UNITED STATES
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: Commission File Number:
December 28, 2002 01-07284
B A L D O R E L E C T R I C C O M P A N Y
(Exact name of registrant as specified in its charter)
Missouri 43-0168840
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5711 R. S. Boreham, Jr. St., Fort Smith, Arkansas 72901 (479) 646-4711
------------------------------------------------- ----- --------------
(Address of principal executive offices) (Zip Code) (Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
------------------------
Title of Each Class which registered
------------------- ----------------
Common Stock, $0.10 Par Value New York Stock Exchange
Common Stock Purchase Rights 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 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]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates of the registrant based on the closing price on
June 29, 2002, was $723,009,748.
At March 19, 2003, there were 32,670,737 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended December 28, 2002 (the "2002 Annual Report to Shareholders"),
are incorporated by reference into Part II.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held May 3, 2003 (the "2003 Proxy Statement"), are
incorporated by reference into Part III.
Baldor Electric Company (“Baldor” or the “Company”) was incorporated in Missouri in 1920. The Company operates in one industry segment, which includes the design, manufacture, and sale of electric motors, drives, generators and related products. Baldor has made several small acquisitions; however, the majority of its growth has come internally through broadening its markets and product lines.
The AC motor product line presently ranges in size from 1/50 up to 1500 horsepower. The DC motor product line presently ranges from 1/50 through 800 horsepower. The adjustable speed controls product line ranges from 1/50 to 900 horsepower. The Company’s industrial control products include servo products, DC controls, position controls, and inverter and vector drives. With these products, the Company provides its customers the ability to purchase a “drive” from one manufacturer. Baldor defines a “drive” as an industrial motor and an electronic control. With the February 2003 acquisition of Energy Dynamics, Inc., the Company’s power generator line now ranges from 1.3 kilowatt to 2000 kilowatts. Sales of industrial electric motors represented approximately 81% of the Company’s business in each of the years 2002 and 2001 and 79% in 2000. The bulk of the remaining sales included power generators, drives, speed reducers, industrial grinders, buffers, polishing lathes, stampings, castings, and repair parts.
Baldor’s industrial motors and drives are designed, manufactured, and marketed for general purpose uses (“stock products”) and to individual customer requirements and specifications (“custom products”). Stock products represented approximately 65% of total product sales in each of the years 2002, 2001 and 2000. Most stock product sales are to customers who place their orders for immediate shipment from current inventory. Custom products generally are shipped within two weeks from the date of order. Because of these and other factors, the Company does not believe that its backlog represents an accurate indication of future shipments.
The products of the Company are marketed throughout the United States and in more than 60 foreign countries. The Company’s field sales organization, comprised of independent manufacturer’s representatives and Company sales personnel, consists of more than 70 locations, including 39 in North America. The remainder of the Company’s representatives are located in various parts of the world including Europe, Latin America, Australia, and the Far East.
Custom products and stock products are sold to original equipment manufacturers (“OEMs”). Stock products are also sold to independent distributors for resale, often as replacement components in industrial machinery that is being modernized or upgraded for improved performance.
No single customer accounted for more than 5% of sales; therefore, the Company does not believe that the loss of any single customer would have a material effect on its total business.
The Company faces substantial competition in the sale of its products in all markets served. Some of the Company’s competitors are larger in size or are divisions of large diversified companies and have substantially greater financial resources. The Company competes by providing its customers better value through product quality and efficiency and better services including product availability, shorter lead-times, on-time delivery, local support, product literature, and training.
The Company is not aware of any industry-wide statistics from which it can precisely determine its relative position in the industrial electric motor industry. In the United States certain industry statistics are available from the U.S. Department of Commerce and the National Electrical Manufacturers Association. However, these sources do not include all competitors or all sizes of motors. The Company believes that it is a significant factor in the markets it serves and that its share of the market has increased over the past several years.
The Company manufactures many of the components used in its products, including laminations, stamped steel parts, and aluminum die castings. Manufacturing many of its own components permits the Company to better manage cost, quality, and availability. In addition to the manufacturing of components, the Company’s motor manufacturing operations include machining, welding, winding, assembling, and finishing operations.
The raw materials necessary for the Company’s manufacturing operations are available from several sources. These materials include steel, copper wire, gray iron castings, aluminum, insulating materials, and diesel engines, and many of these materials are purchased from more than one supplier. The Company believes that alternative sources are available for such materials.
The Company’s design and development of electric motors, drives, and generators include both the development of products, which extend the product lines, and the modification of existing products to meet new application requirements. Additional development work is done to improve production methods. Costs associated with research, new product development, and product and cost improvements are treated as expenses when incurred and amounted to $22,484,000 in 2002, $24,415,000 in 2001, and $24,987,000 in 2000.
Compliance with laws relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on capital expenditures, earnings, or the financial position of the Company and is not expected to have such an effect.
As of February 22, 2003, the Company had 3,623 employees.
Information regarding executive officers is contained in Part III, Item 10, and incorporated herein by reference.
Sales from international operations (foreign affiliates and exports) were approximately 14% of total sales in each of the years 2002, 2001, and 2000. See also Note I on page 25 of the 2002 Annual Report to Shareholders.
The Company’s products are distributed in more than 60 foreign countries, principally in Canada, Mexico, Europe, Australia, the Far East, and Latin America. Baldor’s wholly-owned affiliate, UK-based Optimised Control Ltd., has sales offices and a development and manufacturing facility in the UK. Baldor and its affiliates in Europe have sales offices in Germany and Switzerland. The Company owns majority interests in Australian Baldor Pty. Limited which has locations in Sydney and Melbourne. The Company wholly owns Baldor Electric (Far East) Pte. Ltd. located in Singapore, and has sales offices in Taiwan and the Philippines. The Company also wholly owns Baldor de Mexico, S.A. de C.V. located in Leon, Mexico.
The Company believes that it is in a position to act on global opportunities as they become available. The Company also believes that there are additional risks attendant to international operations, including currency fluctuations and possible restrictions on the movement of funds. However, these risks have not had a significant adverse effect on the Company’s business.
The Company makes available its Forms 10-K, 10-Q, 8-K, and amendments thereto on its corporate website when filed with the SEC. These filings, along with the Company’s Annual Reports to Shareholders and Proxy Statements, may be viewed online free of charge by accessing the Company’s website at www.baldor.com and going to the Investor Relations section.
The Company believes that its facilities, including equipment and machinery, are in good condition, suitable for current operations, adequately maintained and insured, and capable of sufficient additional production levels. The following table contains information with respect to the Company’s properties.
AREA
LOCATION PRIMARY USE (SQ. FT.)
---------
Fort Smith, AR AC motor production 384,969
Distribution and service center 208,000
Administration and engineering offices 79,675
Aluminum die casting 79,330
Drives production center 162,000
St. Louis, MO Metal stamping and engineering toolroom 187,385
Columbus, MS AC motor production 156,000
Westville, OK AC and DC motor production 207,250
Fort Mill, SC DC motor, AC motor, 108,000
and tachometer production
Clarksville, AR Subfractional motor, gear motor, DC motor *165,735
and worm-gear speed reducer production
Ozark, AR AC motor production 151,783
Four other Metal stamping and motor, drives,
domestic locations and generator production 225,798
Ten foreign Sales and distribution centers
locations and electronic controls production 99,200
-------------
2,125,125
*This property is leased pursuant to an Industrial Revenue Bond agreement.
The Company also has approximately 350,000 sq. ft. of space available for expansion, currently fully leased to outside firms.
The Company is party to a number of legal proceedings incidental to its business, none of which is deemed to be material to its operations or business.
Information under the captions “Ticker”, “Dividends paid”, “Common stock price range”, and “Shareholders”, on page 28 of the 2002 Annual Report to Shareholders, is incorporated herein by reference.
