UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 30, 1999
PENN ENGINEERING & MANUFACTURING CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-5356 23-0951065
- ---------------------------- ------------ -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
P.O. Box 1000, Danboro, Pennsylvania 18916
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 766-8853
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
Registrant is filing this amendment to its Form 8-K Current Report, which
was filed initially with the Securities and Exchange Commission on October 15,
1999, for the purpose of reporting under this Item 7: (i) the historical
financial statements of the acquired business; and (ii) the pro forma financial
information.
(a) Financial Statements of Businesses Acquired.
Report of Independent Auditors
Balance Sheet as of September 30, 1999
Statement of Income for the Year Ended September 30, 1999
Statement of Shareholders' Equity for the Year Ended September 30, 1999
Statement of Cash Flows for the Year Ended September 30, 1999
Notes to Financial Statements
(b) Pro Forma Financial Information
Pro Forma Statement of Consolidated Income for the Nine Months Ended
September 30, 1999 (Unaudited)
Pro Forma Statement of Consolidated Income for the Year Ended
December 31, 1998 (Unaudited)
(c) Exhibits
Exhibit No. Exhibit Description
- ----------- -------------------
2.1 Stock Purchase Agreement among Penn Engineering & Manufacturing Corp.
and Harriet Dudek, now known as Harriet Serven, Trustee of Trust B
under Will of Richard C. Dudek, Deceased, Victor E. Carlson, Sara E.
Carlson, John S. Perell, Elizabeth C. Perell and Martha Gail Anderson
dated September 16, 1999. (Schedules omitted; the Company agrees to
furnish supplementally a copy of any omitted schedule to the Commission
upon request.)*
2.2 Agreement of Sale for 800 Del Norte Boulevard, Oxnard, California,
dated as of December 30, 1999 between Victor E. Carlson, Sara E.
Carlson, John S. Perell, Elizabeth C. Perell, Harriet Dudek, now known
as Harriet Serven, Trustee Under Will of Richard C. Dudek, Deceased, as
Seller, and Penn Engineering & Manufacturing Corp., as Buyer.
(Schedules omitted; the Company agrees to furnish supplementally a copy
of any omitted schedule to the Commission upon request.)*
10.4 Loan Agreement dated as of September 28, 1999 between Penn Engineering
& Manufacturing Corp. and First Union National Bank.*
23.1 Consent of Ernst & Young LLP
- -------------
*These exhibits are incorporated by reference to the initial filing of the
Company's Form 8-K Current Report filed with the Commission on October 15, 1999.
-2-
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
R.C. Dudek & Company, Inc.
We have audited the accompanying balance sheet of R.C. Dudek Division of R.C.
Dudek & Company, Inc. (the Company) as of September 30, 1999, and the related
statement of income, shareholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of R.C. Dudek Division of R.C.
Dudek & Company, Inc. as of September 30, 1999, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Woodland Hills, California
November 24, 1999
F-1
<PAGE>
R.C. Dudek Division of
R.C. Dudek & Company, Inc.
Balance Sheet
September 30, 1999
Assets
Current assets:
Cash and cash equivalents $ 1,025,872
Accounts receivable, net of allowance for doubtful
accounts of $169,746 5,454,695
Inventory 8,289,292
Other current assets 362,465
-----------
Total current assets 15,132,324
Property and equipment, net 236,034
===========
Total assets $15,368,358
===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 2,894,043
Accrued expenses 220,519
-----------
Total current liabilities 3,114,562
Shareholders' equity:
Common stock, $.10 par value; 750,000 shares
authorized; 866 shares issued and outstanding 12,549
Retained earnings 12,241,247
-----------
12,253,796
-----------
Total liabilities and shareholders' equity $15,368,358
===========
See accompanying notes.
F-2
<PAGE>
R.C. Dudek Division of
R.C. Dudek & Company, Inc.
Statement of Income
Year ended September 30, 1999
Sales $32,661,304
Costs and expenses:
Cost of sales 23,401,057
Selling, general and administrative 6,223,325
-----------
Income from operations 3,036,922
Other income:
Interest and other income 90,526
-----------
Income before provision for income taxes 3,127,448
Provision for income taxes 40,388
-----------
Net income $ 3,087,060
===========
See accompanying notes
F-3
<PAGE>
R.C. Dudek Division of
R.C. Dudek & Company, Inc.
