SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999
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
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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 15, 2000, the aggregate market value based on the closing sales
price on that date of the voting and non-voting common equity held by
non-affiliates of the Registrant was approximately $194,325,000.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date: 1,675,082 shares of Class A
Common Stock and 6,886,605 shares of Common Stock outstanding on March 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of Registrant's 1999 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 2000 Annual Meeting of
Stockholders to be filed with the Commission 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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<TABLE>
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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. .......................................................................... 8
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 8
Item 6. Selected Financial Data................................................... 8
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations....................... 8
Item 7A. Quantitative and Qualitative Disclosure About Market Risk ................ 8
Item 8. Financial Statements and Supplementary Data............................... 9
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure..................... 9
III. PART III. .......................................................................... 10
Item 10. Directors and Executive Officers of the Registrant........................ 10
Item 11. Executive Compensation.................................................... 10
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 10
Item 13. Certain Relationships and Related Transactions............................ 10
IV. PART IV. .......................................................................... 11
Item 14. Exhibits, Financial Statements and Schedules and Reports on Form 8-K...... 11
</TABLE>
<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 are:
(i) The development, manufacture and sale of PEM(R)self-clinching and
broaching fasteners, inserts for plastics, 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 brush-commutated dc motors under the
Pittman(R) and Pitmo(R) trademarks, and electronically commutated brushless
dc servomotors under the Elcom(R) trademark.
On May 28, 1999, the Registrant acquired the assets of MicroAssembly
Systems, Inc. for a purchase price of $1.8 million. On July 23, 1999, the
Registrant purchased the slotted brushless motor technology, inventory, and
fixed assets of Carson Technologies, Inc. of Carson City, Nevada for $350,000.
On September 30, 1999, the Registrant acquired all of the issued and
outstanding capital stock of R.C. Dudek & Company, Inc., a California
corporation, in consideration for the payment of approximately $34,000,000 in
cash and the assumption of approximately 3,500,000 of liabilities. Also on
September 30, 1999, the Registrant acquired certain real property, including
offices and warehouse facilities, located on approximately 2.15 acres of land at
800 Del Norte Boulevard, Oxnard, California, for a purchase price of $2,200,000
in cash.
The business and the real property acquired are used in conducting a
distribution business, including the distribution of fasteners and other
products manufactured by the Registrant. The Registrant intends to continue such
use and to expand the number and type of products distributed.
Financing for the business and real property acquisitions on September 30,
1999 was provided by First Union National Bank (the "Bank"), pursuant to a loan
agreement dated September 28, 1999 (the "Loan Agreement"). Under the Loan
Agreement, the Bank agreed to provide the Registrant with a working capital line
of credit of up to $10 million and an acquisition line of credit of up to $30
million. The Loan Agreement also provides that the Bank has agreed to make a
term
<PAGE>
loan to the Registrant (to be repaid over a period of three to seven years) in
the amount of the outstanding balance of the acquisition line of credit on
September 27, 2000.
Subsequent to the acquisition, R.C. Dudek & Company, Inc.'s name was
changed to Arconix/USA, Inc. This entity, along with the Company's U.K. and
Singapore distribution operations, were folded into Arconix Group, Inc., a
newly-created entity. Arconix Group, Inc. will serve as the umbrella entity for
all of the Company's operations in the distribution segment beginning in 2000.
(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 page 20 of the Registrant's 1999 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(R) self-clinching
fasteners, which accounted for approximately 82% of the Registrant's sales in
1999, 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 Arconix Group, Inc. subsidiary, which
commenced operations on September 30, 1999, distributes fasteners and other
components utilized by Original Equipment Manufacturers ("OEMs") and provides
comprehensive logistical and inventory management services. The Registrant's
Pittman(R) 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 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-clinching 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
for the end user.
The Registrant also manufactures and sells manual and automated presses for
fastener installation under the PEMSERTER trademark. The rapid and accurate
installation provided by
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PEMSERTER presses, together with the Registrant's broad range of fastener
products, provides the Registrant'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, 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 plastics, and (ii) dc motors were the Registrant's only material
lines of business in 1999. 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, 1997, 1998 and 1999:
Percentage of Total Sales
-------------------------
Year Ended Electric
December 31, Fasteners Motors
------------ --------- ------
1997 81% 19%
1998 82% 18%
1999 82% 18%
The Registrant's fastener products are sold through a worldwide network of
approximately 45 authorized distributors located in 36 countries including the
Company's own subsidiaries in Oxnard, California, Singapore, and England. On
September 30, 1999, the Registrant acquired all of the issued and outstanding
capital stock and certain real property, including offices and warehouse
facilities, of R.C. Dudek & Company, Inc. and established a distribution
business in California. Many of the independent distributors and engineering
representative organizations have been affiliated with the Registrant for more
than 20 years. The Registrant's independent distributors, which maintain their
own inventories of the Registrant's products, typically sell other complementary
industrial components. The Registrant's return allowances, which are made
through the exchange of inventory, have generally averaged less than 1% of
sales. The Registrant'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
Registrant supplies its customers and distributors through warehouses in Oxnard,
California, Doncaster, England and Singapore, in addition to maintaining an
inventory at its Danboro, Pennsylvania facility.
Domestic and European sales of Pittman motors are through independent sales
representatives.
During the year ended December 31, 1999, 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 1999.
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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.
The Registrant also believes its Pittman division maintained its
competitive position in the dc motor market in 1999.
Among the Registrant's principal customers for its fasteners and
PEMSERTERS(R) presses 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 dc motors and servomotors are manufacturers of mass data storage units,
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 totaled approximately $19,827,000 for the
year ended December 13, 1997, $22,885,000 for the year ended December 31, 1998
and $25,354,000 for the year ended December 31, 1999, or approximately 12%, 13%
and 13%, respectively, of the Registrant's consolidated net sales during such
years.
As of December 31, 1999, the Registrant had an order backlog of $68,467,000
compared with $45,105,000 as of December 31, 1998. The Registrant estimates that
substantially all of its backlog as of December 31, 1999 will be shipped during
its fiscal year ending December 31, 2000.
The raw materials used by the Registrant are generally available in
adequate supply.
The Registrant holds a number of patents and trademarks, 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, 1997, 1998 and 1999 were
approximately $2,944,000, $3,410,000, and $4,727,000, 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, 1999, 1,489 persons were employed by the Registrant, 66
more than were employed as of December 31, 1998. None of the Registrant's
personnel are governed by collective bargaining agreements. The Registrant
believes that its labor rates are comparable to those of its competitors and
that the Registrant's relations with its employees are good. The Registrant does
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not consider its business to be seasonal in any material respect, nor is any
material portion of the Registrant's business 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 page 20 of the Registrant's 1999
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, U.S. dollars and Euros. 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, 1999, the Registrant's principal plants and offices, all
of which (other than the Singapore office) were owned by the Registrant, were as
follows:
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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, 120,000 sq. ft. building Manufacture of components
North Carolina on 16.3 acres for fasteners
Suffolk, Virginia 50,000 sq. ft. building Manufacture of components
on 17.2 acres for fasteners
Harleysville, 58,000 sq. ft. building Manufacture of dc motors
Pennsylvania on 6 acres
Oxnard, California 30,600 sq. ft. building Office and warehouse for
on 2.15 acres the distribution of fasteners
and related components
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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 "Commitments & Contingencies" on pages 19 and
20 of the Registrant's 1999 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.
None.
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 60 Chairman of the Board and
Chief Executive Officer
Martin Bidart 63 President and Chief Operating Officer
Raymond L. Bievenour 56 Vice President - Sales/Marketing
Victor E. Carlson 61 Vice President and General
Manager - Arconix Group, Inc.