During the fourth quarter of 2002, certain District Managers exercised non-qualified stock options previously granted to them under the Baldor Electric Company 1990 Stock Option Plan for District Managers (the “DM Plan”). The exercise price paid by the District Managers equaled the fair market value on the date of the grant. The total amount of shares granted under the DM Plan is approximately 1% of the outstanding shares of Baldor common stock. None of the transactions were registered under the Securities Act of 1933, as amended (the “Act”), in reliance upon the exemption from registration afforded by Section 4(2) of the Act. The Company deems this exemption to be appropriate given that there are a limited number of participants in the DM Plan and all parties are knowledgeable about the Company.
Information concerning net sales, net earnings, net earnings per share, dividends per share, long-term obligations, and total assets for the years ended 1992 through 2002 is contained under the caption “Eleven-Year Summary of Financial Data” on page 14 of the 2002 Annual Report to Shareholders and is incorporated herein by reference.
Information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 16 and 17 of the 2002 Annual Report to Shareholders is incorporated herein by reference.
Information under the sub-caption “Market Risk” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 17 of the 2002 Annual Report to Shareholders is incorporated herein by reference.
The consolidated financial statements of the Company and related notes on pages 18 through 27, the “Report of Ernst & Young LLP, Independent Auditors” on page 27, and the “Summary of Quarterly Results of Operations (unaudited)” on page 19 of the 2002 Annual Report to Shareholders are incorporated herein by reference.
Information contained in the 2003 Proxy Statement under the caption “Proposal 1 - Election of Directors” is incorporated herein by reference. The current executive officers of the Company, each of whom is elected for a term of one year or until his successor is elected and qualified, are:
Served as
Officer
Name Age Position Since
Roland S. Boreham, Jr. 78 Chairman 1961
John A. McFarland 51 President and 1990
Chief Executive Officer
Ronald E. Tucker 45 Chief Financial Officer and 1997
Secretary
Randall P. Breaux 40 Vice President - Marketing 2001
Roger V. Bullock 53 Vice President - Drives 2002
Randy L. Colip 44 Vice President - Sales 1997
Charles H. Cramer 58 Vice President - Human Resources 1984
Gene J. Hagedorn 56 Vice President - Materials 1994
Jeffrey R. Hubert 49 Vice President - Sales 2002
Terry B. King 42 Vice President - 2003
Linear Motors & Generators
Tracy L. Long 37 Treasurer and 2003
Assistant Secretary
Randal G. Waltman 53 Vice President - Operations 1997
Each of the executive officers has served as an officer or in a management capacity with the Company for the last five years except
for Jeffrey R. Hubert. Mr. Hubert joined Baldor in July 2001 as the Company's Director of Business Development. Prior to joining
Baldor, Mr. Hubert spent 15 years in the motor business in various areas of sales, marketing, customer service, and application
engineering. There are no family relationships among the directors or executive officers.
Information contained in the 2003 Proxy Statement under the caption “Executive Compensation”, except for the information contained in the sub-captions “Report of the Board of Directors on Executive Compensation” and “Performance Graph”, is incorporated herein by reference. Information contained in the 2003 Proxy Statement under the caption “Proposal 1 – Election of Directors” paragraph headed “Director Compensation” is also incorporated herein by reference.
The security ownership by officers, directors, and beneficial owners of more than five percent of the Company’s Common Stock included under the caption “Security Ownership of Certain Beneficial Owners and Management” of the 2003 Proxy Statement is incorporated herein by reference.
The following table contains information regarding the number of shares of common stock that may be issued pursuant to the Company’s equity compensation plans as of December 28, 2002.
- --------------------------------------------------------------------------------------------------------------------
Equity Compensation Plan Information
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------- ----------------------- ---------------------- -----------------------------
Plan Category (a) (b) (c)
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants, (excluding securities
warrants, and rights and rights reflected in column (a))
- --------------------------------------- ----------------------- ---------------------- -----------------------------
- --------------------------------------- ----------------------- ---------------------- -----------------------------
Equity Compensation plans
approved by security holders 2,444,740 $17.15 1,625,190
- --------------------------------------- ----------------------- ---------------------- -----------------------------
- --------------------------------------- ----------------------- ---------------------- -----------------------------
Equity compensation plans
not approved by security holders
55,050 $21.88 168,191
- --------------------------------------- ----------------------- ---------------------- -----------------------------
- --------------------------------------- ----------------------- ---------------------- -----------------------------
Total 2,499,790 $17.26 1,793,381
- --------------------------------------- ----------------------- ---------------------- -----------------------------
Richard E. Jaudes, a member of the Board of Directors of the Company, is also a partner at Thompson Coburn LLP, a law firm that provides legal counsel to the Company. R. L. Qualls, also a member of the Board of Directors of the Company, provided management consulting services for Baldor during fiscal year 2002 for which he was paid $44,000. These consulting services were provided on as as-needed basis and there was no formal arrangement between Dr. Qualls and Baldor as to the terms of the consulting services.
The Company’s principal executive officer and principal financial officer (the “certifying officers”) have concluded, based on their evaluation within 90 days of the filing of this report, that the Company’s disclosure controls and procedures are operating effectively. In addition, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.
(a) (1) The following consolidated financial statements of Baldor Electric Company and its affiliates, included in the 2002 Annual
Report to Shareholders, are incorporated by reference in Item 8 of this Report:
o Consolidated Balance Sheets
- As of December 28, 2002 and December 29, 2001
o Consolidated Statements of Earnings
- for each of the three years in the period ended December 28, 2002
o Consolidated Statements of Cash Flows
- for each of the three years in the period ended December 28, 2002
o Consolidated Statements of Shareholders' Equity
- for each of the three years in the period ended December 28, 2002
o Notes to Consolidated Financial Statements
(2) The following consolidated financial statement schedule of Baldor Electric Company and its affiliates is included in Item
14(d) of this Report:
o Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable.
(3) See Exhibit Index at page 15 of this Report.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the period covered by this Report.
(c) Exhibits
See Exhibit Index at page 15 of this Report.
(d) Financial Statement Schedules
The response to this portion of Item 15 is submitted as a separate section of this Report at page 14 hereof.
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.
BALDOR ELECTRIC COMPANY
(Registrant)
By /s/ John A. McFarland
John A. McFarland
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 28, 2003
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints R. S. Boreham, Jr. and John A. McFarland, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign this Report and any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
CERTIFICATIONS
I, John A. McFarland, certify that:
(1) I have reviewed this annual report on Form 10-K of Baldor Electric Company;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations, and cash flows of the registrant as of,
and for, the periods presented in this annual report;
(4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period for which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Effective Date;
(5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.
March 28, 2003 /s/ John A. McFarland
President and Chief Executive Officer
I, Ronald E. Tucker, certify that:
(1) I have reviewed this annual report on Form 10-K of Baldor Electric Company;
(2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly
present in all material respects the financial condition, results of operations, and cash flows of the registrant as of,
and for, the periods presented in this annual report;
(4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period for which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Effective Date;
(5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.
March 28, 2003 /s/Ronald E. Tucker
Chief Financial Officer and Secretary
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 PAGE FOR FORM 10-K FOR YEAR ENDED DECEMBER 28, 2002.
Signature Title Date
/s/ R. S. Boreham, Jr. Chairman and March 28, 2003
R. S. Boreham, Jr. Director
/s/ John A. McFarland President, March 28, 2003
John A. McFarland Chief Executive Officer, and
Director
(Principal Executive Officer)
/s/ Ronald E. Tucker Chief Financial Officer and March 28, 2003
Ronald E. Tucker Secretary
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Jefferson W. Asher, Jr. Director March 28, 2003
Jefferson W. Asher, Jr.
/s/ Merlin J. Augustine, Jr. Director March 28, 2003
Merlin J. Augustine, Jr.
/s/ Richard E. Jaudes Director March 28, 2003
Richard E. Jaudes
/s/ Robert J. Messey Director March 28, 2003
Robert J. Messey
/s/ Robert L. Proost Director March 28, 2003
Robert L. Proost
/s/ R. L. Qualls Director March 28, 2003
R. L. Qualls
/s/ Barry K. Rogstad Director March 28, 2003
Barry K. Rogstad
BALDOR ELECTRIC COMPANY AND AFFILIATES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
Charged to Charged to
Balance at Costs Other Balance
Beginning and Accounts Deductions at End of
Description of Period Expenses Describe Describe Period
- ----------- --------- -------- -------- -------- ------
Deducted from current assets:
Allowance for doubtful accounts
2002 $ 4,600 $ 1,386 $ 1,955(A) $ 4,031
2001 $ 4,600 $ 1,043 $ 1,043(A) $ 4,600
2000 $ 4,350 $ 520 $ 270(A) $ 4,600
(A) Uncollectible accounts written off (net of recoveries) during year.
