-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Iq3hS4Gcw5btDpyLTAcWjQs119vCXhQSQnyvj3bDJv0E7hsh89whMm74hRoTy7JL Q8SwAXMW+0JXqhEWGAMZPA== 0000950154-01-500135.txt : 20010328 0000950154-01-500135.hdr.sgml : 20010328 ACCESSION NUMBER: 0000950154-01-500135 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENN ENGINEERING & MANUFACTURING CORP CENTRAL INDEX KEY: 0000077106 STANDARD INDUSTRIAL CLASSIFICATION: BOLTS, NUTS, SCREWS, RIVETS & WASHERS [3452] IRS NUMBER: 230951065 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05356 FILM NUMBER: 1580477 BUSINESS ADDRESS: STREET 1: PO BOX 1000 CITY: DANBORO STATE: PA ZIP: 18916 BUSINESS PHONE: 2157668853 MAIL ADDRESS: STREET 1: P O BOX 1000 CITY: DANBORO STATE: PA ZIP: 18916 10-K405 1 penn-10k_51369.txt PENN 10-K 405 FILING 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, 2000 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. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 23-0951065 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 1000, Danboro, Pennsylvania 18916 - ---------------------------------------- ----------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (215) 766-8853 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------------------------------------------------- Class A Common Stock, $.01 par value New York Stock Exchange Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 9, 2001, 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 $227,194,868. 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 6,934,306 shares of Common Stock outstanding on March 9, 2001. DOCUMENTS INCORPORATED BY REFERENCE: 1. Portions of Registrant's 2000 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 2001 Annual Meeting of Stockholders filed with the Commission on March 26, 2001 are incorporated by reference in Items 10, 11, 12, and 13. PENN ENGINEERING & MANUFACTURING CORP. ----------- INDEX TO FORM 10-K REPORT ----------- PAGE ---- I. PART I. Item 1. Business............................................... 1 Item 2. Properties............................................. 4 Item 3. Legal Proceedings...................................... 5 Item 4. Submission of Matters to a Vote of Security Holders...................................... 5 Executive Officers of the Registrant................... 5 II. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 6 Item 6. Selected Financial Data................................ 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 7 Item 7A. Quantitative and Qualitative Disclosure About Market Risk..................................... 7 Item 8. Financial Statements and Supplementary Data.................................................. 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 8 III. PART III. Item 10. Directors and Executive Officers of the Registrant........................................ 8 Item 11. Executive Compensation................................. 8 Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 8 Item 13. Certain Relationships and Related Transactions.......................................... 8 IV. PART IV. Item 14. Exhibits, Financial Statements and Schedules and Reports on Form 8-K................. 9 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) trademark, and electronically commutated brushless dc servomotors under the Elcom(R) trademark. Effective for the fiscal year ending December 31, 2001, Registrant intends to report its Arconix Group, Inc. distribution business as a separate business segment. On April 10, 2000, the Registrant acquired all of the issued and outstanding capital stock of Atlas Engineering, Inc., a manufacturer of blind threaded rivets and associated installation tools. The purchase price of approximately $4.0 million consisted of cash, the assumption of certain liabilities, and acquisition-related expenses. On February 5, 2001, the Registrant acquired all of the issued and outstanding capital stock of Precision Steel Holdings Limited and its subsidiary, Precision Steel Components Limited ("Precision Steel"). Precision Steel, which is located in Galway, Ireland, is a manufacturer of screw machine products, serving customers throughout Europe. The purchase price consisted of cash of approximately $17.1 million and the assumption of approximately $600,000 of liabilities. The cash portion of the purchase price was financed with borrowings under the Registrant's existing line of credit facilities. (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 Business Segments of the Registrant" on pages 27 and 28 of the Registrant's 2001 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 which are used by the computer, data communications, telecommunications, general electronics, automotive, and avionics industries. PEM(R) self-clinching fasteners, which accounted for approximately 84% of the Registrant's sales in 2000, 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 1 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 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 manufactures 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(R) trademark. The rapid and accurate installation provided by 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 2000. 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, 1998, 1999 and 2000: Percentage of Total Sales Year Ended ------------------------------ December 31, Fasteners Motors ------------ -------------- ------- 1998 82% 18% 1999 82 18 2000 84 16 The Registrant's fastener products are sold through a worldwide network of approximately 40 authorized distributors located in 36 countries, including the Registrant's own subsidiaries in Oxnard, California, Singapore, and England. Many of the independent distributors and engineering representative organizations have been affiliated with the Registrant for more than 2 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, 2000, 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 2000. 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 2000. Among the Registrant's principal customers for its fasteners and PEMSERTER(R) presses are manufacturers of business machines, personal computers, 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 $22,885,000 for the year ended December 31, 1998, $25,354,000 for the year ended December 31, 1999, and $32,557,000 for the year ended December 31, 2000, or approximately 13%, 13%, and 12%, respectively, of the Registrant's consolidated net sales during such years. As of December 31, 2000, the Registrant had an order backlog of $98,998,000 compared with $68,467,000 as of December 31, 1999. The Registrant estimates that substantially all of its backlog as of December 31, 2000 will be shipped during its fiscal year ending December 31, 2001. 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. 