Statement of Shareholders' Equity
Year ended September 30, 1999
Retained
Amount Earnings Total
-----------------------------------------
Balance at October 1, 1998 $12,549 $11,915,187 $11,927,736
Net income -- 3,087,060 3,087,060
Distributions to shareholders -- (2,761,000) (2,761,000)
-----------------------------------------
Balance at September 30, 1999 $12,549 $12,241,247 $12,253,796
=========================================
See accompanying notes.
F-4
<PAGE>
R.C. Dudek Division of
R.C. Dudek & Company, Inc.
Statement of Cash Flows
Year ended September 30, 1999
Operating activities
Net income $ 3,087,060
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 65,465
Changes in operating assets and liabilities:
Accounts receivable (1,638,526)
Inventory 698,701
Other current assets 23,099
Accounts payable 875,663
Accrued expenses (239,241)
-----------
Net cash provided by operating activities 2,872,221
Investing activities
Acquisition of property and equipment (4,921)
Sale of marketable securities 432,719
-----------
Net cash provided by investing activities 427,798
Financing activities
Shareholders' distributions (2,761,000)
Payment to related party (269,519)
-----------
Net cash used in financing activities (3,030,519)
-----------
Net increase in cash 269,500
Cash at beginning of year 756,372
===========
Cash at end of year $ 1,025,872
===========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ 46,318
===========
See accompanying notes.
F-5
<PAGE>
R.C. Dudek Division of
R.C. Dudek & Company, Inc.
Notes to Financial Statements
September 30, 1999
1. Nature of Operations and Basis of Presentation
R.C. Dudek & Company, Inc. (the Company) is a California corporation which had
two operating divisions, the R.C. Dudek Division (the Division), a distributor
of industrial fasteners, and the FOGA division, which extrudes aluminum for
point of purchase displays and trade show exhibits. Historically, approximately
98% of gross revenue of the Company was attributable to the R.C. Dudek Division.
The FOGA division was sold in August 1999.
On September 30, 1999, Penn Engineering & Manufacturing Corp. (Penn) acquired
all of the issued and outstanding capital stock of the Division for $34 million
in cash. Most of the products the Division distributes are manufactured by Penn.
These financial statements present the operations of the R.C. Dudek Division
only.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Division considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Inventory
Inventories, which consist solely of finished products, are stated at the lower
of cost or market. Cost is determined using the last-in, first-out (LIFO)
method.
Property, Equipment and Depreciation
Property and equipment is stated at cost and depreciated using straight-line or
declining balance methods over the estimated useful lives of the assets ranging
from 5 to 15 years. Depreciation expense was $65,465 for the year ended
September 30, 1999.
Revenue Recognition
The Division recognizes revenue from product sales upon shipment.
F-6
<PAGE>
R.C. Dudek & Company, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Property and equipment consists of the following at September 30, 1999:
Machinery and equipment $ 737,507
Transportation equipment 16,036
Leasehold improvements 171,112
---------
924,655
Less accumulated depreciation (688,621)
---------
Property and equipment, net $ 236,034
=========
Long-lived assets are evaluated for impairment where events or circumstances
indicate that their carrying amount may not be recoverable. The Division makes
an assessment of recoverability by estimating the future undiscounted cash flows
excluding interest charges expected to result from the use of the property and
its eventual disposition. If the carrying amount exceeds the aggregate future
cash flows, an impairment loss is recognized to the extent that the carrying
amount exceeds the fair value of the property.
Concentrations of Credit Risk
The Division places its cash and cash equivalents with federally insured
financial institutions and in brokerage house and mutual funds (which are not
insured) which limits the amount of credit exposure to any one financial
institution or fund. From time to time, cash balances in bank accounts may
exceed the $100,000 federally insured limit. The Division believes that it is
not exposed to any significant concentration of credit risk on cash and cash
equivalents.
The Division extends credit to its customers in the ordinary course of business.
The Division does not require collateral from its customers, but routinely
assesses the financial strength of its customers. Based upon the credit
assessment process and due to the large number of customers comprising the
Division's customer base and their dispersion across different industries and
geographic locations, management believes that its receivable credit risk
exposure is limited. As of September 30, 1999, the Division had no significant
concentrations of credit risk with respect to trade receivables.