Kent R. Fretz 62 Vice President and General
Manager - Pittman division
Mark W. Simon 61 Vice President - Finance, Chief
Financial Officer, and Corporate
Secretary
Royce C. Sturdevant 39 Vice President - Quality
Francis P. Wilson 60 Vice President - Operations
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, except for Messrs. Wilson, Carlson and Sturdevant. Mr. Wilson was hired
on June 23, 1997. From 1993 until he joined the Registrant, Mr. Wilson was
Director of Engineering for the International Division of Emhart Fastening
Technologies, a subsidiary of Black & Decker. Mr. Carlson was hired on
September 30,
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1999, and had served as President of R.C. Dudek & Company, Inc., prior to its
acquisition by the Registrant. Mr. Sturdevant was hired on August 2, 1999 and
has an extensive background in quality control with several major multinational
companies.
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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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Registrant's Common Stock (non-voting), par value $0.01, is traded on
the New York Stock Exchange under the symbol "PNN." The Registrant's Class A
Common Stock (voting), par value $0.01, is traded on the New York Stock Exchange
under the symbol "PNNA." As of March 15, 2000, there were 508 holders of record
of the Registrant's Common Stock and 394 holders of record of the Registrant's
Class A Common Stock. Additional information with respect to this Item 5 is
incorporated by reference to page 7 of the Registrant's 1999 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 1 of the Registrant's 1999
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 2 through 6
of the Registrant's 1999 Annual Report to Stockholders, which is included as
Exhibit (13) to this Form 10-K Report.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
The Registrant's earnings and cash flow are subject to fluctuations due to
changes in foreign currency exchange rates and interest rates. The Registrant
manages its exposures to changes in foreign currency exchange rates on certain
firm sales commitments and anticipated, but not yet committed sales, by entering
into foreign currency forward contracts and foreign currency option contracts,
respectively. The Registrant's risk management objective is to reduce its
exposure to the effect of changes in exchange rates on sales revenue over
quarterly time horizons. To a certain extent, foreign currency rate movements
also affect the Registrant's competitive position, as exchange rate changes may
affect business practices and/or pricing strategies of non-U.S. based
competitors. The Registrant's foreign currency risk policies entail entering
into foreign currency derivative instruments only to manage risk, and not for
speculative investments.
Annually, financial officers approve the Registrant's outlook for expected
currency exchange rate movements, as well as the policy on desired future
foreign currency cash flow positions (i.e. long, short, balanced) for those
currencies where there is significant activity. Financial officers receive
reports on open foreign currency hedges on a regular basis. Expected future cash
flow positions and strategies are continuously monitored. Foreign exchange
management practices, including the use of derivative financial instruments, are
reviewed with the Audit Committee of the Registrant's Board of Directors at
least annually.
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Considering both the anticipated cash flows from firm sales commitments
plus anticipated sales for the next quarter and the foreign currency derivative
instruments in place at year end, a hypothetical 10% weakening of the U.S.
dollar relative to all other currencies would not materially adversely affect
expected 2000 earnings or cash flows. This analysis is dependent on actual
export sales during the next quarter occurring within 90% of the budgeted
forecasts. The effect of the hypothetical change in exchange rates ignores the
effect that this movement may have on other variables including competitive
risk. If it were possible to quantify this competitive impact, the results could
well be different than the sensitivity effect shown above. In addition, it is
unlikely that all currencies would uniformly strengthen or weaken relative to
the U.S. Dollar. In reality, some currencies may weaken while others strengthen.
The Registrant's bank loans expose earnings to changes in short-term
interest rates, since the interest rates on the underlying obligations are
either variable or fixed for such a short period of time as to effectively
become variable. The fair value of the Registrant's banks loans are not
significantly affected by changes in market interest rates. The change in fair
value of the Registrant's long-term debt resulting from a hypothetical 10%
change in interest rates is not material.
Item 8. Financial Statements and Supplementary Data.
The answer to this Item is incorporated by reference to pages 7 through 21
of the Registrant's 1999 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.
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning directors is incorporated by reference to the
Registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1999. 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 the
Registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information concerning this item is incorporated by reference to the
Registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1999.
Item 13. Certain Relationships and Related Transactions.
Information concerning this item is incorporated by reference to the
Registrant's Proxy Statement for its 2000 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
the year ended December 31, 1999.
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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, 1999 and 1998. 8*
Statements of Consolidated Income 9*
for the years ended December 31, 1999, 1998 and 1997.
Statements of Changes in Consolidated Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997. 10*
Statements of Consolidated Cash Flows for the years 11*
ended December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements. 12-21*
Independent Auditors' Report. 22*
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* Refers to the respective page of the Registrant's 1999 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.
2. Financial Schedules.
None.
3. Exhibits.
Reference is made to the Exhibit Index on page 15 of this Form 10-K.
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(b) Reports on Form 8-K.
The Registrant filed with the Securities and Exchange Commission on
October 15, 1999 a Form 8-K Current Report dated September 30, 1999, as amended
December 13, 1999, to report under Item 2 that it had acquired all of the issued
and outstanding capital stock of R.C. Dudek & Company, Inc. in consideration for
the payment of cash of approximately $34,000,000 and the assumption of
approximately $3,500,000 of liabilities. The Registrant also acquired certain
real property owned by the shareholders of R.C. Dudek & Company, Inc., used in
the operation of the business, for cash of $2,200,000.
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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 30, 2000 By: /s/ Kenneth A. Swanstrom
------------------------------------
Kenneth A. Swanstrom,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
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<S> <C> <C>
/s/ Kenneth A. Swanstrom Chairman of the Board, March 30, 2000
- ----------------------------- Chief Executive Officer,
Kenneth A. Swanstrom and Director (Principal
Executive Officer)
/s/ Martin Bidart President, Chief Operating March 30, 2000
- ----------------------------- Officer, and Director
Martin Bidart
/s/ Mark W. Simon V.P. Finance, Corporate March 30, 2000
- ----------------------------- Secretary, and Director
Mark W. Simon (Principal Financial
and Accounting Officer)
/s/ Willard S. Boothby, Jr. Director March 30, 2000
- -----------------------------
Willard S. Boothby, Jr.
/s/ Lewis W. Hull Director March 30, 2000
- -----------------------------
Lewis W. Hull
/s/ Thomas M. Hyndman, Jr. Director March 30, 2000
- -----------------------------
Thomas M. Hyndman, Jr.
/s/ Maurice D. Oaks Director March 30, 2000
- -----------------------------
Maurice D. Oaks
</TABLE>
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<TABLE>
<S> <C> <C>
/s/ Charles R. Smith Director March 30, 2000
- -----------------------------
Charles R. Smith
/s/ Daryl L. Swanstrom Director March 30, 2000
- -----------------------------
Daryl L. Swanstrom
</TABLE>
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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 L. Swanstrom.
(Incorporated by reference to Exhibit A to the Registrant's Form
8-K 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 Securities and Exchange 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 Securities and Exchange Commission on September
30, 1996.)
(10)(iv) 1998 Stock Option Plan for Non-Employee Directors. (Incorporated
by reference to the Registrant's Form S-8 Registration Statement
No. 333- 92907 filed with the Securities and Exchange Commission
on December 16, 1999.)
(10)(v) 1999 Employee Stock Option Plan. (Incorporated by reference to
the Registrant's Form S-8 Registration Statement No. 333-92903
filed with the Securities and Exchange Commission on December 16,
1999.)
(10)(vi) 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. (Incorporated by
reference to Exhibit 2.1 of the Registrant's Form 8-K Current
Report dated September 30, 1999.)