3 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, 1998, 1999, and 2000 were approximately $3,410,000, $4,727,000, and $5,635,000, 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, 2000, 1,657 persons were employed by the Registrant, 168 more than were employed as of December 31, 1999. 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 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 Business Segments of the Company" on pages 27 and 28 of the Registrant's 2000 Annual Report to Stockholders, which is included as Exhibit (13) to this Form 10-K. All foreign sales, except for those of PEM International, Ltd., Arconix/UK Ltd., Arconix/Singapore Pte Ltd., and PEM International (Singapore) Pte Ltd., are sold F.O.B., the Registrant's United States factory, payable in U.S. dollars. Sales in the United Kingdom and Western Europe are made through the Registrant's wholly owned subsidiaries, Arconix/UK Ltd. and 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 subsidiaries, Arconix/Singapore Pte Ltd. and 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, 2000, the Registrant's principal plants and offices, all of which (other than the Singapore office) were owned by the Registrant, were as follows:
Location Size of Facility Use of Facility -------- ---------------- --------------- Danboro, Pennsylvania 230,000 sq. ft building Executive offices and on 107 acres manufacture of fasteners Winston-Salem, 120,000 sq. ft. building Manufacture of components North Carolina on 16.3 acres; and for fasteners 58,280 sq. ft. building on 6 acres 4 Kent, Ohio 75,000 sq. ft. building Manufacture of fasteners on 10 acres Harleysville, Pennsylvania 58,000 sq. ft. building Manufacture of dc motors on 6 acres Galway, Ireland 55,000 sq. ft. building Manufacture of fasteners on 2 acres Suffolk, Virginia 50,000 sq. ft. building Manufacture of components on 17 acres for fasteners Bedminster, Pennsylvania 51,000 sq. ft. building Manufacture of installation on 10 acres presses and tooling Oxnard, California 30,600 sq. ft. building Office and warehouse for on 2 acres the distribution of fasteners and related components Doncaster, England 12,300 sq. ft. building Office and warehouse for on 5 acres the distribution of fasteners and related components
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 page 27 of the Registrant's 2000 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 61 Chairman of the Board and Chief Executive Officer 5 Martin Bidart 64 President and Chief Operating Officer Mark W. Simon 62 Senior Vice President, Chief Financial Officer, and Corporate Secretary Raymond L. Bievenour 57 Vice President - Corporate Business Development Royce C. Sturdevant 40 Vice President - Corporate Quality Francis P. Wilson 61 President - PEM Fastening Systems Kent R. Fretz 63 President - Pittman Richard F. Davies 51 Treasurer and Assistant Secretary William E. Sarnese 47 Corporate Controller and Assistant Secretary 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. Sturdevant and Wilson. Mr. Sturdevant was hired on August 2, 1999 and has an extensive background in quality control with several major multinational companies. 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. 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. 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 9, 2001, there were 494 holders of record of the Registrant's Common Stock and 373 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 17 of the Registrant's 2000 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 13 of the Registrant's 2000 Annual Report to Stockholders, which is included as Exhibit (13) to this Form 10-K Report. 6 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 14 through 16 of the Registrant's 2000 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. 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, Registrant's financial officers approve the 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. These officers receive reports on open foreign currency hedges on a regular basis. Expected future cash flow positions and strategies are continuously monitored. Foreign exchange practices, including the use of derivative financial instruments, are reviewed with the Audit Committee of the Registrant's Board of Directors at least annually. 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 2001 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 from the sensitivity effect mentioned 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 become effectively variable. The fair values of the Registrant's bank 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. 7 Item 8. Financial Statements and Supplementary Data. The answer to this Item is incorporated by reference to pages 17 through 29 of the Registrant's 2000 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. PART III Item 10. Directors and Executive Officers of the Registrant. The response to this Item with respect to the Registrant's directors is incorporated by reference to pages 6 through 7 of the proxy statement relating to the Registrant's 2000 annual meeting of stockholders to be held April 26, 2001. Information with respect to executive officers of the Registrant is included in Part I of this Form 10-K report. Item 11. Executive Compensation. The response to this Item is incorporated by reference to pages 8 through 13 of the proxy statement relating to the Registrant's 2000 annual meeting of stockholders to be held April 26, 2001, other than the "Report of the Compensation Committee of the Board of Directors" and the "Performance Graph," which are not incorporated by reference into this Form 10-K Annual Report. Item 12. Security Ownership of Certain Beneficial Owners and Management. The response to this Item is incorporated by reference to pages 2 through 5 of the proxy statement relating to the Registrant's 2000 annual meeting of stockholders to be held April 26, 2001. Item 13. Certain Relationships and Related Transactions. Not applicable. 8 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, 2000 and 1999. 18* Statements of Consolidated Income for the years ended 19* December 31, 2000, 1999, and 1998. Statements of Changes in Consolidated Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998. 20* Statements of Consolidated Cash Flows for the years 21* ended December 31, 2000, 1999, and 1998. Notes to Consolidated Financial Statements. 22-28* Independent Auditors' Report. 29* - ------------------- * Refers to the respective page of the Registrant's 2000 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 12 of this Form 10-K. (b) Reports on Form 8-K. None. 9 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 26, 2001 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.