F-7
<PAGE>
R.C. Dudek & Company, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Significant Suppliers and Customers
One supplier, Penn, accounted for approximately 91% of the Division's purchases
for the year ended September 30, 1999. As more fully described in Note 1, the
Division was acquired by Penn on September 30, 1999.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Company generally does not
pay federal or state corporate income taxes on its taxable income. Instead, the
shareholders will report, for federal and state income tax purposes, their
proportionate share of the Company's taxable income or loss. The Company is
subject to California state income taxes at a rate of 1.5% of taxable income.
The Corporation is required to maintain a deposit with the Internal Revenue
Service in order to use a tax year end other than December 31. The Corporations'
tax year end is September 30. As of September 30, 1999, the deposit amount is
$327,413 and is included in other current assets in the accompanying balance
sheet.
Use of Estimates in Preparing Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
3. Retirement Plan
The Company sponsors a defined contribution plan covering substantially all of
its employees. Contributions are determined based on a percentage of each
participant's salary. Included in the accompanying statement of income is plan
contribution expense for the year ended September 30, 1999 of $206,050.
F-8
<PAGE>
R.C. Dudek & Company, Inc.
Notes to Financial Statements (continued)
4. Commitments
Leases and Related Party Transactions
The Company leases certain office and warehouse space under non-cancelable
operating leases expiring at various dates through 2005, including its principal
operating facility in Oxnard, California which is owned by the shareholders of
the Company. Rental expense of $274,167 ($163,689 applicable to related parties)
is included in selling, general and administrative expenses for the year ended
September 30, 1999.
Aggregate minimum lease payments under all non-cancelable operating leases
during the next five years and thereafter are as follows:
2000 $ 322,892
2001 277,584
2002 262,240
2003 254,436
2004 254,436
Thereafter 318,045
----------
$1,689,633
==========
5. Fair Value of Financial Instruments
Statement of Financial Accounting Standard (SFAS) No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair value, to the
extent practicable, for financial instruments which are recognized or
unrecognized in the balance sheet. At September 30, 1999, financial instruments
include cash and cash equivalents, trade receivables and payables. The carrying
value of these instruments approximate their fair value due to the near term
maturities of these instruments.
F-9
<PAGE>
R.C. Dudek & Company, Inc.
Notes to Financial Statements (continued)
6. Impact of Year 2000 (Unaudited)
The Year 2000 Problem is the result of computer hardware and software systems
(collectively referred to as "Systems" and individually as a "System" having
been designed to use a two digit code rather than a four digit code to define
the applicable year, as in "98" to represent 1998. Any of the Company's Systems
may misinterpret a date using "00" as the year 1900 rather than the year 2000.
This could result in errors causing such Systems to become unreliable or could
cause such System to fail.
The Company began a company-wide assessment in 1997 (the Project) to identify
the Company's reliance on Systems using a two digit date code as well as the
Company's exposure to third party customers and suppliers critical to the
Company's operations. The Project includes an assessment of the Company's
dependence upon such Systems and third parties as well as establishing
priorities for addressing any Systems or third party customers and suppliers
which are assessed as a potential year 2000 compliance risk.
The Company has substantially completed the conversion of the System so it is
deemed to be Year 2000 compliant. Although there can be no assurance, management
considers the financial impact and risk of significant loss because of a Year
2000 Problem to be minimum.
The Company maintain contingency plans in the normal course of business designed
to be deployed in the event of various potential business interruptions. The
Company does not currently anticipate that they will experience a significant
disruption to their business as a result of the Year 2000 matters; however, due
to the general uncertainty over Year 2000 readiness of third-parties, the
Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on its financial statements or results
of operations.
F-10
<PAGE>
Unaudited Pro Forma Statement of Consolidated Income for the Nine Months Ended
September 30, 1999 and the Year Ended December 31, 1998
The unaudited pro forma statement of consolidated income for the nine
months ended September 30, 1999 has been prepared assuming the Dudek acquisition
was completed on January 1, 1999. The unaudited pro forma statement of
consolidated income for the year ended December 31, 1998 has been prepared
assuming the Dudek acquisition was completed on January 1, 1998.