-15-
<PAGE>
(10)(vii) Agreement of Sale for 800 Del Norte Boulevard, Oxnard,
California, dated as of September 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. (Incorporated by reference to
Exhibit 2.2 of the Registrant's Form 8-K Current Report dated
September 30, 1999.)
(10)(viii) Loan Agreement dated as of September 28, 1999 between Penn
Engineering & Manufacturing Corp. and First Union National Bank.
(Incorporated by reference to Exhibit 10.4 of the Registrant's
Form 8-K Current Report dated September 30, 1999.)
(13) 1999 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.)
(21) Subsidiaries of the Registrant.
(23) Independent Auditor's Consent.
(27) Financial Data Schedule (Electronic Filing Only).
-16-
selected financial data
(Dollars in thousands except share and per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 198,074 $179,687 $167,702 $160,323 $141,268
Cost of products sold 135,521 124,468 115,374 111,027 96,190
Provision for income taxes 8,610 7,620 8,425 8,264 8,323
Net income 17,090 16,580 14,501 13,858 13,798
Capital expenditures 11,453 8,315 19,234 25,266 17,213
Depreciation and amortization 8,901 8,064 6,570 5,343 4,165
Total assets 201,544 164,168 150,992 138,538 96,074
Long term debt 15,000 -- -- -- --
Stockholders' equity 152,880 142,052 128,919 121,137 76,091
Working capital $ 74,490 $ 73,657 $ 60,411 $ 64,233 $ 38,881
Number of employees (at year end) 1,489 1,423 1,368 1,330 1,211
Number of stockholders of record (at year end)
PNN 525 572 618 648 N/A
PNNA 407 446 480 520 540
Average number of common shares
outstanding used to compute
per share information (in thousands)
Basic 8,638 8,633 8,664 7,748 6,828
Diluted 8,653 8,659 8,683 7,748 6,828
Per share information:
Net income-basic $ 1.98 $ 1.92 $ 1.67 $ 1.79 $ 2.02
Net income-diluted 1.97 1.91 1.67 1.79 2.02
Stockholders' equity 17.70 16.45 14.88 15.63 11.15
Dividends .48 .45 .42 .37 .50
</TABLE>
1
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition
December 31, 1999
Overview
The Company's operations consists of two business segments:
The manufacture and sale of PEM(R) brand fasteners, including PEMSERTER(R)
fastener insertion machines, and Pittman(R) dc motors. Fasteners, which
accounted for 82.3% of the Company's consolidated net sales in 1999 compared to
81.8% in 1998 and 81.0% in 1997, are marketed through a worldwide network of
independent authorized distributors and three Company owned distributors. In
1999, sales to the computer market accounted for 22% of total fastener sales,
sales to the telecommunications market accounted for 22% of total fastener
sales, sales to the automotive market accounted for 10% of total fastener sales,
and the remaining balance distributed among other markets. Motors accounted for
approximately 17.7% of the Company's consolidated net sales in 1999 compared to
18.2% in 1998 and 19.0% in 1997, and are marketed in North America 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, medical equipment,
and industrial equipment. The Company's motor segment consists of
brush-commutated motors and longer lasting brushless motors.
Fastener units shipped from the Company's manufacturing facilities to all
customers, including independent and Company owned distributors, increased 11.4%
from 2.19 billion in 1998, to 2.44 billion in 1999 after having increased 11.7%
in 1998 from 1.96 billion in 1997. The increase in 1999 was a result of a strong
global economy as well as increased business opportunities in the North American
region. The increase in 1998 was a result of a strong European economy as well
as increased fabrication activity in the Asia-Pacific region as customers
shifted production to that region to take advantage of currency devaluations.
In 1999, 1998, and 1997, sales to domestic customers accounted for 69.4%, 70.0%,
and 73.7%, respectively, of the Company's consolidated net sales. During the
same periods, foreign sales accounted for 30.6%, 30.0%, and 26.3% respectively,
of the Company's consolidated net sales. The Company's export sales have
benefited from the Company's ability to serve large multinational computer and
electronic manufacturers who have moved some of their product fabrication
offshore.
2
<PAGE>
Results of Operations
The following tables sets forth for the periods indicated certain information
derived from the Company's consolidated statements of income expressed in
dollars and as a percentage of total net sales and segment sales.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Fasteners $162,946 82.3% $146,931 81.8% $135,841 81.0%
Motors 35,128 17.7 32,756 18.2 31,861 19.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 198,074 100.0% $179,687 100.0% $167,702 100.0%
Domestic $ 137,510 69.4% $125,777 70.0% $123,534 73.7%
Foreign 60,564 30.6 53,910 30.0 44,168 26.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total $198,074 100.0% $179,687 100.0% $167,702 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit by Segment
Fasteners $ 53,070 32.6% $ 46,860 31.9% $43,805 32.2%
Motors 9,483 27.0 8,359 25.5 8,523 26.8
Total Company
Gross Profit $ 62,553 31.6% $55,219 30.7% $52,328 31.2%
Selling, general &
administrative expenses 37,793 19.1 32,800 18.2 30,640 18.3
Operating profit 24,760 12.5 22,419 12.5 21,688 12.9
Net income 17,090 8.6 16,580 9.2 14,501 8.6
</TABLE>
3
<PAGE>
Management's Discussion and Analysis of Results of Operations and
Financial Condition Continued
Year Ended December 31, 1999 vs. Year Ended December 31, 1998
Consolidated net sales for 1999 were $198.1 million, versus $179.7 million in
1998, a 10.2% increase. Approximately $3.3 million, or 17.9% of this increase,
was the result of the acquisitions of MicroAssembly Systems, Inc. on May 28,1999
and R.C. Dudek & Company, Inc. on September 30, 1999. The remainder of the
increase was due to the continued strength of the electronics and
telecommunications markets in all regions of the world. Sales to customers
outside the United States for 1999 increased 12.4% to $60.6 million, from $53.9
million in 1998. Net sales for the fastener operation for 1999 were $162.9
million, versus $146.9 million in 1998, a 10.9% increase. Motor sales in 1999
increased 7.0% to $35.1 million from $32.8 million in 1998.
Fastener units sold to the Company's global OEM direct customers and its
independent distribution network increased 11.8% from 1998 to 1999. Fasteners
sold within North America, approximately 68.5% of total fasteners sold in 1999,
increased 11.4% from 1998 to 1999 mainly due to new business opportunities in
the second half of the year as well as the addition of a new distributor in the
Southeastern United States. Fasteners sold into Europe, approximately 23.9% of
total fasteners sold in 1999, increased 9.0% from 1998 to 1999. While the rate
of growth has slowed from prior years due to currency exchange factors, there is
still strong growth in the electronics and automotive markets. Fasteners sold
into the Asia-Pacific market, approximately 7.6% of total fasteners sold in
1999, increased 26.8% from 1998 to 1999. Much of this growth was due to new
business, especially in the personal computer and telecommunications markets.
The average selling price of motors decreased approximately 3.7% to $40.60 per
motor in 1999 from $42.16 per motor in 1998. This was due to a shift in sales
toward lower priced brush motors. The number of motors sold increased
approximately 11.4% to 865,245 in 1999 from 776,952 in 1998.
Consolidated gross profit was $62.6 million in 1999, versus $55.2 million in
1998, a 13.4% increase. Fastener gross profit increased 13.2% to $53.1 million
in 1999 from $ 46.9 million in 1998 as a result of lower fixed costs per unit
due to cost reduction projects and increased sales volume. Motor gross profit
increased 13.1% to $9.5 million in 1999 from $8.4 million in 1998.