SIGNATURE TITLE DATE ---------- ----- ---- /s/ Kenneth A. Swanstrom Chairman of the Board, March 26, 2001 - ------------------------- Chief Executive Officer, Kenneth A. Swanstrom and Director (Principal Executive Officer) /s/ Martin Bidart President, Chief Operating March 26, 2001 - ------------------------- Officer, and Director (Principal Martin Bidart Operating Officer) /s/ Mark W. Simon Senior Vice President, Chief March 26, 2001 - ------------------------- Financial Officer, Corporate Mark W. Simon Secretary, and Director (Principal Financial and Accounting Officer) /s/ Willard S. Boothby, Jr. Director March 26, 2001 - ------------------------- Willard S. Boothby, Jr. /s/ Lewis W. Hull Director March 26, 2001 - ------------------------- Lewis W. Hull /s/ Thomas M. Hyndman, Jr. Director March 26, 2001 - ------------------------- Thomas M. Hyndman, Jr. /s/ Maurice D. Oaks Director March 26, 2001 - ------------------------- Maurice D. Oaks 10 /s/ Charles R. Smith Director March 26, 2001 - ------------------------- Charles R. Smith /s/ Daryl L. Swanstrom Director March 26, 2001 - ------------------------- Daryl L. Swanstrom
11 PENN ENGINEERING & MANUFACTURING CORP. EXHIBIT INDEX Item Description ---- ----------------------------- (3)(i) Restated Certificate of Incorporation of the Registrant. (Incorpor- ated 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-Q Quarterly Report for the quarter ended June 30, 2000.) (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, 12 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.) (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) 2000 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. EX-13 2 penn-ex13_51369.txt ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 ---------- ANNUAL REPORT TO STOCKHOLDERS
SELECTED FINANCIAL DATA (Dollars in thousands except share and per share amounts) - ------------------------------------------------------------------------------------------------------------------------------------ YEARS ENDED DECEMBER 31, 2000(1) 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $264,563 $198,074 $179,687 $167,702 $160,323 Cost of products sold 171,100 135,521 124,468 115,374 111,027 Provision for income taxes 13,175 8,610 7,620 8,425 8,264 Net income 27,464 17,090 16,580 14,501 13,858 Capital expenditures 13,174 11,453 8,315 19,234 25,266 Depreciation and amortization 10,518 8,901 8,064 6,570 5,343 Total assets 209,996 201,544 164,168 150,992 138,538 Long term debt -- 15,000 -- -- -- Stockholders' equity 176,288 152,880 142,052 128,919 121,137 Working capital $ 78,536 $ 74,490 $ 73,657 $ 60,411 $ 64,233 Number of employees (at year end) 1,657 1,489 1,423 1,368 1,330 Number of stockholders of record (at year end) PNN 487 525 572 618 648 PNNA 373 407 446 480 520 Average number of common shares outstanding used to compute per share information (in thousands) Basic 8,576 8,638 8,633 8,664 7,748 Diluted 8,712 8,653 8,659 8,683 7,748 Per share information: Net income-basic $ 3.20 $ 1.98 $ 1.92 $ 1.67 $ 1.79 Net income-diluted 3.15 1.97 1.91 1.67 1.79 Stockholders' equity 20.56 17.70 16.45 14.88 15.63 Dividends .52 .48 .45 .42 .37
(1) Reflects the full year results of R.C. Dudek & Company, Inc. (now Arconix/USA) which was acquired by the Company on September 30, 1999. -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS DECEMBER 31, 2000 OVERVIEW The Company's operations consist of two business segments: the manufacture and sale of PEM(R) brand fasteners, including PEMSERTER(R) fastener insertion machines, and Pittman(R) motors. Fasteners, which accounted for 83.7% of the Company's consolidated net sales in 2000 compared to 82.3% in 1999 and 81.8% in 1998, are marketed through three Company owned distributors and a worldwide network of independent distributors. In 2000, sales to the computer market accounted for 22% of total fastener sales, sales to the telecommunications and datacommunications market accounted for 29% of total fastener sales, sales to the automotive market accounted for 9% of total fastener sales, and the remaining balance was distributed among other markets. Motors accounted for approximately 16.3% of the Company's consolidated net sales in 2000 compared to 17.7% in 1999 and 18.2% in 1998, 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 Company owned and independent distributors, increased 23.4% from 2.44 billion in 1999, to 3.01 billion in 2000 after having increased 11.4% in 1999 from 2.19 billion in 1998. The increase in 2000 was a result of continued strong demand throughout the Americas and Europe especially in the area of wireless communication devices. The increase in 1999 was a result of a strong global economy as well as increased business opportunities in the North American region. In 2000, 1999, and 1998, sales to domestic customers accounted for 75.2%, 69.4%, and 70.0%, respectively, of the Company's consolidated net sales. During the same periods, foreign sales accounted for 24.8%, 30.6%, and 30.0% respectively, of the Company's consolidated net sales. The Company's domestic sales increased in 2000 due mainly to the acquisition of R.C. Dudek & Company, Inc. in the 4th quarter of 1999 which allowed us to expand our markets on the West Coast with the addition of new product lines. 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.
- ------------------------------------------------------------------------------------------------------------------------------------ YEARS ENDED DECEMBER 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) NET SALES Fasteners $221,323 83.7% $162,946 82.3% $146,931 81.8% Motors 43,240 16.3 35,128 17.7 32,756 18.2 - ------------------------------------------------------------------------------------------------------------------------------------ Total $264,563 100.0% $198,074 100.0% $179,687 100.0% - ------------------------------------------------------------------------------------------------------------------------------------ Domestic $198,966 75.2% $137,510 69.4% $125,777 70.0% Foreign 65,597 24.8 60,564 30.6 53,910 30.0 - ------------------------------------------------------------------------------------------------------------------------------------ Total $264,563 100.0% $198,074 100.0% $179,687 100.0% ==================================================================================================================================== GROSS PROFIT BY SEGMENT Fasteners $ 80,153 36.2% $ 53,070 32.6% $ 46,860 31.9% Motors 13,310 30.8 9,483 27.0 8,359 25.5 TOTAL COMPANY Gross Profit $ 93,463 35.3% $ 62,553 31.6% $ 55,219 30.7% Selling, general & administrative expenses 51,900 19.6 37,793 19.1 32,800 18.2 Operating profit 41,563 15.7 24,760 12.5 22,419 12.5 Net income 27,464 10.4 17,090 8.6 16,580 9.2