The unaudited pro forma statements of consolidated income do not purport to
represent what Penn Engineering & Manufacturing Corp.'s actual results of
operations would have been had the acquisition occurred as of such dates, or to
project Penn Engineering & Manufacturing Corp.'s results of operations for any
period or date, nor does it give effect to any matters other than those
described in the notes thereto. In addition, the allocations of the purchase
price to the assets and liabilities of Dudek are preliminary and the final
allocations may differ from the amounts reflected herein. The unaudited pro
forma statements of consolidated income should be read in conjunction with Penn
Engineering & Manufacturing Corp.'s historical consolidated financial statements
and notes thereto and the historical financial statements of R.C. Dudek &
Company, Inc. which have been included elsewhere in this Current Report on Form
8-K/A.
F-11
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED INCOME FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
(in thousands except share & per share data)
----------------------------------------------------------------------------
Penn Engineering and R.C. Dudek & Pro Forma Pro Forma
Manufacturing Corp. Company, Inc. Adjustments Consolidated
-------------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 141,415 $ 25,415 $ (15,874)(1) $ 150,956
COST OF PRODUCTS SOLD 96,402 18,465 (14,657)(1) 100,210
---------- ---------- ---------- ----------
GROSS PROFIT 45,013 6,950 (1,217) 50,746
OTHER EXPENSES:
Selling expenses 14,786 2,650 (783)(1) 16,653
Goodwill amortization -- -- 792 (2) 792
General and administrative expenses 11,501 2,003 (134)(3) 13,370
---------- ---------- ---------- ----------
TOTAL 26,287 4,653 (125) 30,815
OPERATING PROFIT 18,726 2,297 (1,092) 19,931
OTHER INCOME (EXPENSE) - NET 523 144 (973)(4) (306)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 19,249 2,441 (2,065) 19,625
PROVISION FOR INCOME TAXES 6,458 41 87 (5) 6,586
---------- ---------- ---------- ----------
NET INCOME $ 12,791 $ 2,400 $ (2,152) $ 13,039
========== ========== ========== ==========
NET INCOME PER SHARE - BASIC $ 1.51
==========
WEIGHTED AVERAGE SHARES OUTSTANDING 8,642,523
==========
NET INCOME PER SHARE - DILUTED $ 1.51
WEIGHTED AVERAGE SHARES OUTSTANDING 8,642,523
NET EFFECT OF DILUTUVE SECURITIES 16,008
----------
TOTAL SHARES OUTSTANDING USED IN
COMPUTING DILUTED EARNINGS PER SHARE 8,658,531
==========
</TABLE>
F-12
<PAGE>
Notes to the Unaudited Pro Forma Statements of Consolidated Income for the Nine
Months Ended September 30, 1999
(1) To eliminate sales and cost of products sold for sales from the Company to
Dudek during the nine month period ended September 30, 1999. The pro forma
adjustment also eliminates Dudek commission revenue of $1,217,000 and Dudek
commission expense of $783,000 related to the Dudek Manufacturer's
Representative Business (Rep Business). Dudek historically recorded the
revenue from its Rep Business as a reduction to cost of products sold.
Dudek was party to a manufacturer's representative agreement with the
Company whereby Dudek earned commissions from the Company and paid
commissions to certain sales representatives. The manufacturer's
representative agreement was terminated on the acquisition date in
accordance with the terms of the Stock Purchase Agreement.
(2) To record amortization expense for the goodwill associated with the Dudek
acquisition using the straight line method over a period of 20 years, as if
the acquisition occurred on January 1, 1999.
(3) To (a) adjust depreciation expense for the change in the basis of property
and equipment as if the acquisition of Dudek occurred on January 1, 1999,
(b) record depreciation expense related to the office and warehouse
facilities acquired by the Company utilized in the business and (c)
eliminate rent expense for the offices and warehouses which the Company
acquired, that were previously being leased by Dudek from its shareholders.
(4) To record interest expense related to borrowings of $20,000,000 on the
Company's acquisition line of credit which bears interest at 5.90% and
$2,000,000 on the Company's demand line of credit which bears interest at
5.85%, used to finance the acquisition of Dudek, as if the acquisition
occurred on January 1, 1999.
(5) To adjust income taxes for the termination of the Subchapter S status of
Dudek.