Consolidated selling, general, and administrative expenses ("SG&A") for 1999
were $37.8 million, versus $32.8 million for 1998, a 15.2% increase. Additional
expenses were incurred in 1999 due to increased technology related expenditures
including Year 2000 related expenses, goodwill and start-up costs related to
acquisition efforts, and other outside professional service expenses.
4
<PAGE>
Consolidated net income for 1999 was $17.1 million, versus $16.6 million for
1998. In 1999, the Company incurred $480,000 of interest and goodwill expenses
due to acquisitions.
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
Consolidated net sales for 1998 were $179.7 million, versus $167.7 million in
1996, a 7.2% increase. This growth in sales was largely the result of the
continued growth in the personal computer and automotive markets, especially in
the European and Asia-Pacific regions. Sales to customers outside the United
States for 1998 increased 21.9% to $53.9 million, from $44.2 million in 1997.
Net sales for the fastener operation for 1998 were $146.9 million, versus $135.8
million in 1997, an 8.2% increase. Motor sales in 1998 increased 2.8% to $32.8
million from $31.9 million in 1997.
The Company's average selling price for fasteners shipped to global OEM direct
customers and its independent distribution network in 1998 was $63.96 per
thousand, compared to $65.15 per thousand in 1997, a decrease of 1.8%. This
decrease is mainly due to a change in product mix toward lower margin fasteners
as inventory levels at distributors are once again replenished.
The number of fastener units sold to the Company's global OEM direct customers
and its independent distribution network increased 10.1% from 1997 to 1998. The
number of fasteners sold within North America, approximately 68.8% of total
fasteners sold in 1998, increased 4.9% from 1997 to 1998 as distributor
inventory levels stabilized in 1998 and there was a return to a more stable
ordering pattern. The number of fasteners sold into Europe, approximately 24.5%
of total fasteners sold in 1998, increased 21.7% from 1997 to 1998. This
increase is mainly due to continued strong point-of-sale demand for personal
computers, network servers, and automotive products. The number of fasteners
sold into the Asia-Pacific market, approximately 6.7% of total fasteners sold in
1998, increased 31.7% from 1997 to 1998. Much of this growth was due to the
shifting of production to this area to take advantage of the currency
devaluation which occurred in the region during the latter half of 1997 and
early 1998. This allowed major computer manufacturers to lower the selling price
for products shipped back to the United States for sale.
The average selling price of motors increased approximately 3.9% to $42.16 per
motor in 1998 from $40.58 per motor in 1997. The number of motors sold decreased
approximately 1.0% to 776,952 in 1998 from 785,052 in 1997.
Consolidated gross profit was $55.2 million in 1998, versus $52.3 million in
1997, a 5.5% increase. Fastener gross profit increased 7.0% to $46.9 million in
1998 from $ 43.8 million in 1997 mainly as a result of increased sales volume.
Motor gross profit decreased 1.2% to $8.4 million in 1998 from $8.5 million in
1997.
5
<PAGE>
Consolidated selling, general, and administrative expenses ("SG&A") for 1998
were $32.8 million, versus $30.6 million for 1997, a 7.2% increase. Additional
expenses were incurred in 1998 due to changes in the Company's executive
management structure, increased technology related expenditures including Year
2000 related expenses, and other outside professional expenses related to the
Company's foreign operations.
Consolidated net income for 1998 was $16.6 million, versus $14.5 million for
1997. Other income, which includes investment income and realized currency
translation gains, increased to $1.8 million in 1998 from $1.2 million in 1997.
Consolidated net income was favorably impacted by a reduction in the Company's
effective tax rate from 36.7% in 1997 to 31.5% in 1998. This decrease was due
primarily to the increased benefits of the Foreign Sales Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations totaled $24.2 million for the year ended
December 31, 1999. Funds from operations were sufficient to pay dividends and
for capital expenditures other than the acquisition of R.C. Dudek & Company,
Inc. which was partially funded through both long and short-term borrowings.
Capital expenditures totaled $11.5 million during 1999 and included
approximately $3.5 million for an additional 50,000 square feet of manufacturing
space on 10 acres of land near the Company's Danboro, PA. headquarters. 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.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. The Company expensed
approximately $1.0 million during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
6
<PAGE>
Selected Quarterly Financial Data
(Unaudited, dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Total Year
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 46,000 $ 47,037 $ 48,378 $56,659 $198,074
Gross profit 14,488 14,969 15,556 17,540 62,553
Net income 4,056 4,265 4,469 4,300 17,090
Net income per share-basic .47 .49 .52 .50 1.98
Net income per share-diluted .47 .49 .51 .50 1.97
Dividends declared per share .12 .12 .12 .12 .48
---------------------------------------------------------------------
Market prices per share:
Common Stock (PNN)
High 23 1/4 23 25 1/8 25 7/8 25 7/8
Low 17 3/4 17 5/8 21 5/16 22 7/8 17 5/8
Class A Common Stock (PNNA)
High 20 1/2 20 3/8 22 22 7/8 22 7/8
Low 18 17 1/2 20 3/4 21 1/8 17 1/2
- ------------------------------------------------------------------------------------------------------------------------------------
1998 Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Total Year
---------------------------------------------------------------------
Net sales $ 46,725 $ 44,995 $ 43,357 $44,610 $179,687
Gross profit 14,594 13,938 13,291 13,396 55,219
Net income 4,266 3,882 3,881 4,551 16,580
Net income per share-basic .49 .45 .45 .53 1.92
Net income per share-diluted .49 .45 .45 .53 1.91
Dividends declared per share .11 .11 .11 .12 .45
---------------------------------------------------------------------
Market prices per share:
Common Stock (PNN)
High 26 1/2 28 3/8 24 7/8 23 28 3/8
Low 22 1/16 22 3/4 18 5/8 17 1/4 17 1/4
Class A Common Stock (PNNA)
High 25 3/16 26 22 11/16 21 3/8 26
Low 22 5/8 19 9/16 18 16 1/4 16 1/4
</TABLE>
The common stock and Class A common stock of Penn Engineering & Manufacturing
Corp. are traded on the New York Stock Exchange.
Symbols: PNN & PNNA.
Lines of Business
The manufacture and sale of fasteners and 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>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
Fasteners 82% 82% 81%
Motors 18 18 19
Operating Profit
Fasteners 88 88 87
Motors 12 12 13
</TABLE>
7
<PAGE>
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,231 $ 13,103
Short-term investments 9,538 10,584
Accounts receivable (less allowance for doubtful accounts-1999, $800; 1998, $550) 37,622 28,963
Inventories 43,292 31,840
Other current assets 2,051 2,474
-------------------------------------
Total current assets 96,734 86,964
-------------------------------------
Property-At cost:
Land and improvements 6,198 4,729
Buildings and improvements 35,637 31,067
Machinery and equipment 98,757 90,977
-------------------------------------
Total 140,592 126,773
Less accumulated depreciation 60,742 52,769
-------------------------------------
Total property-net 79,850 74,004
-------------------------------------
Goodwill-net 21,460 --
-------------------------------------
Other Assets 3,500 3,200
-------------------------------------
Total $ 201,544 $ 164,168
=====================================
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 9,622 $ 5,460
Lines of credit 5,850 --
Accrued expenses:
Pension and profit sharing 984 1,155
Payroll and commissions 3,613 3,237
Other 2,175 3,455
-------------------------------------
Total current liabilities 22,244 13,307
-------------------------------------
Accrued Pension Cost 6,518 4,088
-------------------------------------
Deferred Income Taxes 4,902 4,721
-------------------------------------
Long-Term Debt 15,000 --
-------------------------------------
Stockholders' Equity:
Common stock-authorized 20,000,000 shares of $.01 par value each;
Issued 7,246,143 shares in 1999 and 7,218,191 shares in 1998 72 72
Class A common stock-authorized 3,000,000 shares of $.01 par value each;
Issued 1,772,025 shares in 1999 and 1998 18 18
Additional paid-in capital 37,056 36,530
Retained earnings 122,335 109,384
Accumulated other comprehensive loss (1,165) (966)
-------------------------------------
Total 158,316 145,038
-------------------------------------
Less cost of treasury stock-456,831 shares in 1999 and 356,831 shares in 1998 5,436 2,986
Total stockholders' equity 152,880 142,052
-------------------------------------
Total $ 201,544 $ 164,168
=====================================
</TABLE>
See the accompanying notes to consolidated financial statements.