-14- YEAR ENDED DECEMBER 31, 2000 VS. YEAR ENDED DECEMBER 31, 1999 Consolidated net sales for 2000 were $264.6 million, versus $198.1 million in 1999, a 33.6% increase. Approximately $20.3 million, or 30.5% of this increase, was the result of the acquisition of R.C. Dudek & Company, Inc (now Arconix/USA) on September 30, 1999. The remainder of the increase was due to the growth in the telecommunications markets in all regions of the world. Sales to customers outside the United States for 2000 increased 8.3% to $65.6 million, from $60.6 million in 1999. Net sales for the fastener operation for 2000 were $221.3 million, versus $162.9 million in 1999, a 35.9% increase. Motor sales in 2000 increased 23.1% to $43.2 million from $35.1 million in 1999. Fastener units sold to the Company's global OEM direct customers and its independent distribution network increased 24.4% from 1999 to 2000. Fasteners sold within North America, approximately 73.4% of total fasteners sold in 2000, increased 33.8% from 1999 to 2000 mainly due to very strong demand for all types of wireless communication devices. Fasteners sold into Europe, approximately 20.9% of total fasteners sold in 2000, increased 8.1% from 1999 to 2000. The European economy remains strong despite currency pressures. Fasteners sold into the Asia-Pacific market, approximately 5.7% of total fasteners sold in 2000, decreased 8.1% from 1999 to 2000. Shipments into this region fluctuate as global fabricators shift their production to take advantage of lower costs and currency fluctuations. The average selling price of motors increased approximately 7.4% to $43.61 per motor in 2000 from $40.60 per motor in 1999. The number of motors sold increased approximately 14.6% to 991,566 in 2000 from 865,245 in 1999. Increased demand from the data storage and semiconductor equipment manufacturers contributed to this increase. Consolidated gross profit was $93.5 million in 2000, versus $62.6 million in 1999, a 49.4% increase. The consolidated gross profit percentage increased 3.7% in 2000 to 35.3% primarily as a result of the acquisition of R.C. Dudek & Company, Inc. Fastener gross profit increased 51.0% to $80.2 million in 2000 from $53.1 million in 1999 and motor gross profit increased 40.0% to $13.3 million in 2000 from $9.5 million in 1999. Both segments benefited from increased sales, cost containment, and productivity improvements. Consolidated selling, general, and administrative expenses ("SG&A") for 2000 were $51.9 million, versus $37.8 million for 1999, a 37.3% increase. The additional SG&A of R.C. Dudek & Company, Inc. and Atlas Engineering, Inc. contributed to 24.8% of this increase. Also contributing, were increased commission expense due to greater sales volume in North America, as well as increased information services expenses and legal and professional fees. Consolidated net income for 2000 was $27.5 million, versus $17.1 million for 1999. In 2000, the Company incurred $1.9 million of interest and goodwill expenses versus $480,000 in 1999 as a result of its recent acquisition. 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 appointment of a new distributor in 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. -15- SG&A expenses 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. 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. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operations totaled $30.0 million for the year ended December 31, 2000. Funds from operations were sufficient to pay dividends, repay long-term debt, and for capital expenditures other than acquisitions which were partially funded through short-term borrowings. Capital expenditures totaled $13.2 million during 2000 and included approximately $2.3 million for a 75,000 square foot building for Atlas Engineering, Inc. in Kent, Ohio to replace the current leased facility. 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. -16-
SELECTED QUARTERLY FINANCIAL DATA (Unaudited, dollars in thousands except per share amounts) - ------------------------------------------------------------------------------------------------------------------------------------ 2000 QUARTERS ENDED - ------------------------------------------------------------------------------------------------------------------------------------ Mar. 31 June 30 Sept. 30 Dec. 31 Total Year - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 65,137 $ 64,651 $ 66,551 $ 68,224 $ 264,563 Gross profit 21,077 22,513 24,119 25,754 93,463 Net income 5,645 6,231 7,478 8,110 27,464 Net income per share-basic .66 .73 .87 .94 3.20 Net income per share-diluted .66 .72 .85 .92 3.15 Dividends declared per share .12 .12 .14 .14 .52 - ------------------------------------------------------------------------------------------------------------------------------------ Market prices per share: Common Stock (PNN) High 24.88 37.88 36.13 39.13 39.13 Low 21.75 23.44 31.06 29.25 21.75 Class A Common Stock (PNNA) High 21.62 33.94 31.88 34.31 34.31 Low 20.12 21.50 28.12 28.38 20.12 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 QUARTERS ENDED - ------------------------------------------------------------------------------------------------------------------------------------ Mar. 31 June 30 Sept. 30 Dec. 31 Total Year - ------------------------------------------------------------------------------------------------------------------------------------ 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 23.25 23.00 25.12 25.88 25.88 Low 17.75 17.63 21.31 22.88 17.63 Class A Common Stock (PNNA) High 20.50 20.38 22.00 22.88 22.88 Low 18.00 17.50 20.75 21.12 17.50
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:
- ------------------------------------------------------------------------------------------------------------------------------------ YEARS ENDED DECEMBER 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net Sales Fasteners 84% 82% 82% Motors 16 18 18 Operating Profit Fasteners 87 88 88 Motors 13 12 12
-17-
CONSOLIDATED BALANCE SHEETS (Dollars in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ CURRENT ASSETS: Cash and cash equivalents $ 3,550 $ 4,231 Short-term investments 3,064 9,538 Accounts receivable (less allowance for doubtful accounts-2000, $1,050; 1999, $800) 43,039 37,622 Inventories 46,847 43,292 Other current assets 5,139 2,051 - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 101,639 96,734 - ------------------------------------------------------------------------------------------------------------------------------------ PROPERTY-At cost: Land and improvements 6,241 6,198 Buildings and improvements 38,682 35,637 Machinery and equipment 108,888 98,757 - ------------------------------------------------------------------------------------------------------------------------------------ Total 153,811 140,592 Less accumulated depreciation 69,524 60,742 - ------------------------------------------------------------------------------------------------------------------------------------ Total property-net 84,287 79,850 - ------------------------------------------------------------------------------------------------------------------------------------ GOODWILL, NET 20,570 21,460 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER ASSETS 3,500 3,500 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 209,996 $ 201,544 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ CURRENT LIABILITIES: - ------------------------------------------------------------------------------------------------------------------------------------ Accounts payable $ 10,612 $ 9,622 Lines of credit 2,783 5,850 Accrued expenses: Pension and profit sharing 3,106 984 Payroll and commissions 4,712 3,613 Other 1,890 2,175 - ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 23,103 22,244 - ------------------------------------------------------------------------------------------------------------------------------------ ACCRUED PENSION COST 5,965 6,518 - ------------------------------------------------------------------------------------------------------------------------------------ DEFERRED INCOME TAXES 4,640 4,902 - ------------------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT -- 15,000 - ------------------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY: Common stock-authorized 20,000,000 shares of $.01 par value each; Issued 7,277,439 shares in 2000 and 7,246,143 shares in 1999 73 72 Class A common stock-authorized 3,000,000 shares of $.01 par value each; Issued 1,772,025 shares in 2000 and 1999 18 18 Additional paid-in capital 37,736 37,056 Retained earnings 145,339 122,335 Accumulated other comprehensive loss (1,442) (1,165) - ------------------------------------------------------------------------------------------------------------------------------------ Total 181,724 158,316 - ------------------------------------------------------------------------------------------------------------------------------------ Less cost of treasury stock-456,831 shares in 2000 and 1999 5,436 5,436 - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 176,288 152,880 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 209,996 $ 201,544 ====================================================================================================================================