F-13
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF CONSOLIDATED INCOME FOR
THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
(in thousands except share & per share data)
---------------------------------------------------------------------------------
Penn Engineering and R.C. Dudek & Pro Forma Pro Forma
Manufacturing Corp. Company, Inc. Adjustments Consolidated
-------------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 179,687 $ 29,684 $ (21,046)(1) $ 188,325
COST OF PRODUCTS SOLD 124,468 20,725 (19,366)(1) 125,827
---------- ---------- ---------- ----------
GROSS PROFIT 55,219 8,959 (1,680) 62,498
OTHER EXPENSES:
Selling expenses 18,414 3,575 (1,021)(1) 20,968
Goodwill amortization -- -- 1,056 (2) 1,056
General and administrative expenses 14,386 2,290 (168)(3) 16,508
---------- ---------- ---------- ----------
TOTAL 32,800 5,865 (133) 38,532
OPERATING PROFIT 22,419 3,094 (1,547) 23,966
OTHER INCOME (EXPENSE) - NET 1,781 267 (1,297)(4) 751
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 24,200 3,361 (2,844) 24,717
PROVISION FOR INCOME TAXES 7,620 41 122 (5) 7,783
---------- ---------- ---------- ----------
NET INCOME $ 16,580 $ 3,320 $ (2,966) $ 16,934
========== ========== ========== ==========
NET INCOME PER SHARE - BASIC $ 1.96
==========
WEIGHTED AVERAGE SHARES OUTSTANDING 8,632,739
==========
NET INCOME PER SHARE - DILUTED $ 1.96
WEIGHTED AVERAGE SHARES OUTSTANDING 8,632,739
NET EFFECT OF DILUTUVE SECURITIES 26,359
----------
TOTAL SHARES OUTSTANDING USED IN
COMPUTING DILUTED EARNINGS PER SHARE 8,659,098
==========
</TABLE>
F-14
<PAGE>
Notes to the Unaudited Pro Forma Statements of Consolidated Income for the Year
Ended December 31, 1998
(1) To eliminate sales and cost of products sold for sales from the Company to
Dudek during the year ended December 31, 1998. The pro forma adjustment
also eliminates Dudek commission revenue of $1,680,000 and Dudek commission
expense of $1,021,000 related to the Dudek Manufacturer's Representative
Business (Rep Business). Dudek historically recorded the revenue from its
Rep Business as a reduction to cost of products sold. Dudek was party to a
manufacturer's representative agreement with the Company whereby Dudek
earned commissions from the Company and paid commissions to certain sales
representatives. The manufacturer's representative agreement was terminated
on the acquisition date in accordance with the terms of the Stock Purchase
Agreement.
(2) To record amortization expense for the goodwill associated with the Dudek
acquisition using the straight line method over a period of 20 years, as if
the acquisition occurred on January 1, 1998.
(3) To (a) adjust depreciation expense for the change in the basis of property
and equipment as if the acquisition of Dudek occurred on January 1, 1998,
(b) record depreciation expense related to the office and warehouse
facilities acquired by the Company utilized in the business and (c)
eliminate rent expense for the offices and warehouses which the Company
acquired, that were previously being leased by Dudek from its shareholders.
(4) To record interest expense related to borrowings of $20,000,000 on the
Company's acquisition line of credit which bears interest at 5.90% and
$2,000,000 on the Company's demand line of credit which bears interest at
5.85%, used to finance the acquisition of Dudek, as if the acquisition
occurred on January 1, 1998.
(5) To adjust income taxes for the termination of the Subchapter S status of
Dudek.
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PENN ENGINEERING &
MANUFACTURING CORP.
Date: December 13, 1999 By: /s/ Mark W. Simon
-----------------------------
Mark W. Simon, Vice President
and Chief Financial Officer
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated November 24, 1999, with respect to the
financial statements of R.C. Dudek Division of R.C. Dudek & Company, Inc.,
included in the Current Report on Form 8-K/A of Penn Engineering & Manufacturing
Corp.
We also consent to the incorporation by reference of our report dated November
24, 1999 with respect to the financial statements of R.C. Dudek Division of R.C.
Dudek & Company, Inc. included in this Current Report on Form 8-K/A, for the
year ended September 30, 1999, in the following registration statements:
Penn Engineering & Manufacturing Corp. 1996 Equity Incentive Plan Form S-8
Registration Statement (No. 333-20101); and
Penn Engineering & Manufacturing Corp. 1996 Employee Stock Purchase Plan
Form S-8 Registration Statement (No. 333-13073)
/s/ Ernst & Young LLP
Woodland Hills, California
December 10, 1999