8
<PAGE>
Statements of Consolidated Income
(Dollars in thousands except share and per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 198,074 $ 179,687 $ 167,702
Cost of Products Sold 135,521 124,468 115,374
------------------------------------------------------------
Gross Profit 62,553 55,219 52,328
Selling Expenses 20,467 18,414 18,016
General and Administrative Expenses 17,326 14,386 12,624
------------------------------------------------------------
Operating Profit 24,760 22,419 21,688
------------------------------------------------------------
Other Income (Expense):
Interest income 1,335 1,446 1,072
Interest expense (201) -- --
Other, net (194) 335 166
------------------------------------------------------------
Total Other Income 940 1,781 1,238
------------------------------------------------------------
Income Before Income Taxes 25,700 24,200 22,926
Provision for Income Taxes 8,610 7,620 8,425
------------------------------------------------------------
Net Income $ 17,090 $ 16,580 $ 14,501
============================================================
Net Income Per Share-Basic $ 1.98 $ 1.92 $ 1.67
Weighted Average Shares Outstanding 8,638,120 8,632,739 8,663,530
------------------------------------------------------------
Net Income Per Share-Diluted $ 1.97 $ 1.91 $ 1.67
Weighted Average Shares Outstanding 8,638,120 8,632,739 8,663,530
Net Effect of Dilutive Securities 15,243 26,359 19,729
------------------------------------------------------------
Total Shares Outstanding Used in
Computing Diluted Earnings Per Share 8,653,363 8,659,098 8,683,259
============================================================
</TABLE>
See the accompanying notes to consolidated financial statements.
9
<PAGE>
Statements of Changes in Consolidated Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Class A Additional Other Total
Common Common Paid-in Treasury Retained Comprehensive Stockholders'
Stock Stock Capital Stock Earnings Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 72 $ 18 $ 35,421 $ (952) $ 85,822 $ 756 $ 121,137
-----------------------------------------------------------------------------
Net income for 1997 14,501 14,501
Increase in unrealized investment loss reserve (2) (2)
Foreign currency translation adjustment (2,173) (2,173)
------------
Comprehensive income-total 12,326
------------
Cash dividends declared-$.42 per share (3,635) (3,635)
Stock issued under employee stock
purchase plan 457 457
Purchase of treasury stock (1,366) (1,366)
-----------------------------------------------------------------------------
Balance at December 31, 1997 $ 72 $ 18 $ 35,878 $(2,318) $ 96,688 $ (1,419) $ 128,919
Net income for 1998 16,580 16,580
Decrease in unrealized investment loss reserve 16 16
Foreign currency translation adjustment 437 437
------------
Comprehensive income-total 17,033
------------
Cash dividends declared-$.45 per share (3,884) (3,884)
Stock issued under employee stock
purchase plan and stock option plan 652 652
Purchase of treasury stock (668) (668)
-----------------------------------------------------------------------------
Balance at December 31, 1998 $ 72 $ 18 $ 36,530 $(2,986) $ 109,384 $ (966) $ 142,052
Net income for 1999 17,090 17,090
Increase in unrealized investment loss reserve (31) (31)
Foreign currency translation adjustment (168) (168)
------------
Comprehensive income-total 16,891
------------
Cash dividends declared-$.48 per share (4,139) (4,139)
Stock issued under employee stock
purchase plan and stock option plan 526 526
Purchase of treasury stock (2,450) (2,450)
-----------------------------------------------------------------------------
Balance at December 31, 1999 $ 72 $ 18 $ 37,056 $(5,436) $ 122,335 $ (1,165) $ 152,880
-----------------------------------------------------------------------------
</TABLE>
See the accompanying notes to consolidated financial statements.
10
<PAGE>
Statements of Consolidated Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 17,090 $ 16,580 $14,501
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 8,622 8,064 6,570
Amortization 279 -- --
(Gain) loss on disposal of property (67) (51) 329
Loss (gain) on disposal of investments 59 4 (6)
Changes in assets and liabilities, net of effects from acquisitions
(Increase) decrease in accounts receivables (3,341) (1,309) 597
Increase in inventories (1,305) (4,900) (7)
Decrease (increase) in other current assets 814 (331) 374
Increase in other assets (300) (28) (407)
Increase (decrease) in accounts payable 1,059 (380) 2,095
(Decrease) increase in accrued expenses (1,307) 159 2,006
Increase (decrease) in accrued pension costs 2,430 (242) (463)
Increase in deferred income taxes-noncurrent 181 490 1,331
---------------------------------------------------------
Net cash provided by operating activities 24,214 18,056 26,920
---------------------------------------------------------
Cash Flows from Investing Activities:
Property additions (11,453) (8,315) (19,234)
Acquisitions of businesses (net of cash) (37,786) -- --
Additions to held-to-maturity investments (15,046) (25,999) (28,355)
Proceeds from disposal of available-for-sale investments -- 101 448
Proceeds from maturity of held-to-maturity investments 15,983 25,608 27,925
Proceeds from disposal of property 417 226 199
---------------------------------------------------------
Net cash used in investing activities (47,885) (8,379) (19,017)
---------------------------------------------------------
Cash Flows from Financing Activities:
Net short-term borrowings 5,850 -- --
Borrowings of long-term debt 15,000 -- --
Issuance of common stock 526 652 457
Dividends paid (4,139) (3,884) (3,635)
Acquisition of treasury stock (2,450) (668) (1,366)
---------------------------------------------------------
Net cash provided by (used in) finanancing activities 14,787 (3,900) (4,544)
---------------------------------------------------------
Effect of exchange rate changes on cash 12 500 (741)
---------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (8,872) 6,277 2,618
Cash and cash equivalents at beginning of year 13,103 6,826 4,208
---------------------------------------------------------
Cash and cash equivalents at end of year $ 4,231 $ 13,103 $ 6,826
=========================================================
Supplemental Cash Flow Data:
Cash paid during the year for:
Income taxes $ 8,536 $ 6,952 $ 5,574
Interest $ 201 -- --
</TABLE>
See the accompanying notes to consolidated financial statements.
11
<PAGE>
Notes to Consolidated Financial Statements
for the years ended December 31, 1999, 1998 and 1997
Note 1: Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
Penn Engineering & Manufacturing Corp. and its wholly owned subsidiaries, PEM
International Ltd., PEM International Singapore Pte. Ltd., and R.C. Dudek &
Company, Inc. (now Arconix/USA). All significant intercompany transactions and
balances are eliminated in consolidation.
Short-Term Investments
Management determines the appropriate classifications of securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Bonds and commercial paper investments are classified as Held-to-Maturity as the
Company has the positive intent and ability to hold the securities to maturity.
Bonds are stated at amortized cost. Securities not classified as
Held-to-Maturity have been classified as Available-for-Sale. Available-for-Sale
securities are stated at fair value, with unrealized gains and losses reported
as a separate component of stockholders' equity. The fair value of all
securities is determined based upon the current value quoted on public
exchanges. Investments are classified as short-term if the maturities at
December 31 are less than one year.