See the accompanying notes to consolidated financial statements. -18-
STATEMENTS OF CONSOLIDATED INCOME (Dollars in thousands except share and per share amounts) - ------------------------------------------------------------------------------------------------------------------------------------ YEARS ENDED DECEMBER 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ NET SALES $ 264,563 $ 198,074 $ 179,687 COST OF PRODUCTS SOLD 171,100 135,521 124,468 - ------------------------------------------------------------------------------------------------------------------------------------ GROSS PROFIT 93,463 62,553 55,219 SELLING EXPENSES 28,329 20,467 18,414 GENERAL AND ADMINISTRATIVE EXPENSES 23,571 17,326 14,386 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING PROFIT 41,563 24,760 22,419 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER (EXPENSE) INCOME: Interest income 535 1,335 1,446 Interest expense (745) (201) -- Other, net (714) (194) 335 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OTHER (EXPENSE) INCOME (924) 940 1,781 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 40,639 25,700 24,200 PROVISION FOR INCOME TAXES 13,175 8,610 7,620 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 27,464 $ 17,090 $ 16,580 ==================================================================================================================================== NET INCOME PER SHARE BASIC $ 3.20 $ 1.98 $ 1.92 WEIGHTED AVERAGE SHARES OUTSTANDING 8,575,841 8,638,120 8,632,739 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME PER SHARE DILUTED $ 3.15 $ 1.97 $ 1.91 WEIGHTED AVERAGE SHARES OUTSTANDING 8,575,841 8,638,120 8,632,739 NET EFFECT OF DILUTIVE SECURITIES 136,113 15,243 26,359 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHARES OUTSTANDING USED IN COMPUTING DILUTED EARNINGS PER SHARE 8,711,954 8,653,363 8,659,098 ====================================================================================================================================
See the accompanying notes to consolidated financial statements. -19-
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY (Dollars in thousands) Accumulated Class A Additional Other Total Common Common Paid-in Treasury Retained Comprehensive Stockholders' Stock Stock Capital Stock Earnings Income (Loss) Equity - ------------------------------------------------------------------------------------------------------------------------------------ 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) $152,880 Net income for 2000 27,464 27,464 Increase in unrealized investment loss reserve (14) (14) Foreign currency translation adjustment (263) (263) - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income-total 27,187 - ------------------------------------------------------------------------------------------------------------------------------------ Cash dividends declared-$.52 per share (4,460) (4,460) Stock issued under employee stock purchase plan and stock option plan 1 680 681 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 2000 $ 73 $ 18 $ 37,736 $ (5,436) $145,339 $ (1,442) $176,288 ====================================================================================================================================
See the accompanying notes to consolidated financial statements. -20-
STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Years ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 27,464 $ 17,090 $ 16,580 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 9,407 8,622 8,064 Amortization 1,111 279 -- Increase in deferred income taxes 148 181 247 Loss (gain) on disposal of property 79 (67) (51) Loss on disposal of investments -- 59 4 Changes in assets and liabilities, net of effects of acquisition: (Increase) in accounts receivable (4,856) (3,341) (1,309) (Increase) in inventories (3,424) (1,305) (4,900) (Increase) decrease in other current assets (3,096) 814 (331) Increase in other assets -- (300) (28) Increase (decrease) in accounts payable 719 1,059 (380) Increase (decrease) in accrued expenses 3,040 (1,307) 402 (Decrease) increase in accrued pension costs (553) 2,430 (242) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 30,039 24,214 18,056 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Property additions (13,174) (11,453) (8,315) Acquisitions of businesses (net of cash acquired) (1,791) (37,786) -- Additions to held-to-maturity investments -- (15,046) (25,999) Proceeds from disposal of available-for-sale investments -- -- 101 Proceeds from disposal of held-to-maturity investments 6,474 15,983 25,608 Proceeds from disposal of property 206 417 226 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (8,285) (47,885) (8,379) - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net short-term debt (repayments) borrowings (3,067) 5,850 -- Long-term debt (repayments) borrowings (15,653) 15,000 -- Issuance of common stock 681 526 652 Dividends paid (4,460) (4,139) (3,884) Acquisition of treasury stock -- (2,450) (668) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (22,499) 14,787 (3,900) - ------------------------------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash 64 12 500 - ------------------------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents (681) (8,872) 6,277 Cash and cash equivalents at beginning of year 4,231 13,103 6,826 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 3,550 $ 4,231 $ 13,103 ==================================================================================================================================== SUPPLEMENTAL CASH FLOW DATA: Cash paid during the year for: Income taxes $ 14,086 $ 8,536 $ 6,952 Interest $ 745 $ 201 --