BALDOR ELECTRIC COMPANY AND AFFILIATES
INDEX OF EXHIBITS
Exhibit No. Description
- ----------- -----------
3(i) * Articles of Incorporation (as restated and amended) of Baldor Electric Company, effective May 2, 1998, filed as
Exhibit 3(i) to the Registrant's Current Report on Form 10-Q for the quarter ended July 4, 1998.
3(ii) * Bylaws of Baldor Electric Company (as restated and amended), dated August 2, 1999, filed as Exhibit 3(ii) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended October 2, 1999.
4(i) * Rights Agreement, dated May 6, 1998, between Baldor Electric Company and Wachovia Bank of North Carolina, N.A.
(formerly Wachovia Bank & Trust Company, N.A.), as Rights Agent, originally filed as Exhibit 1 to the Registrant's
Current Report on Form 8-K dated May 13, 1988, and refiled as Exhibit 4(i) to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
4(ii) * Amendment Number 1 to the Rights Agreement, dated February 5, 1996, filed as Exhibit 2 to the Registrant's
Registration Statement on Form 8-A/A dated March 21, 1996.
4(iii) * Amendment Number 2 to the Rights Agreement, dated June 1, 1999, filed as Exhibit 4(i)(c) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1999.
10(ii) * + Officers Compensation Plan, originally filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for year
ended December 31, 1988, and refiled as Exhibit 10(iii)(A)(2) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
10(iii) * + 1987 Incentive Stock Plan, originally filed as Appendix A to Registrant's Proxy Statement dated April 3, 1987, and
refiled as Exhibit 10(iii)(A)(3) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
(continued on next page)
BALDOR ELECTRIC COMPANY AND AFFILIATES
INDEX OF EXHIBITS
(continued from previous page)
Exhibit No. Description
- ----------- -----------
10(iv) * + 1989 Stock Option Plan for Non-Employee Directors, as restated and amended at the Board of Directors Meeting on
August 10, 1998, filed as Exhibit 10(iii)A.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 4, 1998.
10(v) * + 1994 Incentive Stock Option Plan, as restated and amended at the Company's Annual Meeting on May 2, 1998, filed as
Exhibit 10(iii)A.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 4, 1998.
10(vi) * + 1996 Stock Option Plan for Non-Employee Directors, as restated and amended at the Board of Directors Meeting on
August 10, 1998, filed as Exhibit 10(iii)A.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 4, 1998.
10(vii) * + Stock Option Plan for Non-Employee Directors, as approved by the Company's Board of Directors on February 5, 2001,
filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 2001.
10(viii) + Employment Transition and Resignation Agreement between Baldor Electric Company and Lloyd Davis.
11 Computation of Earnings Per Share, incorporated by reference in Note J of the 2002 Annual Report to Shareholders
filed as Exhibit 13.
13 Portions of the 2002 Annual Report to Shareholders. The Annual Report is being filed as an exhibit solely for the
purpose of incorporating certain provisions thereof by reference. Portions of the Annual Report not specifically
incorporated are not deemed "filed" for the purposes of the Securities Exchange Act of 1934, as amended.
21 Affiliates of the Registrant.
23 Consent of Independent Auditors.
24 Powers of Attorney (set forth on signature page hereto).
99 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The Registrant agrees to furnish to the Securities and Exchange Commission, upon request, pursuant to Item 601(b)(4)(iii) of
Regulation S-K, copies of instruments defining the rights of the holders of long-term debt of the Registrant and its consolidated
affiliates.
* Previously filed.
+ Management contract or compensatory plan or arrangement.
ELEVEN YEAR SUMMARY OF FINANCIAL DATA
(In thousands, except percentages and per-share data)
PER SHARE DATA
PERCENT
COST DILUTED BASIC RETURN ON
NET GOODS NET NET NET AVERAGE SHAREHOLDERS'
SALES SOLD EARNINGS EARNINGS EARNINGS DIVIDENDS EQUITY EQUITY
2002 549,507 396,815 23,895 0.69 0.70 0.52 8.9% 274,598
2001 557,459 401,471 22,385 0.65 0.66 0.52 8.6% 262,485
2000 621,243 423,861 46,263 1.34 1.36 0.50 17.6% 260,845
1999 585,551 399,833 43,723 1.19 1.21 0.45 16.5% 266,109
1998 596,660 410,748 44,610 1.17 1.21 0.40 17.6% 264,292
1997 564,756 389,711 40,365 1.09 1.13 0.36 18.2% 243,434
1996 508,526 353,345 35,173 0.97 1.00 0.30 17.1% 200,325
1995 478,315 334,306 32,305 0.84 0.88 0.26 16.3% 211,377
1994 422,714 297,212 26,359 0.69 0.73 0.21 15.3% 184,262
1993 360,195 255,557 19,426 0.52 0.54 0.17 12.7% 160,539
1992 322,038 229,686 15,264 0.42 0.43 0.14 10.9% 145,226
LONG
TOTAL TERM WORKING
ASSETS OBLIGATIONS CAPITAL
2002 472,761 105,285 199,023
2001 457,527 98,673 173,638
2000 464,978 99,832 174,803
1999 423,941 56,305 183,956
1998 411,926 57,015 176,126
1997 355,889 27,929 141,268
1996 325,486 45,027 146,975
1995 313,462 25,255 145,069
1994 283,155 26,303 118,550
1993 237,950 22,474 108,601
1992 211,941 23,209 97,343
Continued difficult economic conditions and corresponding declines in customer orders resulted in decreased sales in 2002. However, improved operating efficiencies and cost containment initiatives resulted in improved operating and net margins. For the year, sales declined 1.4% from 2001. Gross and operating margins were 27.8% and 8.2%, respectively compared to 28.0% and 8.0% a year ago. Diluted earnings per share increased to $.69 from $.65 in 2001. Total dividends paid in 2002 remained at $.52 per share.
Baldor’s 2002 sales were $549.5 million, falling 1.4% from 2001 sales of $557.5 million. Sales in 2000 were $621.2 million. For the years 2002, 2001, and 2000, sales to distributors and Original Equipment Manufacturer (OEM) customers remained at approximately 50% each. Baldor serves many industries and geographic regions by selling to a broad base of distributors and OEMs both domestically and in more than 60 countries around the world. No single customer accounted for more than 5% of sales in any year covered by this report.
Net earnings in 2002 amounted to $23.9 million, advancing 6.7% from earnings of $22.4 million in 2001. Net earnings in 2000 were a record $46.3 million.
Gross margin dipped slightly to 27.8% in 2002 compared to 28.0% in 2001 and 31.8% in 2000. Although the Company’s continued focus on improved efficiencies generated savings, the decline in sales resulted in a decreased gross margin. Operating margin, however, improved to 8.2% from 8.0% in 2001. The Company realized record operating margin of approximately 13.8% in 2000. Reductions in freight and warranty costs combined with the Company’s overall fixed cost reduction initiatives contributed to improvement in the operating margin. Pre-tax margin was 6.9% for 2002 compared to 6.4% in 2001 and 11.9% in 2000. Decreases in interest rates on outstanding debt helped to move the pre-tax margin in a positive direction. The Company’s effective tax rate amounted to 37.0% for 2002 and 2001and 37.5% in 2000.
Sales from international operations (foreign affiliates and exports) amounted to $74.8 million in 2002, $78.1 million in 2001 and $85.6 million in 2000. Although the Company experienced sales declines of 4.2% in the international markets in 2002, sales for the fourth quarter of 2002 increased over the same period of 2001 in Europe, Australia, Mexico and the Far East.
Management believes, based on their internal reviews and other factors, that the future costs relating to environmental remediation and compliance will not have a material effect on the capital expenditures, earnings, or competitive position of the Company.
