officer and the Named Executive Officers under the
provisions of Section 162(m) given their current compensation levels. The
Committee intends to take the necessary steps to conform the Company's policies
with respect to executive compensation in order to comply with the provisions of
Section 162(m) if and at such time as the deductibility thereof becomes affected
by such provisions.
Respectfully submitted by
the Compensation Committee
of the Board of Directors
Willard S. Boothby, Jr.
Lewis W. Hull
Thomas M. Hyndman, Jr.
Daryl L. Swanstrom
13
<PAGE>
PERFORMANCE GRAPH
The following performance graph compares the cumulative total stockholder
return on the Company's Common Stock with the S&P 600(Registered) SmallCap
Index, the AMEX Market Value Index and the following combined Standard & Poor's
line-of-business indices (the "S&P Indices"): Electronics-Semiconductor
Companies; Electronics-Instrumentation Companies; Office Equipment Companies;
and Communications Equipment Manufacturers. The S&P Indices consist of companies
that are representative of the lines of business that generate the major portion
of the Company's revenues.
[GRAPHIC]
In the printed version of this document, a line graph appears which
depicts the following plot points:
<TABLE>
<CAPTION>
BASE INDEXED RETURNS
PERIOD YEARS ENDING
COMPANY NAME/INDEX DEC 91 DEC 92 DEC 93 DEC 94 DEC 95 DEC 96
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Penn Engineering & Manufacturing Corp.
- -PNNA/PNN........................................... 100 140.06 182.57 169.36 400.20 346.66
S&P 600(Registered) SmallCap Index.................. 100 121.04 143.78 136.92 177.94 215.88
American Stock Exchange Index....................... 100 101.06 120.78 109.78 138.77 147.65
S&P Indices......................................... 100 133.98 172.62 199.07 275.00 405.59
</TABLE>
- ----------
(1) The comparisons of total return on investment (change in year-end stock
price plus reinvested dividends) for each of the periods assumes that $100
was invested on December 31, 1991 in each of the Company's Common Stock, the
S&P 600(Registered) SmallCap Index, the AMEX Market Value Index, and the S&P
Indices with the investment weighted on the basis of market capitalization.
Inasmuch as the Company has listed its Common Stock and Class A Common Stock
on the New York Stock Exchange, the Company has added the S&P
600(Registered) SmallCap Index to this performance graph, and the Company
does not intend to include the AMEX Market Value Index in future years.
14
<PAGE>
PENSION PLAN
The following table is representative of the annual benefits payable under
the Company's qualified retirement plans to an employee currently age 65 whose
annual compensation remained unchanged during the last five years of employment
and whose benefits will be paid for the remainder of the employee's life.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------
ANNUAL COMPENSATION 10 20 30 40
- -------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$75,000........................................... $ 9,045 $ 18,090 $ 27,135 $ 36,180
100,000........................................... 12,170 24,340 36,510 48,680
125,000........................................... 15,295 30,590 45,885 61,180
150,000........................................... 18,420 36,840 55,260 73,680
175,000........................................... 18,420 36,840 55,260 73,680
200,000........................................... 18,420 36,840 55,260 73,680
300,000........................................... 18,420 36,840 55,260 73,680
400,000........................................... 18,420 36,840 55,260 73,680
500,000........................................... 18,420 36,840 55,260 73,680
</TABLE>
Credited full years of service for the five officers listed in the Summary
Compensation Table are as follows: Kenneth A. Swanstrom, 36 years; Mark W.
Simon, 20 years; Martin Bidart, 6 years; Raymond L. Bievenour,
6 years; and Richard B. Ernest, 35 years. The covered compensation under the
Pension Plan Table is that amount shown in the salary and bonus columns of the
Summary Compensation Table. The amounts shown in the Pension Plan Table do not
reflect any deduction for social security or other offset amounts. Benefits are
subject to maximum limitations under the Internal Revenue Code of 1986, as
amended (the "Code"). Therefore, with regard to 1996, the maximum salary that
can be recognized under the plan is $150,000 and the maximum annual benefit at
age 65 is limited to $120,000. The foregoing Pension Plan Table may be used for
all five officers, except for Kenneth A. Swanstrom, who is entitled to a higher
benefit due to plan provisions protecting prior accrued benefits. Mr.
Swanstrom's projected annual benefit at age 65, after 44 years of service, is
$107,479.