See the accompanying notes to consolidated financial statements -21- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2000, 1999, and 1998 NOTE 1: SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of PennEngineering and its wholly owned subsidiaries, PEM International Ltd., PEM International Singapore Pte. Ltd., PEM Industries, Inc., Arconix Group, Inc., and Atlas Engineering, Inc. 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 59% and 45% of total inventories at December 31, 2000 and 1999, 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 20 years. Accumulated amortization was $1,374,000 and $279,000 at December 31, 2000 and 1999, respectively. 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 Arconix/Singapore and 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 weighted 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. FAIR VALUES OF FINANCIAL INSTRUMENTS At December 31, 2000, the Company has the following financial instruments: cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses and lines of credit. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value because of their short-term nature. Short-term investments include both held-to-maturity securities and available-for-sale securities whose carrying value approximates fair value based on quoted market prices. The carrying amounts of the lines of credit approximate fair value because the interest rates are 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 Common Stock and $.01 par value Class A 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 Common Stock and Class A Common Stock, including rights with respect to dividends, stock splits, the consideration payable in a merger or consolidation, and distributions upon liquidation, are the same. REVENUE RECOGNITION The Company's revenues are recorded at the time the products are shipped. -22- 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 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 On January 1, 2001, the Company will adopt Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and hedging activities. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in 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 if it is, depending on the type of hedge transaction. For fair value hedges in which the Company is hedging firmly committed sales denominated in a foreign currency, changes in the fair value of the derivative instrument will be recognized currently in income along with changes in the fair value of the firmly committed sale. For foreign currency cash-flow hedge transactions in which the Company is hedging the variability of cash flows related to forecasted foreign currency denominated sales, changes in the fair value of the derivative instruments will be reported in other comprehensive income. The gains and losses on these derivatives that are reported in other comprehensive income will be reclassified as earnings or losses in the periods in which the forecasted sales occur. The ineffective portion, if any, of all hedges will be recognized in the current period. Given the nature of the Company's current hedging strategy, management does not expect SFAS No. 133 to have a material impact on the consolidated financial statements. RECLASSIFICATIONS Certain reclassifications have been made to prior year amounts and balances to conform with the 2000 presentation. NOTE 2: SHORT-TERM INVESTMENTS Held-to-Maturity--The following is a summary of short-term held-to-maturity securities: - -------------------------------------------------------------------------------- DECEMBER 31, 2000 1999 - -------------------------------------------------------------------------------- (Dollars in thousands) U.S. Treasury securities and securities of U.S. Government agencies $ 52 $ 626 Certificates of deposit 10 532 Collateralized mortgage obligations 331 756 Corporate bonds 1,734 5,624 Asset-backed securities 217 1,257 - -------------------------------------------------------------------------------- Total $2,344 $8,795 ================================================================================ Available-for-Sale--Unrealized losses were $93,000, net of taxes of $60,000 at December 31, 2000, and were $79,000, net of taxes of $51,000 at December 31, 1999. The following is a summary of the estimated fair value of short-term available-for-sale securities: - -------------------------------------------------------------------------------- December 31, 2000 1999 - -------------------------------------------------------------------------------- (Dollars in thousands) Common Stock Mutual Funds $535 $568 State and Municipal Bond Funds 185 175 - -------------------------------------------------------------------------------- Total $720 $743 ================================================================================ NOTE 3: INVENTORIES Inventories consist of the following: - -------------------------------------------------------------------------------- DECEMBER 31, 2000 1999 - -------------------------------------------------------------------------------- (Dollars in thousands) Raw material $ 6,157 $ 5,472 Tooling 4,145 3,529 Work-in-process 12,828 12,463 Finished goods 23,717 21,828 - -------------------------------------------------------------------------------- Total $46,847 $43,292 ================================================================================ If the FIFO method of inventory valuation had been used for all inventories by the Company, inventories at December 31, 2000, and 1999 would have been $10,322,000 and $9,562,000 higher, respectively. Other Assets consist of long-term tooling inventory totaling $3,500,000 at December 31, 2000 and 1999, respectively. -23- NOTE 4: ACQUISITIONS On April 10, 2000, the Company acquired all of the issued and outstanding capital stock of Atlas Engineering, Inc. The acquisition was accounted for using the purchase method. The purchase price of approximately $4.0 million consisted of cash, the assumption of certain liabilities, and acquisition related expenses. The results of the operations of Atlas Engineering, Inc. have been included in the accompanying consolidated statement of income since the acquisition date. The purchase price was allocated to; accounts receivable- $671,000, inventory-$322,000, other current assets-$29,000, property-$985,000 and goodwill-$1,965,000. 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 $37,600,000 consisted of cash, the assumption of certain liabilities, and acquisition related expenses. The purchase price reflects the refunding of approximately $1,200,000 in 2000 from the sellers upon determination of the final purchase price. The purchase was partly financed with the lines of credit discussed in Note 5. The purchase price has been allocated to; accounts receivable- $5,094,000, inventory-$9,607,000, other current assets-$362,000, property- $2,450,000, deferred tax asset-$532,000, and goodwill-$19,527,000. The proforma unaudited results of the Company's operations, assuming consummation of the purchase and issuance of the debt as of January 1, 1998, are as follows: - -------------------------------------------------------------------------------- December 31, 1999 1998 - -------------------------------------------------------------------------------- (Dollars in thousands except per share amounts) Net sales $ 207,615 $ 188,325 Net income 17,338 16,934 Per share data: Basic earnings $ 2.01 $ 1.96 Diluted earnings $ 2.00 $ 1.96 In addition to the above acquisitions, 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 $452,000 was allocated to goodwill. NOTE 5: LINES OF CREDIT At December 31, 2000, 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, 2000, $2,783,000, bearing interest at 7.06%, was outstanding on this facility. The second line of credit facility permits borrowings of up to $10,000,000. At December 31, 2000, there was no outstanding amount 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, 2000, there was no outstanding amount on this line of credit. The availability of funds under these facilities is annually reviewed by the banks. The above lines of credit require the Company to comply with certain financial covenants. At December 31, 2000, the Company was in compliance with all financial covenants. 