Baldor’s financial position remained strong through 2002. The Company maintained its financial strength while continuing research and development for new and existing products, making capital investments in our manufacturing facilities, and continuing to invest in both our employees’ and customers’ education and training.
Baldor believes the investment in our employees through training and education is a key to continued success and improved shareholder value. The Company continues to be a leader not only in employee education, but also in customer training.
Investments in property, plant and equipment were $10.6 million in 2002, $19.4 million in 2001 and $22.6 million in 2000. These investments were made to centralize operations, increase capacity, and improve quality and productivity.
The Company’s commitment to research and development continues to help it maintain a leadership position in the marketplace and to satisfy customers’ needs. Investments in research and development amounted to $22.5 million in 2002, $24.4 million in 2001, and $25.0 million in 2000. The Company continues to make investments in existing products for improved performance, increased energy efficiency, and manufacturability.
Baldor’s liquidity position remained strong in 2002 with solid working capital and a current ratio of 3.7 to 1. Working capital was $199.0 million at year-end 2002 compared to $173.6 million at the end of 2001. Liquidity was supported by cash flows from operations of $53.6 million in 2002, $38.3 million in 2001 and $46.4 million in 2000. The Company utilized a portion of its cash flows from operations to fund property, plant and equipment additions of $10.6 million and pay dividends to shareholders of $17.9 million.
The Company expects that its foreseeable cash needs for operations and capital expenditures will continue to be met through cash flows from operating activities and existing credit facilities.
Long-term debt as a percent of total capital was 27.7% at year-end 2002 and 27.3% at year-end 2001. Baldor repurchased 121,300 shares of common stock during 2001. Of the 6.0 million shares authorized for repurchase since September 1998, 4.3 million had been repurchased as of December 28, 2002. An additional 1.5 million shares were repurchased on February 14, 2003 for cash of $26.7 million. Shareholders’ equity was $274.6 million at year-end 2002 compared to $262.5 million at the end of 2001. Return on average shareholders’ equity was 8.9% in 2002 and 8.6% in 2001.
Annual dividends per diluted share amounted to $.52 in 2002 and 2001, and $.50 in 2000. There have been three dividend increases in the last five years and 11 increases in the last 10 years. These increases were in line with Baldor’s policy of making increases periodically, as earnings and financial strength warrant, and reinvesting to finance growth opportunities. The objective is for shareholders to obtain dividend increases over time while also participating in the growth of the Company.
Market risks relating to the Company’s operations result primarily from changes in commodity prices, interest rates and foreign exchange rates. To maintain stable pricing for its customers, the Company enters into various hedging transactions as described below.
The Company is a purchaser of certain commodities, primarily copper, aluminum and steel, and periodically utilizes commodity futures and options for hedging purposes to reduce the effects of changing commodity prices. Generally, contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation. Contracts that are highly effective at meeting this risk reduction and correlation criteria are recorded using hedge accounting.
The Company’s interest rate risk is related to its available-for-sale securities and long-term debt. Due to the short-term nature of the Company’s securities portfolio, anticipated interest rate risk is not considered material. The Company’s debt obligations include certain notes payable to banks bearing interest at a quarterly variable rate. The Company does not currently utilize derivatives for managing interest rate risk, but continues to monitor changes in market interest rates.
Foreign affiliates comprise less than 5% of total assets. The Company does not anticipate the use of derivatives for managing foreign currency risk, but continues to monitor the effects of foreign currency exchange rates.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. The new rules on accounting for goodwill and other intangible assets became effective for the Company beginning in the first quarter of 2002. The Company assessed its goodwill for impairment upon adoption and will test for impairment at least annually hereafter. The Company’s transitional impairment test did not indicate any impairment losses. The Company’s first annual test for impairment was completed during the fourth quarter of 2002 and did not indicate any impairment losses. Had the provisions of SFAS No. 142 been in effect during the years ended December 29, 2001 and December 30, 2000, an increase in net income of $1.1 million or $.03 per diluted share and $619,000 or $.02 per diluted share, respectively, would have been recorded.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which became effective for the Company beginning December 30, 2001. The Company’s adoption of SFAS No. 144 had no effect on its consolidated financial position, results of operations or cash flows as of the year ended December 28, 2002.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The Company is required to adopt SFAS No. 146 for all exit and disposal activities initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The disclosure provisions of this Statement became effective for the Company as of the fourth quarter of 2002.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” The Company was required to adopt the expanded disclosure requirements of SFAS No. 148 for the year ended December 28, 2002.
During 2002, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” and SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which become effective for the Company December 29, 2002.
This annual report and other written reports and oral statements made from time to time by the Company and its representatives may contain forward-looking statements. The forward-looking statements (generally identified by words or phrases indicating a projection or future expectation such as “outlook”, “optimistic”, “trends”, “expect(s)", “assuming”, “expectations”, “forecasted”, “estimates”, “expected”) are based on the Company’s current expectations and some of them are subject to risks and uncertainties. Accordingly, you are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, but are not limited to, the following: (i) changes in economic conditions, (ii) developments or new initiatives by our competitors in the markets in which we compete, (iii) fluctuations in the costs of select raw materials, (iv) the success in increasing sales and maintaining or improving the operating margins of the Company, and (v) other factors including those identified in the Company’s filings made from time to time with the Securities and Exchange Commission.
Consolidated Balance Sheets
Baldor Electric Company and Affiliates
December 28 December 29
ASSETS (In thousands, except share data) 2002 2001
CURRENT ASSETS: Cash and cash equivalents $ 24,515 $ 5,564
Marketable securities 27,155 11,052
Receivables, less allowances for doubtful accounts
of $4,031 in 2002 and $4,600 in 2001. 83,630 83,182
Inventories:
Finished products 78,044 83,919
Work in process 9,927 10,155
Raw materials 50,237 56,751
138,208 150,825
LIFO valuation adjustment (25,068) (24,604)
113,140 126,221
Other current assets and deferred income taxes 24,264 25,262
TOTAL CURRENT ASSETS 272,704 251,281
OTHER ASSETS: Goodwill 57,158 57,158
Other 6,232 6,973
PROPERTY, PLANT Land and improvements 6,282 6,267
AND EQUIPMENT: Buildings and improvements 56,350 54,372
Machinery and equipment 274,314 266,627
Allowances for depreciation and amortization (200,279) (185,151)
NET PROPERTY, PLANT AND EQUIPMENT 136,667 142,115
$ 472,761 $ 457,527
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT Accounts payable $ 25,289 $ 28,830
LIABILITIES: Employee compensation 7,526 5,997
Profit sharing 5,279 5,102
Accrued warranty costs 6,625 6,625
Accrued insurance obligations 13,794 15,694
Other accrued expenses 12,274 14,670
Income taxes payable (receivable) 1,004 (1,046)
Current maturities of long-term obligations 1,890 1,771
TOTAL CURRENT LIABILITIES 73,681 77,643
LONG-TERM OBLIGATIONS 105,285 98,673
DEFERRED INCOME TAXES 19,197 18,726
SHAREHOLDERS' EQUITY: Preferred stock, $.10 par value
Authorized shares: 5,000,000
Issued and outstanding shares: None
Common Stock, $.10 par value
Authorized shares: 150,000,000
Issued shares: 2002 - 39,693,091;
2001 - 39,411,473 3,969 3,941
Additional capital 48,657 44,224
Retained earnings 331,373 325,642
Accumulated other comprehensive income (loss) (4,880) (8,164)
Treasury stock (5,553,633 shares in 2002
and 5,493,053 shares in 2001) (104,521) (103,158)
TOTAL SHAREHOLDERS' EQUITY 274,598 262,485
$ 472,761 $ 457,527
See notes to consolidated financial statements.