Inventories
The Company's domestic fastener inventories, are priced on the last-in,
first-out (LIFO) method, at the lower of cost or market. Other inventories,
representing approximately 45% and 59% of total inventories at December 31, 1999
and 1998, respectively, are priced on the first-in, first-out (FIFO) method, at
the lower of cost or market.
Property
Depreciation is calculated under the straight-line method over the estimated
useful lives of the respective assets, generally 3-5 years for tooling and
computer equipment, 10 years for furniture, fixtures, and machinery, and 25-40
years for buildings. Maintenance and repairs are charged to income and major
renewals and betterments are capitalized. At the time properties are retired or
sold, the cost and related accumulated depreciation are eliminated and any gain
or loss is included in income.
Goodwill
The excess of purchase price over fair value of net assets of acquired
businesses is recorded as an asset and amortized using the straight-line method
over a period of 20 years. Accumulated amortization was $279,000 at December 31,
1999. The carrying value of goodwill will be reviewed if facts and circumstances
suggest that it may be impaired. If this review indicates that the goodwill will
not be recoverable, as determined based on anticipated cash flows over the
remaining amortization period, the carrying value of the goodwill will be
reduced based on the discounted present value of the anticipated cash flows.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
deposit, cash in excess of daily requirements which is invested in overnight
repurchase agreements, and other interest bearing accounts withdrawable on a
daily basis.
Research and Development Costs
The Company expenses all research and development costs as incurred.
Foreign Currency Translation
The effect of translating the financial statements of PEM International Ltd. &
PEM International Singapore Pte. Ltd. is recorded as a separate component of
other comprehensive income (loss) 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 average rate for the year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that may 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.
12
<PAGE>
Notes to Consolidated Financial Statements Continued
Fair Values of Financial Instruments
The carrying value of cash equivalents, accounts receivable
and accounts payable approximate fair value because of their short-term nature.
The carrying amount of long-term debt approximates its fair value because the
interest rate is reflective of rates that the Company would be able to obtain on
debt with similar terms and conditions.
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.
Revenue Recognition
The Company's revenues are recorded at the time the products are shipped.
Concentrations of Credit Risk
The Company has operations and affiliates in the United States, the United
Kingdom, and Singapore. The Company performs ongoing credit evaluations of its
customers' financial condition, and except where risk warrants, requires no
collateral. The Company may require, however, prepayment terms for certain
customers. Short-term investments are placed with high credit quality financial
institutions. The Company limits the amount of credit exposure in any one
institution or single investment.
Accounting for Stock Options
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for stock options. Under APB 25, if the exercise price of stock options granted
equals or exceeds the market price of the underlying common stock on the date of
grant, no compensation expense is recognized. Note 7 to these consolidated
financial statements includes the disclosure and pro forma information required
by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123").
Net Income Per Share
Basic and diluted earnings per share are calculated in accordance with FASB
Statement No. 128, "Earnings Per Share." Basic earnings per share is calculated
by dividing net income by the weighted average shares outstanding for the year,
and diluted earnings per share is calculated by dividing net income by the
weighted average shares outstanding for the year plus the dilutive effect of
stock options.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires entities to record all derivative instruments on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and the type of
13
<PAGE>
Notes to Consolidated Financial Statements Continued
hedge transaction. The ineffective portion of all hedges will be
recognized in earnings. In June 1999, the FASB voted to defer the implementation
date of SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Management is currently evaluating the impact of
SFAS No. 133 on the earnings and financial position of the Company.
Reclassifications
Certain reclassifications have been made to prior year amounts and balances to
conform with the 1999 presentation.
Note 2: Short-term Investments
Held-to-Maturity--The following is a summary of short-term Held-to-Maturity
securities:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury securities and securities
of U.S. Government agencies $ 626 $ 2,979
Certificates of deposit 532 --
Collateral mortgage obligations 756 --
Corporate bonds 5,624 2,832
Commercial paper -- 3,980
Asset-backed securities 1,257 --
--------------------
Total $ 8,795 $ 9,791
====================
Available-for-Sale--Unrealized losses were $79,000, net of taxes of $51,000 at
December 31, 1999, and were $48,000, net of taxes of $32,000, at December 31,
1998. The following is a summary of the estimated fair value of short-term
Available-for-Sale securities:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
(Dollars in thousands)
Mutual Common Stock Funds $ 568 $ 602
State and Municipal Bond Funds 175 191
--------------------
Total $ 743 $ 793
====================
Note 3: Inventories
Inventories consist of the following:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
(Dollars in thousands)
Raw material $ 5,472 $ 4,572
Tooling 3,529 3,435
Work-in-process 12,463 10,533
Finished goods 21,828 13,300
--------------------
Total $43,292 $31,840
====================
If the FIFO method of inventory valuation had been used for all inventories by
the Company, inventories at December 31, 1999, 1998, and 1997 would have been
$9,562,000, $9,046,000, and $8,704,000 higher. Finished goods inventory at
December 31, 1999 includes $10,486,000 held by our recently acquired subsidiary,
R.C. Dudek & Company, Inc. (Note 4).
Included in Other Assets is long-term tooling inventory totaling $3,500,000 and
$3,200,000 at December 31, 1999 and 1998, respectively.
14
<PAGE>
Notes to Consolidated Financial Statements Continued
Note 4: Acquisitions
On September 30, 1999, the Company acquired all of the outstanding capital stock
of R.C. Dudek & Company, Inc. (now Arconix/ USA). The acquisition was accounted
for using the purchase method. The purchase price of approximately $38,800,000
consisted of cash, the assumption of certain liabilities, and acquisition
related expenses. Of the total amount paid, $3,400,000 has been placed in escrow
pending the final determination of the purchase price. The purchase was partly
financed with the lines of credit discussed in Note 5. The purchase price has
been preliminarily allocated to; accounts receivable-$5,094,000,
inventory-$9,607,000, other current assets-$362,000, property-$2,450,000 and
goodwill and other intangible assets-$21,287,000. The proforma unaudited results
of operations, assuming consummation of the purchase and issuance of the debt as
of January 1, 1998, are as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998
- --------------------------------------------------------------------------------
(Dollars in thousands except per share amount)
Net sales $207,615 $188,325
Net income 17,338 16,934
Per share data:
Basic $ 2.01 $ 1.96
Diluted 2.00 1.96
In addition to the above acquisition, the Company acquired MicroAssembly
Systems, Inc. on May 28, 1999 and Carson Technologies, Inc. on July 23, 1999.
The purchase price of these companies consisted of cash, the assumption of
certain liabilities, and acquisition related expenses. Of the total purchase
price, $916,000 was allocated to current assets, $957,000 was allocated to
property, and $453,000 was allocated to goodwill.
Note 5: Lines of Credit
At December 31, 1999, the Company has two short-term unsecured line of credit
facilities available with two banks. The lines of credit bear interest at
interest rate options provided in the facilities. The first line of credit
facility permits maximum borrowings of $15,000,000, due on demand. At December
31, 1999, $4,000,000, bearing interest at 5.16%, was outstanding on this
facility. The availability of funds under this facility is periodically reviewed
by the bank. The second line of credit facility permits borrowings of up to
$10,000,000 and expires on September 27, 2000 unless extended by the bank. At
December 31, 1999, $1,850,000 bearing interest at 6.32%, was outstanding on this
facility.