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 amount required for federal income tax qualification purposes. 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, 2000 1999 - ------------------------------------------------------------------------------- (Dollars in thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 29,428 $ 35,591 Service cost 2,249 2,599 Interest cost 2,257 2,173 Actuarial loss (gain) 1,638 (9,963) Benefits paid (1,468) (972) Plan amendments 75 -- - ------------------------------------------------------------------------------- Benefit obligation at end of year $ 34,179 $ 29,428 ================================================================================ Change in plan assets: Fair value of plan assets at beginning of year $ 29,076 $ 28,559 Actual return on assets (410) 1,489 Employer contributions 2,307 0 Benefits paid (1,468) (972) - ------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 29,505 $ 29,076 ================================================================================ Funded status $ (4,674) $ (352) Unrecognized actuarial gain (1,139) (5,858) Unamortized prior service cost (89) (181) Unrecognized transition asset (63) (127) - ------------------------------------------------------------------------------- Accrued pension cost $ (5,965) $ (6,518) ================================================================================ -24- Net pension costs included the following components: - ------------------------------------------------------------------------------- December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- (Dollars in thousands) Service cost $ 2,249 $ 2,599 $ 2,537 Interest cost 2,257 2,173 2,137 Expected return on plan assets (2,442) (2,256) (2,042) Net amortization and deferral (311) (86) (86) - ------------------------------------------------------------------------------- Net periodic pension cost $ 1,753 $ 2,430 $ 2,546 ================================================================================ The weighted-average assumptions used as of December 31 to determine the plans' financial status and pension cost were: - ------------------------------------------------------------------------------- December 31, 2000 1999 - ------------------------------------------------------------------------------- Discount rate 7.75% 6.75% Expected return on plan assets 8.00 8.00 Rate of compensation increase 5.25 5.25 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 $5,088,000 in 2000, $4,486,000 in 1999, and $4,156,000 in 1998. The Company also provides retirement benefits to all eligible participants at its foreign operations. NOTE 7: STOCK OPTION AND STOCK PURCHASE PLANS 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 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, 1998, December 31, 1999 and December 31, 2000 is as follows: - -------------------------------------------------------------------------------- Weighted- Average Exercise Options Price - -------------------------------------------------------------------------------- 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 Granted 223,150 $36.13 Exercised 12,426 $20.89 Canceled 20,324 $23.32 - -------------------------------------------------------------------------------- Outstanding-December 31, 2000 798,293 $27.00 Exercisable at December 31, 2000 370,221 $23.79 Weighted-average fair value of options granted during 2000 $ 11.75 Weighted-average remaining life of options outstanding at December 31, 2000 8.35 years 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 2000, 1999, and 1998 grants had the following common assumptions, expected life of 6 years and a volatility of 30%. The 2000, 1999, and 1998 grants assumed risk free interest rates of 5.35%, 6.28%, and 5.78%, respectively, and dividend yields of 2.00%, 2.00%, 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, 2000 a $1,465,000 reduction of net income, or $0.17 per diluted share, as of December 31, 1999 a $1,179,000 reduction of net income, or $0.14 per diluted share, and as of December 31, 1998, a $823,000 reduction of net income, or $0.09 per diluted share. -25- 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 $113,322 in employee withholdings at the beginning of the year and had employee withholdings of $123,852 for the current subscription period at December 31, 2000. The Plan has issued to employees 85,465 shares as of December 31, 2000. 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 (losses) gains of $(610,000), $(664,000), and $180,000 were recorded in other income (expense) in 2000, 1999, and 1998, respectively. Forward contracts outstanding at December 31, 2000 mature during 2001 and 2002, and require the Company to exchange foreign currency for U.S. dollars at maturity. At December 31, 2000, the Company had foreign exchange forward contracts with a face value of $3,113,000. Had the Company liquidated these contracts at December 31, 2000, it would have received $3,076,000, resulting in a net loss of $37,000. 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. Foreign exchange option contracts outstanding at December 31, 2000 can be exercised by the Company during 2001 and 2002 to exchange foreign currency for U.S. dollars at maturity. The Company had foreign exchange option contracts of $9,983,000 and $13,800,000 outstanding at December 31, 2000 and 1999, respectively, with fair market values which approximated amortized 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, 2000 1999 1998 - -------------------------------------------------------------------------------- (Dollars in thousands) Current: Federal $12,228 $ 7,703 $ 6,688 State 799 726 685 - -------------------------------------------------------------------------------- Total current tax provision 13,027 8,429 7,373 - -------------------------------------------------------------------------------- Deferred: Federal 133 162 232 State 15 19 15 - -------------------------------------------------------------------------------- Total deferred tax 148 181 247 Total income tax provision $13,175 $ 8,610 $ 7,620 ================================================================================ The significant components of the Company's net deferred tax assets and liabilities are as follows : - -------------------------------------------------------------------------------- December 31, 2000 1999 - -------------------------------------------------------------------------------- Deferred tax assets: Accrued pension $2,328 $2,544 Allowance for doubtful accounts 405 247 Other 788 497 - -------------------------------------------------------------------------------- Total deferred tax asset 3,521 3,288 ================================================================================ Deferred tax liabilities: Property 7,938 7,552 Inventories 46 458 Other 177 180 - -------------------------------------------------------------------------------- Total deferred tax liability 8,161 8,190 - -------------------------------------------------------------------------------- Net deferred tax liability 4,640 $4,902 ================================================================================ -26- 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, 2000 1999 1998 - ------------------------------------------------------------------------------- Federal income tax provision at statutory rate $ 14,224 $ 8,995 $ 8,470 State income taxes, after