Consolidated Statements of Earnings
Baldor Electric Company and Affiliates
Year Ended
December 28 December 29 December 30
(In thousands, except share data) 2002 2001 2000
Net sales $ 549,507 $ 557,459 $ 621,242
Other income, net 1,383 839 1,838
550,890 558,298 623,080
Cost and expenses: Cost of goods sold 396,815 401,471 423,861
Selling and administrative 107,407 111,253 111,611
Profit sharing 5,285 5,136 9,747
Interest 3,454 4,906 3,840
512,961 522,766 549,059
Earnings before income taxes 37,929 35,532 74,021
Income taxes 14,034 13,147 27,758
NET EARNINGS $ 23,895 $ 22,385 $ 46,263
Net earnings per share-basic $ 0.70 $ 0.66 $ 1.36
Net earnings per share-diluted $ 0.69 $ 0.65 $ 1.34
Weighted average shares outstanding-basic 34,060,853 33,896,164 33,980,529
Weighted average shares outstanding-diluted 34,622,136 34,505,550 34,570,328
See notes to consolidated financial statements.
Summary of Quarterly Results of Operations (unaudited)
Baldor Electric Company and Affiliates
Quarter
(In thousands, except share data) First Second Third Fourth Total
2002: Net sales $ 133,510 $ 145,176 $ 134,890 $ 135,931 $ 549,507
Gross profit 37,156 41,370 36,132 38,034 152,692
Net earnings 5,428 7,195 5,172 6,100 23,895
Net earnings per share-basic 0.16 0.21 0.15 0.18 0.70
* Net earnings per share-diluted 0.16 0.21 0.15 0.18 0.69
2001: Net sales $ 150,155 $ 146,668 $ 138,125 $ 122,511 $ 557,459
Gross profit 42,610 41,793 39,048 32,537 155,988
Net earnings 7,167 6,449 5,423 3,346 22,385
Net earnings per share-basic 0.21 0.19 0.16 0.10 0.66
* Net earnings per share-diluted 0.21 0.19 0.16 0.10 0.65
*The sum of the quarter amounts does not agree to the total due to rounding.
Year Ended
December 28 December 29 December 30
(In thousands) 2002 2001 2000
Operating activities
Net earnings $ 23,895 $ 22,385 $ 46,263
Adjustments Depreciation 17,595 17,348 17,727
to reconcile Amortization 1,410 3,331 2,111
net earnings Deferred income taxes 4,435 1,800 3,690
to net cash Changes in Receivables (448) 17,312 (65)
from operating Inventories 13,081 (5,270) (10,888)
operating assets and Other current assets 452 1,586 (481)
activities: liabilities: Accounts payable (3,541) 2,017 (2,621)
Accrued expenses and other liabilities (2,590) (6,629) (3,514)
Income taxes (951) (6,187) (1,715)
Other, net 236 (9,443) (4,154)
Net cash from operating activities 53,574 38,250 46,353
Investing activities
Additions to property, plant and equipment (10,556) (19,361) (22,577)
Marketable securities purchased (32,014) (7,941) (4,597)
Marketable securities sold 16,045 6,125 26,266
Acquisitions (net of cash acquired) 0 (925) (40,272)
Net cash used in investing activities (26,525) (22,102) (41,180)
Financing activities
Additional long-term obligations 14,000 65,500 41,362
Reduction of long-term obligations (7,268) (65,529) (2,605)
Unexpended debt proceeds 3 7 (7)
Dividends paid (17,931) (17,641) (16,910)
Common stock repurchased 0 (2,337) (35,311)
Stock option plans 3,098 3,548 2,063
Net cash used in financing activities (8,098) (16,452) (11,408)
Net increase (decrease) in cash and cash equivalents 18,951 (304) (6,235)
Beginning cash and cash equivalents 5,564 5,868 12,103
Ending cash and cash equivalents $ 24,515 $ 5,564 $ 5,868
Consolidated Statements of Shareholders' Equity
Baldor Electric Company and Affiliates
Accumulated
Other Treasury
Common Stock Additional Retained Comprehensive Stock
(In thousands, except share data) Shares Amount Capital Earnings Income (Loss) (at cost) Total
BALANCE AT JANUARY 2, 2000 35,592 $ 3,872 $ 34,971 $ 291,741 $ (2,676) $ (61,799) $ 266,109
Comprehensive income
Net earnings 46,263 46,263
Other comprehensive income (loss)
Securities valuation adjustment,
net of taxes of $158 263 263
Translation adjustments (1,453) (1,453)
Total other comprehensive income (loss) (1,190)
Total comprehensive income $45,073
Stock option plans (net of shares exchanged) 234 30 3,275 (1,242) 2,063
Cash dividends at $.50 per share (16,910) (16,910)
Common stock repurchased (2,057) (222) (35,089) (35,311)
Other (179) (179)
BALANCE AT DECEMBER 30, 2000 33,769 $ 3,902 $ 38,024 $ 320,915 $ (3,866) $ (98,130) $ 260,845
Comprehensive income
Net earnings 22,385 22,385
Other comprehensive income (loss)
Securities valuation adjustment,
net of taxes of $37 61 61
Translation adjustments (2,999) (2,999)
Derivative unrealized loss,
net of tax benefit of $870 (1,360) (1,360)
Total other comprehensive income (loss) (4,298)
Total comprehensive income $18,087
Stock option plans (net of shares exchanged) 270 39 6,200 (2,691) 3,548
Cash dividends at $.52 per share (17,641) (17,641)
Common stock repurchased (121) (2,337) (2,337)
Other (17) (17)
BALANCE AT DECEMBER 29, 2001 33,918 $ 3,941 $ 44,224 $ 325,642 $ (8,164) $ (103,158) $ 262,485
Comprehensive income
Net earnings 23,895 23,895
Other comprehensive income
Securities valuation adjustment,
net of taxes of $51 85 85
Translation adjustments 1,900 1,900
Derivative unrealized gain,
net of taxes of $831 1,299 1,299
Total other comprehensive income 3,284
Total comprehensive income $27,179
Stock option plans (net of shares exchanged) 221 28 4,433 (1,363) 3,098
Cash dividends at $.52 per share (17,931) (17,931)
Other (233) (233)
BALANCE AT DECEMBER 28, 2002 34,139 $ 3,969 $ 48,657 $ 331,373 $ (4,880) $ (104,521) $ 274,598
Line of Business: The Company operates in one industry segment that includes the design, manufacture and sale of electric motors, drives and generators.
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 affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
Consolidation: The consolidated financial statements include the accounts of the Company and all its affiliates. Intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year: The Company’s fiscal year ends on the Saturday nearest to December 31, which results in a 52-week or 53-week year. Fiscal years 2002, 2001 and 2000 contained 52 weeks.
Cash Equivalents: Cash equivalents consist of highly liquid investments having original maturities of three months or less.
Marketable Securities: All marketable securities are classified as available-for-sale and are available to support current operations or to take advantage of other investment opportunities. Those securities are stated at estimated fair value based upon market quotes. Unrealized gains and losses, net of tax, are computed on the basis of specific identification and are included in Accumulated Other Comprehensive Income. Realized gains, realized losses and declines in value, judged to be other than temporary, are included in Other Income. The cost of securities sold is based on the specific identification method and interest earned is included in Other Income.
Accounts Receivable: Trade receivables are recorded in the balance sheet at outstanding principal, adjusted for charge-offs and allowances for doubtful accounts. The allowance for doubtful accounts is estimated based on historical losses and current conditions.
Inventories: The Company values inventories at the lower of cost or market, with cost being determined principally by the last-in, first-out method (LIFO), except for $16,461,000 in 2002 and $19,412,000 in 2001, at foreign locations, valued by the first-in, first-out method (FIFO).
Property, Plant and Equipment: Property, plant and equipment, including assets under capital leases, are stated at cost. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the assets ranging from 10 to 39 years for buildings and improvements and 3 to 15 years for machinery and equipment. Capitalized software costs amounting to $19.7 million and $18.3 million, net of accumulated amortization, at December 28, 2002 and December 29, 2001, respectively, are included in machinery and equipment and are amortized over their estimated useful life of 15 years.
Fair Value of Financial Instruments: The Company’s methods and assumptions used to estimate the fair value of financial instruments include quoted market prices for marketable securities and discounted cash flow analysis for fixed rate long-term debt. The Company estimates that the fair value of its financial instruments approximates carrying value at December 28, 2002 and December 29, 2001. The carrying amounts of cash and cash equivalents, receivables, and trade payables approximated fair value at December 28, 2002 and December 29, 2001, due to the short-term maturities of these instruments.