In addition to the above short-term lines of credit, the Company has an
unsecured line of credit with a bank that permits borrowings of up to
$30,000,000 to finance acquisitions. At December 31, 1999, $15,000,000, bearing
interest at 6.97%, was outstanding on this line of credit. The Company has a
choice of a three year revolving term for the acquisition line of credit or, on
September 27, 2000, the acquisition line of credit can be terminated and
transferred to a term loan to be repaid over periods ranging from three to seven
years. As such, the line of credit has been classified as long-term debt at
December 31, 1999.
The above lines of credit require the Company to comply with certain financial
covenants. At December 31, 1999, the Company was in compliance with all
financial covenants.
15
<PAGE>
Notes to Consolidated Financial Statements Continued
Note 6: Pension and Profit Sharing Plans
The Company has a defined benefit pension plan covering all eligible 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. At December 31, 1998, the Company made a $2,000,000
contribution to the pension plan for the 1999 Plan year. Plan provisions and
funding meet the requirements of the Employee Retirement Income Security Act of
1974. The following table sets forth the financial status of the plan:
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
(Dollars in thousands)
Change in benefit obligation:
Benefit obligation at
beginning of year $35,591 $30,690
Service cost 2,599 2,537
Interest cost 2,173 2,137
Actuarial (gain) loss (9,963) 1,944
Benefits paid (972) (1,717)
--------------------
Benefit obligation at
end of year $29,428 $35,591
====================
Change in plan assets:
Fair value of plan assets
at beginning of year $28,559 $25,399
Actual return on assets 1,489 2,063
Employer contributions -- 2,814
Benefits paid (972) (1,717)
--------------------
Fair value of plan assets at
end of year $29,076 $28,559
====================
Funded status $ (352) $(7,032)
Unrecognized actuarial (gain) loss (5,858) 3,338
Unamortized prior service cost (181) (204)
Unrecognized transition asset (127) (190)
--------------------
Accrued pension cost $(6,518) $(4,088)
====================
Net pension costs included the following components:
- --------------------------------------------------------------------------------
December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost $2,599 $2,537 $ 2,076
Interest cost 2,173 2,137 1,857
Expected return on
plan assets (2,256) (2,042) (1,699)
Net amortization
and deferral (86) (86) (86)
------------------------------
Net periodic pension cost $2,430 $2,546 $ 2,148
==============================
The weighted-average assumptions used as of December 31 to determine the plans'
financial status and pension cost were:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Discount rate 6.75% 7.00%
Expected return on plan assets 8.00 8.00
Rate of compensation increase 5.25 6.00
16
<PAGE>
The Company has a profit sharing plan 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 $4,486,000 in 1999, $4,156,000 in 1998, and
$4,026,000 in 1997. The Company also provides retirement benefits to all
eligible participants at its foreign operations.
Note 7: Stock Options and Stock Purchase Plan
The Company currently has three fixed option plans: the 1996 Equity Incentive
Plan, the 1998 Stock Option Plan For Non-Employee Directors, and the 1999
Employee Stock Option Plan. The 1996 Equity Incentive Plan and the 1999 Employee
Stock Option Plan provide for the granting of options to eligible employees of
the Company. The 1998 Stock Option Plan For Non-Employee Directors provides for
the granting of options to eligible directors. All Plans provide for the
granting of options that do not qualify as incentive stock options under the
Code (Non-Qualified Stock Options). The Company is authorized under the Plans to
grant options (for shares of the Company's non-voting Common Stock) not to
exceed in the aggregate: 500,000 shares for the 1996 Equity Incentive Plan,
100,000 shares for the 1998 Stock Option Plan For Non-Employee Directors, and
1,000,000 shares for the 1999 Employee Stock Option Plan. The Plans provide for
the granting of options equal to the closing market price of the Company's
non-voting Common Stock on the date of the grant with a maximum term of ten
years. All options granted under these Plans shall vest in four equal
installments commencing on the first, second, third, and fourth anniversaries of
the grant date of the option.
A summary of the Company's option activity, and related information for the
years ended December 31, 1997, December 31, 1998 and December 31, 1999 is as
follows:
- --------------------------------------------------------------------------------
Weighted-Average
Options Exercise price
- --------------------------------------------------------------------------------
Outstanding-December 31, 1996 126,220 $18.38
Granted 141,410 $25.63
Canceled 1,140 $18.38
--------------------------
Outstanding-December 31, 1997 266,490 $22.22
Granted 157,680 $22.00
Exercised 10,835 $18.38
Canceled 5,980 $22.16
--------------------------
Outstanding-December 31, 1998 407,355 $22.28
Granted 219,054 $25.38
Exercised 2,715 $19.77
Canceled 15,801 $22.24
--------------------------
Outstanding-December 31, 1999 607,893 $23.43
Exercisable at December 31, 1999 209,130 $21.62
Weighted-average fair value of
options granted during 1999 $ 8.60
Weighted-average remaining
life of options outstanding at
December 31, 1999 7.98 years
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 the Company. The Purchase Plan
commenced on October 1,1996 and has a term of ten years with twenty 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
lower of the market price on the last trading day before the first day of the
subsequent 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 a balance of
$ 48,140 in employee withholdings at the beginning of the year and had employee
withholdings of $113,322 for the current subscription period at December
31,1999. The Plan has issued to employees 66,529 shares as of December 31,1999.
The Company utilized the same valuation assumptions in this plan as it had in
the stock option plan.
17
<PAGE>
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. SFAS No. 123 requires pro forma
information regarding net income and earnings per share as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option-pricing model. The 1999, 1998, and 1997 grants
had the following common assumptions: expected life of 6 years and volatility of
30%. The 1999, 1998, and 1997 grants assumed a risk free interest rate of 6.28%,
5.78%, and 5.75% respectively and a dividend yield of 2.00%, 2.25% and 2.25%,
respectively. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. Had
compensation costs 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, the impact on the Company's financial results would have been
as follows: as of December 31, 1999 an $1,179,000 reduction of net income, or
$0.14 per share, as of December 31, 1998, an $823,000 reduction of net income,
or $0.09 per share, and as of December 31,1997, a $392,000 reduction of net
income, or $0.04 per share.
Note 8: 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 and
foreign currency option 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 $(664,000), $180,000, and
$373,000 were recorded in other income (expense) in 1999, 1998, and 1997,
respectively.
Forward contracts outstanding at December 31, 1999 mature during 2000 and 2001,
and require the Company to exchange foreign currency for U.S. dollars at
maturity. At December 31, 1999, the Company had foreign exchange forward
contracts with a face value of $7,500,000. Had the Company liquidated these
contracts at December 31, 1999, it would have received $7,600,000, resulting in
a net gain of $100,000. At December 31, 1998, the Company had foreign exchange
forward contracts with a face value of $17,900,000. Had the Company liquidated
these contracts at December 31, 1998, it would have received $18,080,000,
resulting in a net gain of $180,000.
Foreign exchange option contracts outstanding at December 31, 1999 can be
exercised by the Company during 2000 and 2001 to exchange foreign currency for
U.S. dollars at maturity. The Company had foreign exchange option contracts of
$13,800,000 and $3,400,000 outstanding at December 31, 1999 and 1998,
respectively, with a fair market value which approximated cost. The fair market
value of the foreign exchange forward and option contracts is the amount the
Company would receive or pay to terminate the contracts using quoted market
rates.