DIRECTOR COMPENSATION
The Company's non-employee directors each receive an annual retainer of
$10,000 plus a fee of $750 for each meeting attended and reimbursement for
travel expenses. Employees who are directors of the Company each received a fee
of $250 for each meeting attended in 1996. Members of the Audit Committee and
the Compensation Committee each receive a fee of $500 for each meeting attended
plus reimbursement for travel expenses.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires that the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, file reports of ownership and changes in ownership
with the Commission. Based solely on the Company's review of the copies of such
reports received by
15
<PAGE>
it, or written representations from certain reporting persons that no Forms 5
were required for those persons, the Company believes that, during the period
January 1, 1996 through December 31, 1996, all filing requirements applicable to
its officers and directors were complied with, except that Lewis Hull filed an
amended Form 5 late to report the transaction by his wife for the purchase of
1,000 shares of Class A Common Stock and Mark W. Simon reported late the
acquisition of 25 shares of Common Stock by his daughter on his Form 5 report.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Engineered Components/Spyraflo, Inc., which is engaged in the manufacturing
and distribution of various products, is an authorized distributor for the
Company's products in Florida, Alabama, Georgia, and South Carolina. As such,
Engineered Components/Spyraflo, Inc. maintains an inventory of the Company's
products which Engineered Components/Spyraflo, Inc. purchases from the Company
at the Company's standard distributor prices for resale to Engineered
Components/Spyraflo, Inc.'s customers. In 1996, net sales by the Company to
Engineered Components/Spyraflo, Inc. were approximately $651,000, and net
purchases by the Company from such company were $289,000. At December 31, 1996,
the Company had trade receivables balances due from this company of $443,000.
Daryl L. Swanstrom, a director of the Company and a member of the Compensation
Committee, is President and sole stockholder of Spyraflo, Inc. and was the
President of Engineered Components, Inc. until November 1996. The foregoing
amounts reflect transactions with Engineered Components, Inc. through November
1996.
Thomas M. Hyndman, Jr., a director of the Company and a member of the
Compensation Committee, is Of Counsel to Duane, Morris & Heckscher, a law firm
that performed legal services for the Company during 1996.
ELECTION OF AUDITORS
Deloitte & Touche LLP served as the Company's auditors for the Company's
1996 fiscal year. Unless instructed to the contrary, it is intended that votes
will be cast pursuant to the proxies for the election of Deloitte & Touche LLP
as auditors for the Company for its 1997 fiscal year. The Company has been
advised by such firm that none of its members or any of its associates has any
direct financial interest or material indirect financial interest in the Company
or its subsidiaries. Election of Deloitte & Touche LLP will require the
affirmative vote of the holders of a majority of the shares represented in
person or by proxy at the Annual Meeting.
A representative of Deloitte & Touche LLP will attend the Annual Meeting.
This representative will have the opportunity to make a statement, if such
representative desires to do so, and will be available to respond to any
appropriate questions presented by the stockholders at the Annual Meeting.
ANNUAL REPORT
A copy of the Company's Annual Report for its fiscal year ended December
31, 1996 is being mailed to the Company's stockholders with this Proxy
Statement.
STOCKHOLDER PROPOSALS
Any stockholder who, in accordance with and subject to the provisions of
the proxy rules of the Commission, wishes to submit a proposal for inclusion in
the Company's proxy statement for the 1998 Annual Meeting of Stockholders must
deliver such proposal in writing to the Secretary of the Company at the
Company's mailing address in Danboro, Pennsylvania, not later than November 30,
1997.
16
<PAGE>
OTHER MATTERS
The Board of Directors does not know of any matters to be presented for
consideration at the Annual Meeting other than the matters described in the
Notice of Annual Meeting, but if other matters are properly presented, it is the
intention of the persons named in the accompanying proxy to vote on such matters
in accordance with their judgment.
By Order of the Board of Directors,
Kenneth A. Swanstrom
Chairman of the Board
March 31, 1997
17
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PEM International, Ltd., incorporated under the laws of the State of
Delaware, is 100% owned by the Registrant.
PEM Management, Inc., incorporated under the laws of the State of
Delaware, is 100% owned by the Registrant.
PEM Investments, Inc., incorporated under the laws of the State of
Delaware, is 100% owned by the Registrant.
PEM World Sales, Ltd., incorporated under the laws of Bermuda, is 100%
owned by the Registrant.
PEM International (Singapore) Pte Ltd., incorporated under the laws of the
State of Delaware, is 100% owned by the Registrant.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
333-20101 and No. 333-13073 of Penn Engineering & Manufacturing Corp. on Form
S-8 of our report dated January 29, 1997, appearing in this Annual Report on
Form 10-K of Penn Engineering & Manufacturing Corp. for the year ended December
31, 1996.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 26, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,208,339
<SECURITIES> 10,857,728
<RECEIVABLES> 29,579,972
<ALLOWANCES> 1,000,000
<INVENTORY> 27,533,220
<CURRENT-ASSETS> 73,940,500
<PP&E> 101,260,757
<DEPRECIATION> 39,428,723
<TOTAL-ASSETS> 138,537,534
<CURRENT-LIABILITIES> 9,707,676
<BONDS> 0
0
0
<COMMON> 89,381
<OTHER-SE> 121,047,770
<TOTAL-LIABILITY-AND-EQUITY> 138,537,534
<SALES> 160,323,091
<TOTAL-REVENUES> 161,326,563
<CGS> 111,027,364
<TOTAL-COSTS> 139,074,861
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,168
<INCOME-PRETAX> 22,122,534
<INCOME-TAX> 8,264,000
<INCOME-CONTINUING> 13,858,534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,858,534
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
</TABLE>