Goodwill: The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" effective December 30, 2001. Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized, but are reviewed for impairment on an annual basis.
Long-Lived Assets: Impairment losses are recognized on long-lived assets when information indicates the carrying amount of these assets, intangibles and any goodwill related to long-lived assets will not be recovered through future operations or sale.
Benefit Plans: The Company has a profit-sharing plan covering most employees with more than two years of service. The Company contributes 12% of earnings before income taxes of participating companies to the Plan.
Income Taxes: Income taxes are provided based on the liability method of accounting. Deferred income taxes are provided for the expected future tax consequences of temporary differences between the basis of assets and liabilities reported for financial and tax purposes.
Research and Engineering: Costs associated with research, new product development and product cost improvements are treated as expenses when incurred and amounted to approximately $22,484,000 in 2002, $24,415,000 in 2001, and $24,987,000 in 2000.
Derivatives: The Company recognizes all derivatives on the balance sheet at fair value. Derivatives that are not hedges are adjusted to fair value through earnings. If the derivative is a cash flow hedge, changes in the fair value are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. If a hedge transaction is terminated, any unrealized gain (loss) at the date of termination is carried in other comprehensive income (loss) until the hedged item is recognized as earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings in the period of change.
Shipping and Handling Costs: The Company classifies all amounts billed to customers for shipping and handling as revenue and classifies gross shipping and handling costs paid as selling expense. Costs included in selling and administrative expenses related to shipping and handling amounted to $22,391,000 in 2002, $22,516,000 in 2001, and $23,986,000 in 2000.
Stock-Based Compensation: The Company has certain stock-based employee compensation plans, which are described more fully in Note K. In accounting for these plans, the Company applies the intrinsic value method permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations.
SFAS No. 123 requires pro forma disclosure of the effects on net income and earnings per share when applying the fair value method of valuing stock-based compensation. The following table sets forth the pro forma disclosure of net income and earnings per share using the Black-Scholes option pricing model. For purposes of this disclosure, the estimated fair value of the options is amortized over the applicable compensatory periods.
Pro Forma Information (in thousands except share data)
2002
Net income, as reported $ 23,895
Less: Stock-based employee compensation expense
determined under fair value method,
net of related tax effects (581)
Pro forma net income $ 23,314
Earnings per share: Basic Diluted
Reported $0.70 $0.69
Pro forma $0.68 $0.67
2001
Net income, as reported $ 22,385
Less: Stock-based employee compensation expense
determined under fair value method,
net of related tax effects (1,079)
Pro forma net income $ 21,306
Earnings per share: Basic Diluted
Reported $0.66 $0.65
Pro forma $0.63 $0.62
2000
Net income, as reported $ 46,263
Less: Stock-based employee compensation expense
determined under fair value method,
net of related tax effects (1,215)
Pro forma net income $ 45,048
Earnings per share: Basic Diluted
Reported $1.36 $1.34
Pro forma $1.33 $1.31
Revenue Recognition: The Company recognizes revenue from product sales when product is shipped and title passes to customers.
Earnings Per Share: The Company's presentation of financial results includes both basic earnings per share and diluted earnings per share in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share includes all dilutive common stock equivalents.
Foreign Currency Translation: Assets and liabilities of foreign affiliates are translated into U.S. dollars at year-end exchange rates. Income statement items are generally translated at average exchange rates prevailing during the period. Translation adjustments are recorded in Accumulated Other Comprehensive Income (Loss) in Shareholders' Equity.
Product Warranties: The Company accrues for product warranty claims based on historical experience and the expected costs to provide warranty service. The changes in the carrying amount of product warranty reserves for the year ended December 28, 2002 is as follows:
Balance at Charges to Costs Balance at
December 29, 2001 and Expenses Deductions December 28, 2002
-----------------------------------------------------------------------------------------
$6,625 $2,804 $(2,804) $6,625
Amounts included in selling and administrative costs amounted to $2,804,000 in 2002, $3,296,000 in 2001, and $3,349,000 in 2000.
Long-term obligations consist of the following:
(In thousands) 2002 2001
Industrial Development Bonds:
Due through 2010 at variable rates
ranging from 1.6% to 5.5% $ 8,155 $ 9,915
Notes payable to banks:
Due October 25, 2004 at 4.97% fixed rate 25,000 25,000
Due March 31, 2003 at 2.17% variable rate 12,000 0
Due January 4, 2002 at 2.58% variable rate 0 500
Due July 31, 2003 at 2.18% variable rate 15,000 13,000
Due March 15, 2003 at 2.48% variable rate 47,000 52,000
Due November 1, 2004 at 10.16% fixed rate 20 29
107,175 100,444
Less current maturities 1,890 1,771
$ 105,285 $ 98,673
Certain long-term obligations are collateralized by property, plant and equipment with a net book value of $3,519,000 at December 28, 2002.
Maturities of long-term obligations during each of the five fiscal years ending 2007 are; 2003 - $1,890,000; 2004 - $99,820,000; 2005 - $0; 2006 - $0, 2007 and thereafter - $5,465,000.
Certain long-term obligations require that the Company maintain various financial ratios. These ratios were all met for 2002 and 2001. At December 28, 2002, the Company had outstanding letters of credit totaling $7,497,000.
Interest paid was $3,312,000 in 2002, $5,172,000 in 2001, and $2,899,000 in 2000.
The Company has a note payable to bank of $47,000,000, which is secured by the Company’s accounts receivable. This note was renewed March 5, 2003 with a maturity date of March 13, 2005.
The Company has negotiated commitments to renew notes payable to banks of $15,000,000 and $12,000,000 on or before their due dates.
Baldor currently invests in only high-quality, short-term investments, which it classifies as available-for-sale. Differences between amortized cost and estimated fair value at December 28, 2002 and December 29, 2001 are not material and are included in Accumulated Other Comprehensive Income. Because investments are predominantly short-term and are generally allowed to mature, realized gains and losses for both years have been minimal. The following table presents the estimated fair value breakdown of investments by category:
(In thousands) 2002 2001
Municipal debt securities $ 21,690 $ 9,924
U.S. corporate debt securities 8,096 0
U.S. Treasury & agency securities 1,918 1,128
Other debt securities 14,665 611
46,369 11,663
Less cash equivalents 19,214 611
$ 27,155 $ 11,052
The estimated fair value of marketable debt and equity securities at December 28, 2002 was $21,007,000 due in one year or less, $23,377,000 due in one to five years and $1,985,000 due after five years. Because of the short-term nature of the investments, expected maturities and contractual maturities are generally the same.
The Company made income tax payments of $10,174,000 in 2002, $16,065,000 in 2001, and $25,775,000 in 2000. Income tax expense consists of the following:
(In thousands) 2002 2001 2000
Current:
Federal $ 8,829 $ 10,398 $ 21,626
State 1,283 1,483 1,932
Foreign (513) (534) 510
Deferred: 4,435 1,800 3,690
$ 14,034 $ 13,147 $ 27,758
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The sources of these differences relate primarily to depreciation, certain liabilities and bad debt expense.
The following table reconciles the difference between the Company’s effective income tax rate and the federal corporate statutory rate:
2002 2001 2000
Statutory federal income tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 3.2% 2.7% 2.1%
Other (1.20%) (0.70%) 0.4%
Effective income tax rate 37.0% 37.0% 37.5%
The principal components of deferred tax assets (liabilities) follow:
2002 2001
Property, plant, equipment and intangibles $ (20,675) $ (18,726)
Accrued liabilities 5,652 5,428
Employee compensation and benefits 850 1,746
Total deferred tax liabilities $ (14,173) $ (11,552)
Periodically, the Company uses derivative financial instruments to reduce its exposure to various market risks. The Company does not regularly engage in speculative transactions, nor does the Company regularly hold or issue financial instruments for trading purposes. Generally, contract terms of a hedge instrument closely mirror those of the hedged item providing a high degree of risk reduction and correlation and are recorded using hedge accounting. Instruments that do not meet the criteria for hedge accounting are marked to fair value with unrealized gains or losses reported currently in earnings.