Note 9: Income Taxes
The income tax provision consists of the following:
- --------------------------------------------------------------------------------
December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(Dollars in thousands)
Current:
Federal $7,703 $6,688 $6,058
State 726 685 565
-------------------------------
Total current tax provision 8,429 7,373 6,623
-------------------------------
Deferred:
Federal 162 232 1,617
State 19 15 185
-------------------------------
Total deferred tax provision 181 247 1,802
-------------------------------
Total income tax provision $8,610 $7,620 $8,425
===============================
The significant components of the Company's net deferred tax assets and
liabilities are as follows :
- --------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Accrued pension $2,544 $2,376
Allowance for doubtful accounts 247 215
Other 497 285
------------------
Total deferred tax asset 3,288 2,876
------------------
Deferred tax liabilities:
18
<PAGE>
Property 7,552 6,895
Inventories 458 520
Other 180 182
------------------
Total deferred tax liability 8,190 7,597
------------------
Net deferred tax liability $4,902 $4,721
==================
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:
- --------------------------------------------------------------------------------
December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Federal income tax provision
at statutory rate $8,995 $8,470 $8,024
State income taxes, after
deducting federal
income tax benefit 484 455 488
Foreign sales corporation
tax benefits (650) (1,132) --
Other (219) (173) (87)
-------------------------------
Provision for income taxes $8,610 $7,620 $8,425
===============================
Note 10: Accumulated Other Comprehensive Income (loss)
The components of other comprehensive income (loss) are as follows:
- --------------------------------------------------------------------------------
Unrealized
Losses on
Currency Available-
Translation for-Sale
Adjustments Securities Total
- --------------------------------------------------------------------------------
(Dollars in thousands)
Balance at December 31, 1997 $(1,355) $(64) $(1,419)
Currency translation
adjustments 437 437
Unrealized gains on
available-for-sale securities 26 26
Deferred taxes relating to
unrealized gains on
available-for-sale securities (10) (10)
---------------------------------
Balance at December 31, 1998 (918) (48) (966)
Currency translation
adjustments (168) (168)
Unrealized losses on
available-for-sale securities (50) (50)
Deferred taxes relating to
unrealized losses on
available-for-sale securities 19 19
---------------------------------
Balance at December 31, 1999 $(1,086) $(79) $(1,165)
=================================
Note 11: Commitments & Contingencies
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, 1999, having initial or
remaining terms of more than one year are $1,079,000 for 2000, $913,000 for
2001, $516,000 for 2002, and $154,000 for 2003.
Rental and operating lease expenses charged against earnings were $866,000,
$697,000, and $671,000 in 1999, 1998, and 1997 respectively.
19
<PAGE>
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.
Note 12: Financial Reporting For Segments of the Company
The Company operates in two business segments, fasteners and 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 $25,354,000, $22,885,000, and $19,827,000 for the years ended
December 31,1999, 1998, and 1997 respectively (approximately 13%, 13%, and 12%
of consolidated net sales in 1999, 1998, and 1997, respectively).
Information about the operations of the Company in different business segments
are as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1999
- --------------------------------------------------------------------------------
(Dollars in thousands)
Fasteners Motors Consolidated
--------------------------------------
Net sales $162,946 $35,128 $198,074
---------------------------------
Operating profit 21,771 2,989 24,760
Other income & expense 940
--------
Income before income taxes $ 25,700
---------------------------------
Identifiable assets $174,828 $16,033 $190,861
Corporate assets 10,683
--------
Total assets at December 31, 1999 $201,544
========
Depreciation and amortization $ 8,257 $ 644 $ 8,901
Capital expenditures 11,060 393 11,453
- --------------------------------------------------------------------------------
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
Fasteners Motors Consolidated
---------------------------------------
Net sales $146,931 $32,756 $179,687
---------------------------------
Operating profit 19,696 2,723 22,419
Other income 1,781
--------
Income before income taxes $ 24,200
--------
Identifiable assets $138,069 $14,370 $152,439
Corporate assets 11,729
--------
Total assets at December 31, 1998 $164,168
========
Depreciation $ 7,434 $ 631 $ 8,064
Capital expenditures 7,605 710 8,315
- --------------------------------------------------------------------------------
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
Fasteners Motors Consolidated
--------------------------------------
Net sales $135,841 $31,861 $167,702
---------------------------------
Operating profit 18,884 2,804 21,688
Other income 1,238
--------
Income before income taxes $ 22,926
========
Identifiable assets $123,426 $15,576 $139,002
Corporate assets 11,990
--------
Total assets at December 31, 1997 $150,992
========
Depreciation $ 5,973 $ 597 $ 6,570
Capital expenditures 18,820 414 19,234
20
<PAGE>
The Company has operations in the United States, the United Kingdom, and
Singapore. Information about the operations of the Company in different
geographic segments are as follows:
<TABLE>
<CAPTION>
United States Operations PEM
--------------------------------------------- PEM International
North Asia-Pacific International Singapore Total
America Europe & Other Total Ltd. Pte. Ltd. Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales 1999 $143,882 $ 2,627 $1,939 $148,448 $36,451 $13,175 $198,074
1998 131,311 2,206 1,861 135,378 34,180 10,129 179,687
1997 127,490 2,362 1,413 131,265 29,309 7,128 167,702
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets 1999 $175,211 $17,544 $ 8,789 $201,544
1998 132,854 18,161 13,153 164,168
1997 126,153 16,068 8,771 150,992
</TABLE>
21
<PAGE>
Report of Independent Auditors
To the Stockholders and Board of Directors
Penn Engineering & Manufacturing Corp.
We have audited the accompanying consolidated balance sheets of Penn Engineering
& Manufacturing Corp. as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 26, 2000
22
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 International (Singapore) Pte 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.
Arconix Group, Inc., incorporated under the laws of Delaware, is 100% owned
by the Registrant.
INDIRECT SUBSIDIARIES OF THE REGISTRANT
Arconix/Singapore Pte Ltd., incorporated under the laws of Delaware, is
100% owned by Arconix Group, Inc.
Arconix/U.K. Ltd., incorporated under the laws of Delaware, is 100% owned
by Arconix Group, Inc.
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Penn Engineering & Manufacturing Corp. of our report dated January 26, 2000,
included in the 1999 Annual Report to Stockholders of Penn Engineering &
Manufacturing Corp.
We also consent to the incorporation by reference of our report dated
January 26, 2000 with respect to the consolidated financial statements of Penn
Engineering & Manufacturing Corp. incorporated by reference in this Annual
Report (Form 10-K) for the year ended December 31, 1999, in the following
registration statements:
Penn Engineering & Manufacturing Corp. 1996 Equity Incentive Plan Form S-8
Registration Statement (Registration No. 333-20101);
Penn Engineering & Manufacturing Corp. 1996 Employee Stock Purchase Plan
Form S-8 Registration Statement (Registration No. 333-13073);
Penn Engineering & Manufacturing Corp. 1998 Stock Option Plan for
Non-Employee Directors Form S-8 Registration Statement (Registration No.
333-92907); and
Penn Engineering & Manufacturing Corp. 1999 Employee Stock Option Plan
Form S-8 Registration Statement (Registration No. 333-92903).
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,231
<SECURITIES> 9,538
<RECEIVABLES> 38,422
<ALLOWANCES> 800
<INVENTORY> 43,292
<CURRENT-ASSETS> 96,734
<PP&E> 140,592
<DEPRECIATION> 79,850
<TOTAL-ASSETS> 201,544
<CURRENT-LIABILITIES> 22,244
<BONDS> 15,000
0
0
<COMMON> 90
<OTHER-SE> 152,790
<TOTAL-LIABILITY-AND-EQUITY> 201,544
<SALES> 198,074
<TOTAL-REVENUES> 199,409
<CGS> 135,521
<TOTAL-COSTS> 173,314
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 161
<INTEREST-EXPENSE> 201
<INCOME-PRETAX> 25,700
<INCOME-TAX> 8,610
<INCOME-CONTINUING> 17,090
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,090
<EPS-BASIC> 1.98
<EPS-DILUTED> 1.97
</TABLE>