deducting federal income tax benefit 529 484 455 Foreign sales corporation tax benefits (1,679) (650) (1,132) Other 101 (219) (173) - -------------------------------------------------------------------------------- Provision for income taxes $ 13,175 $ 8,610 $ 7,620 ================================================================================ 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, 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) ================================================================================ Currency translation adjustments (263) (263) Unrealized losses on available-for-sale securities (23) (23) Deferred taxes relating to unrealized losses on available-for-sale securities 9 9 - -------------------------------------------------------------------------------- Balance at December 31, 2000 $(1,349) $ (93) $(1,442) ================================================================================ 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, 2000, having initial or remaining terms of more than one year are $1,437,000 for 2001, $807,000 for 2002, $270,000 for 2003, $14,000 for 2004, and $8,700 for 2005. Rental and operating lease expenses charged against earnings were $1,694,000, $866,000, and $697,000 in 2000, 1999, and 1998, respectively. 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 BUSINESS 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, $32,557,000, $25,354,000, and $22,885,000 for the years ended December 31, 2000, 1999, and 1998, respectively, (approximately 12%, 13%, and 13% of consolidated net sales in 2000, 1999, and 1998, respectively). Information about the operations of the Company's business segments are as follows: - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2000 - -------------------------------------------------------------------------------- (Dollars in thousands) Fasteners Motors Consolidated - -------------------------------------------------------------------------------- Net sales $ 221,323 $ 43,240 $ 264,563 - -------------------------------------------------------------------------------- Operating profit 36,159 5,404 41,563 Other income and expense (924) - -------------------------------------------------------------------------------- Income before income taxes $ 40,639 ================================================================================ Identifiable assets $ 187,457 $ 18,330 $ 205,787 Corporate assets 4,209 - -------------------------------------------------------------------------------- Total assets at December 31, 2000 $ 209,996 ================================================================================ Depreciation and amortization $ 9,869 $ 649 $ 10,518 Capital expenditures 12,579 595 13,174 -27- 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 and 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 (Dollars in thousands) 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 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:
United States Operations - ------------------------------------------------------------------------------ North Asia-Pacific United Total America Europe & Other Total Kingdom Singapore Consolidated - ----------------------------------------------------------------------------------------------------------------- Sales 2000 $ 207,492 $3,090 $ 2,390 $ 212,972 $ 39,446 $ 12,145 $ 264,563 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 Identifiable assets 2000 $ 176,273 $ 22,567 $ 11,156 $ 209,996 1999 175,211 17,544 8,789 201,544 1998 132,854 18,161 13,153 164,168
NOTE 13: SUBSEQUENT EVENT (UNAUDITED) On February 5, 2001, the Company acquired all of the issued and outstanding capital stock of Precision Steel Holdings Limited and its subsidiary, Precision Steel Components Limited (Precision Steel). Precision Steel, which is located in Galway, Ireland, is a manufacturer of screw machine products,serving customers throughout Europe. The purchase price consisted of cash of approximately $17,100,000 and the assumption of approximately $600,000 of liabilities. The cash portion of the purchase price was financed with borrowings on the Company's existing line of credit facilities. -28- 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, 2000 and 1999, 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, 2000. 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 Penn Engineering & Manufacturing Corp. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Philadelphia, Pennsylvania January 26, 2001 -29- CORPORATE INFORMATION ANNUAL MEETING The 2001 Annual Meeting will be held at 2:00 P.M., Thursday, April 26, 2001 at: Penn Engineering & Manufacturing Corp., 5190 Old Easton Road Building 3 Danboro, PA 18916 REGISTRAR, TRANSFER, AND DIVIDEND DISBURSING AGENT First Union National Bank Shareholder Services Group 1525 West W.T. Harris Boulevard Charlotte, NC 28288 AUDITORS Ernst & Young, LLP Philadelphia, PA GENERAL COUNSEL Duane Morris Philadelphia, PA STOCK EXCHANGE LISTING New York Stock Exchange Trading Symbols: PNN: Common Stock (non-voting) PNNA: Class A Common Stock (voting) INVESTOR RELATIONS Investor Relations Phone: 215.766.3660 Email: investor-info@penn-eng.com A copy of the Annual Report as filed with the Securities and Exchange Commission on Form 10-K can be accessed on the company's website, or can be mailed upon written request to: Richard F. Davies, Treasurer PennEngineering 5190 Old Easton Road Danboro, PA 18916 FOR ADDITIONAL INFORMATION, PLEASE VISIT OUR WEBSITE AT: WWW.PENN-ENG.COM Forward Looking Statements: Statements contained in this report, other than statements of historical data, are considered forward looking statements under the Private Securities Litigation Reform Act of 1995. These forward looking statements include matters such as business strategies, expectations for new business potential and new market penetration, and expectations for profitability of our various businesses. These statements are subject to various risks and uncertainties that could cause actual results to differ from those contemplated in these statements including, but not limited to, the ability of the Company to develop new products, fluctuations in the foreign currency markets, and the ability of the Company to meet demand. For additional information, please refer to the Company's Securities and Exchange Commission filings including its most recent 10-K. (C)2001 PennEngineering EX-21 3 penn-ex21_51369.txt SUBSIDIARIES OF THE REGISTRANT 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 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. Atlas Engineering, Inc., incorporated under the laws of Ohio, is 100% owned by the Registrant. Precision Steel Holdings, Ltd., incorporated under the laws of Ireland, 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. Arconix/USA Inc., incorporated under the laws of California, is 100% owned by Arconix Group, Inc. Precision Steel Components Ltd., incorporated under the laws of Ireland, is 100% owned by Precision Steel Holdings Ltd. EX-23 4 penn-ex23_51369.txt CONSENT OF INDEPENDENT AUDITORS 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, 2001, included in the 2000 Annual Report to Stockholders of Penn Engineering & Manufacturing Corp. We also consent to the incorporation by reference of our report dated January 26, 2001 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, 2000, 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 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----