The Company had derivative balances related to cash flow hedges, with a fair value liability of $99,000 and $1.4 million recorded as a reduction in other current assets as of December 28, 2002 and December 29, 2001, respectively.
The amount recognized in cost of sales on cash flow hedges amounted to approximately $1.8 million and $1.4 million in 2002 and 2001, respectively. The Company expects that after-tax losses, totaling approximately $61,000 recorded in accumulated other comprehensive income (loss) at December 28, 2002, related to cash flow hedges, will be recognized in cost of sales within the next twelve months. The Company generally does not hedge anticipated transactions beyond 18 months.
The cumulative effect of adoption of SFAS No. 133 on December 31, 2000 did not have a material effect on the consolidated financial statements of the Company.
The Company maintains a shareholder rights plan intended to encourage a potential acquirer to negotiate directly with the Board of Directors. The purpose of the plan is to ensure the best possible treatment for all shareholders. Under the terms of the plan, one Common Stock Purchase Right (a Right) is associated with each outstanding share of common stock. If an acquiring person acquires 20% or more of the Company’s common stock then outstanding, the Rights become exercisable and would cause substantial dilution. Effectively, each such Right would entitle its holder (excluding the 20% owner) to purchase shares of Baldor common stock for half of the then current market price, subject to certain restrictions under the plan. A Rights holder is not entitled to any benefits of the Right until it is exercised. The Rights, which expire in May 2008, may be redeemed by the Company at any time prior to someone acquiring 20% or more of the Company’s outstanding common stock and in certain events thereafter.
Balances of related after-tax components comprising accumulated other comprehensive income (loss), included in shareholders’ equity, at December 28, 2002, December 29, 2001, and December 30, 2000, are as follows:
Total
Foreign Accumulated
Unrealized Unrealized Currency Other
Gains on Gains (Losses) Translation Comprehensive
Securities on Derivatives Adjustments Income (Loss)
Balance at December 30, 2000 $ 35 $ - $ (3,901) $ (3,866)
Net change for 2001 61 (1,360) (2,999) (4,298)
Balance at December 29, 2001 96 (1,360) (6,900) (8,164)
Net change for 2002 85 1,299 1,900 3,284
Balance at December 28, 2002 $ 181 $ (61) $ (5,000) $ (4,880)
The Company leases certain computers, buildings and other equipment under operating lease agreements. Related rental expense was $5,800,000 in 2002, $5,100,000 in 2001 and $5,400,000 in 2000. Future minimum payments for operating leases having non-cancelable lease terms in excess of one year are: 2003 - $4,332,000; 2004 - $3,615,000; 2005 - $3,049,000; 2006 - $1,256,000; and 2007 - $1,204,000.
The Company is subject to a number of legal actions arising in the ordinary course of business. Management expects that the ultimate resolution of these actions will not materially affect the Company’s financial position or results of operations.
On November 27, 2000, the Company acquired Pow’R Gard Generator Corporation for cash in the amount of $40 million. The acquisition has been accounted for as a purchase. Prior to December 30, 2001, goodwill associated with the acquisition was being amortized on a straight-line basis over 40 years. Pow’R Gard’s results of operations for the year ended December 30, 2000 were not material to the Company’s consolidated financial statements. Accordingly, pro forma information has not been presented. The Company’s consolidated financial statements include the results of operations and the assets and liabilities of Pow’R Gard after November 27, 2000.
The Company’s foreign operations include both export sales and the results of its foreign affiliates in Europe, Austrialia, Singapore and Mexico. Consolidated sales, earnings before income taxes, and identifiable assets consist of the following:
(In thousands) 2002 2001 2000
Net Sales:
United States Companies
Domestic customers $ 474,729 $ 479,362 $ 534,796
Export customers 36,792 38,445 39,054
511,521 517,807 573,850
Foreign Affiliates 37,986 39,652 47,378
$ 549,507 $ 557,459 $ 621,228
Earnings Before Income Taxes:
United States Companies $ 38,524 $ 37,220 $ 71,462
Foreign Affiliates (595) (1,688) 2,559
$ 37,929 $ 35,532 $ 74,021
Assets:
United States Companies $ 455,699 $ 439,445 $ 444,907
Foreign Affiliates 17,062 18,082 20,071
$ 472,761 $ 457,527 $ 464,978
The table below details earnings per share for the years indicated:
2002 2001 2000
Numerator Reconciliation:
The numerator is the same for
diluted and basic EPS:
Net earnings (in thousands) $ 23,895 $ 22,385 $ 46,263
Denominator Reconciliation:
The denominator for basic
earnings per share:
Weighted average shares 34,060,853 33,896,164 33,980,529
Effect of dilutive securities:
Stock options 561,283 609,386 589,799
The denominator for diluted
earnings per share:
Adjusted weighted
average shares 34,622,136 34,505,550 34,570,328
Basic Earnings Per Share $0.70 $0.66 $1.36
Diluted Earnings Per Share $0.69 $0.65 $1.34
At December 28, 2002 the Company had various stock plans. Grants can and have included: (1) incentive stock options to purchase shares at market value at grant date, and/or (2) non-qualified stock options to purchase shares of restricted stock equal to and less than the stock’s market value at grant date. Grants from the 1990 Plan expire six years from the grant date. All other grants expire ten years from the date of grant. The 1987, 1989, and 1996 Plans have expired except for options outstanding. A summary of the Company’s stock plans follows.
1990 Plan – Only non-qualified options can be granted from this Plan. Options vest and become 50% exercisable at the end of one year and 100% exercisable at the end of two years. There are no charges to income.
1987 and 1994 Plans – Incentive stock options vest and become fully exercisable with continued employment of six months for officers and three years for non-officers. Restrictions on non-qualified stock options normally lapse after a period of five years or earlier under certain circumstances. Related compensation expense for the non-qualified stock options is amortized over the applicable compensatory period.
1989, 1996 and 2001 Plans – Each non-employee director is granted an annual grant consisting of non-qualified stock options to purchase: (1) 3,240 shares at a price equal to the market value at grant date, and (2) 2,160 shares at a price equal to 50% of the market value at grant date. These options are immediately exercisable. Related compensation expense on the options granted at 50% of market is amortized over the applicable compensatory period.
Plan Type Administrator Recipients Status - ---------------------------------------------------------------------------------------------------------------- 1987 Compensatory Stock Option Committee Employee Expired 1989 Compensatory Executive Committee Non-employee directors Expired 1990 Non-compensatory Stock Option Committee District Managers Active 1994 Compensatory Stock Option Committee Employees Active 1996 Compensatory Executive Committee Non-employee directors Expired 2001 Compensatory Executive Committee Non-employee directors Active
A summary of the Company’s weighted average variables, using the Black-Scholes option pricing model, and stock option activity for fiscal years 2002, 2001, and 2000 follows.
2002 2001 2000
Weighted Average Variables
Volatility 2.5% 3.5% 3.6%
Risk-free interest rates 5.0% 5.1% 6.6%
Dividend yields 2.4% 2.4% 2.8%
Expected option life 7.6 years 6.9 years 7.0 years
Remaining contractual life 5.2 years 5.7 years 5.9 years
Fair value per share price granted during year
At market price $3.08 $2.94 $3.56
At less than market price $9.04 $8.09 $5.59
Stock Option Activity Weighted Weighted Weighted
Average Average Average
Shares Price/share Shares Price/share Shares Price/share
Total options outstanding
Beginning Balance 2,601,234 $16.62 2,669,899 $15.67 2,710,817 $14.85
Granted 233,300 19.17 398,500 19.72 358,833 16.13
Exercised (281,618) 14.65 (390,945) 12.69 (298,020) 8.02
Canceled (53,126) 19.86 (76,220) 19.86 (101,731) 17.93
Ending Balance 2,499,790 17.26 2,601,234 16.62 2,669,899 15.67
Shares authorized for grant 8,141,600 12,191,600 11,991,600
Shares exercisable, at year end 2,110,490 16.74 2,083,384 15.88 2,135,299 14.56
Shares reserved for future grants,
at year end 1,793,381 1,973,555 2,128,435
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. The new rules on accounting for goodwill and other intangible assets became effective for the Company beginning in the first quarter of 2002. The Company’s transitional impairment test did not indicate any impairment losses. The Company’s first annual test for impairment was completed during the fourth quarter of 2002 and did not indicate any impairment losses.
Pro Forma Information (in thousands except share data)
2002 2001 2000
Net Income, as reported $ 23,895 $ 22,385 $ 46,263
Goodwill amortization 0 1,120 619
Adjusted net income $ 23,895 $ 23,505 $ 46,882
EPS - Basic:
Reported $0.70 $0.66 $1.36
Adjusted $0.70 $0.69 $1.38
EPS - Diluted:
Reported $0.69 $0.65 $1.34
Adjusted $0.69 $0.68 $1.36
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which became effective for the Company beginning December 30, 2001. The Company’s adoption of SFAS No. 144 had no effect on its consolidated financial position, results of operations, or cash flows for the year ended December 28, 2002.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The Company is required to adopt SFAS No. 146 for all exit and disposal activities initiated after December 31, 2002.
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The disclosure provisions of this Statement are effective for the Company as of the fourth quarter of 2002.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” The Company adopted the expanded disclosure requirements of SFAS No. 148 for the year ended December 28, 2002.
During 2002, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” and SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which become effective for the Company December 29, 2002.
On February 13, 2003, the Company acquired Energy Dynamics, Inc. (“EDI”) for cash. EDI is a designer, assembler, and marketer of industrial generator sets. EDI’s annual sales amounted to approximately $8 million in 2002.
On February 14, 2003, pursuant to the Company’s stock repurchase plan, the Company repurchased 1.5 million shares of its common stock for cash in the amount of $26.7 million.
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors, Baldor Electric Company and Affiliates
We have audited the accompanying consolidated balance sheets of Baldor Electric Company and affiliates as of
December 28, 2002 and December 29, 2001, and the related consolidated statements of earnings, cash flows and
shareholders' equity for each of the three years in the period ended December 28, 2002. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with 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 financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Baldor Electric Company and affiliates at December 28, 2002 and December 29,
2001, and the consolidated results of their operations and their cash flows for each of the three years in the
period ended December 28, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed in Note A to the consolidated financial statements, effective December 30, 2001, Baldor
Electric Company changed its method of accounting for goodwill and identifiable assets with indefinite lives.
/s/ Ernst & Young LLP
Little Rock, Arkansas
January 31, 2003
Except for Note B and Note M, as to which the date is March 5, 2003
Report of Management on Responsibility for Financial Reporting
Baldor management is responsible for the integrity and objectivity of the financial information contained in
this annual report. The accompanying financial statements have been prepared in conformity with generally
accepted accounting principles, applying informed judgments and estimates where appropriate.
Baldor maintains a system of internal accounting controls that provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with management's authorization and recorded properly to
permit the preparation of financial statements in accordance with accounting principles generally accepted in the
United States.
The Audit Committee of the Board of Directors is composed solely of outside directors and is responsible for
recommending to the Board the independent accounting firm to be retained for the coming year. The Audit Committee
meets regularly with the independent auditors, with the Director of Audit Services, as well as with Baldor
management, to review accounting, auditing, internal accounting controls and financial reporting matters. The
independent auditors, Ernst & Young LLP, and the Director of Audit Services have direct access to the Audit
Committee without the presence of management to discuss the results of their audits.
Ernst & Young LLP, independent certified public accountants, have audited Baldor's financial statements.
Management has made available to Ernst & Young LLP all of the Company's financial records and related data, as
well as the minutes of shareholders' and directors' meetings.
/s/ R. S. BOREHAM, JR.
Chairman of the Board
/s/ JOHN McFARLAND
President and Chief Executive Officer
/s/ RONALD E. TUCKER
Chief Financial Officer and Secretary
Shareholder Information
Dividends Paid
There have been three dividend increases in the last five years and 11 increases in the last 10 years.
2002 2001 2000
1st quarter $0.13 $0.13 $0.12
2nd quarter 0.13 0.13 0.12
3rd quarter 0.13 0.13 0.13
4th quarter 0.13 0.13 0.13
Year $0.52 $0.52 $0.50
Common stock price range
2002 2001
HIGH LOW HIGH LOW
1st quarter $23.33 $20.25 $23.25 $19.50
2nd quarter 25.24 21.75 25.15 20.00
3rd quarter 25.20 17.85 22.58 18.00
4th quarter 20.86 17.30 21.50 18.81
Shareholders At December 28, 2002, there were 4,902 shareholders of record including employee shareholders through participation in the benefit plans. Shareholders' Annual Meeting The Company's Annual Meeting of Shareholders will be held at 10:30 a.m., Saturday, May 3, 2003, at the Fort Smith Convention Center in Fort Smith, Arkansas. Independent auditors Ernst & Young LLP 425 West Capitol - Suite 3600 Little Rock, Arkansas 72201 General counsel Thompson Coburn LLP One US Bank Plaza St. Louis, Missouri 63101-1693 Ticker The common stock of Baldor Electric Company trades on the New York Stock Exchange (NYSE) with the ticker symbol BEZ. Annual Report on Form 10-K Baldor's Form 10-K report is filed with the Securities and Exchange Commission and the NYSE. Copies of the Form 10-K are available, without charge, by submitting a written request to Baldor's Investor Relations Department at the address under shareholder inquiries. The Form 10-K report can also be viewed at Baldor's Corporate website. Please refer to the contact information under Shareholder Inquiries. Shareholder Inquiries To request additional copies of the Annual Report to Shareholders, or other materials and information about Baldor Electric Company, please contact us at: Baldor Electric Company Attn: Investor Relations P. O. Box 2400 Fort Smith, Arkansas 72902 Phone: (479) 646-4711 Fax: (479) 648-5752 Internet: www.baldor.com Transfer agent and registrar Continental Stock Transfer & Trust Company 17 Battery Place - Floor 8 New York, New York 10004 (800) 509-5586 212-509-4000 or 212-845-3200 Fax: 212-509-5150 www.continentalstock.com Officers Roland S. Boreham, Jr. Chairman John A. McFarland President and Chief Executive Officer Ronald E. Tucker Chief Financial Officer and Secretary Randall P. Breaux Vice President - Marketing Roger V. Bullock Vice President - Drives Randy L. Colip Vice President - Sales Charles H. Cramer Vice President - Human Resources Gene J. Hagedorn Vice President - Materials Jeffrey R. Hubert Vice President - Sales Terry B. King Vice President - Linear Motors and Generators Tracy L. Long Treasurer and Assistant Secretary Randal G. Waltman Vice President - Operations Board of Directors Roland S. Boreham, Jr. Chairman Chairman of the Board since 1981 Former Chief Executive Officer Director since 1961 Officer since 1961 Chairman - Executive Committee John A. McFarland President and Chief Executive Officer Director since 1996 Officer since 1990 Member - Executive Committee Jefferson W. Asher, Jr. Independent Management Consultant Director since 1973 Chairman - Audit Committee Member - Nominating Committee Merlin J. Augustine, Jr. Assistant Vice Chancellor for Finance and Administration and Director of Customer Relations at the University of Arkansas in Fayetteville Director since 2000 Chairman - Compensation Committee Member - Stock Option Committee Richard E. Jaudes Partner, Thompson Coburn LLP, Attorneys at Law Director since 1999 Member - Nominating Committee Robert J. Messey Senior Vice President and Chief Financial Officer of Arch Coal, Inc. (NYSE) Director since 1993 Chairman - Stock Option Committee Member - Audit Committee Robert L. Proost Financial Consultant and Lawyer Director since 1988 Member - Audit Committee Member - Compensation Committee R. L. Qualls Former Chief Executive Officer Officer from 1986 through 2000 Director since 1987 Member - Executive Committee Barry K. Rogstad Former President of the American Business Conference Director since 2001 Member - Compensation Committee Member - Stock Option Committee