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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to ____
Commission file number 1-14182
TB Wood's Corporation
(Exact name of registrant as specified in its charter)
Delaware 25-1771145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
440 North Fifth Avenue, Chambersburg, PA 17201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 264-7161
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each Exchange on
Which Registered
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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing price on February 11, 2000, was $50,238,873. On
February 15, 2000, there were 5,467,403 shares of the registrant's common stock
outstanding.
1
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders are
incorporated by reference into Part III hereof. Only those specific portions so
incorporated are to be deemed filed as part of this Form 10-K.
2
TB WOOD'S CORPORATION
FISCAL YEAR 1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I................................................................................................................... 4
Item 1. Business.................................................................................................4
Item 2. Properties...............................................................................................9
Item 3. Legal Proceedings........................................................................................9
Item 4. Submission of Matters to a Vote of Security Holders......................................................9
PART II..................................................................................................................10
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters...................................10
Item 6. Selected Financial Data.................................................................................10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation....................11
Item 8. Financial Statements and Supplementary Data.............................................................15
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....................38
PART III.................................................................................................................39
Item 10. Directors and Executive Officers of the Registrant.....................................................39
Item 11. Executive Compensation.................................................................................39
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................39
Item 13. Certain Relationships and Related Transactions.........................................................39
PART IV..................................................................................................................40
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................................40
SIGNATURES...............................................................................................................43
3
PART I
Item 1. Business.
General
TB Wood's Corporation (the "Company" or "TB Wood's") is an established
designer, manufacturer and marketer of electronic and mechanical industrial
power transmission products. The Company's products are sold to North American
and international manufacturers and users of industrial equipment. Headquartered
in Chambersburg, Pennsylvania, the 143 year-old business operates 11 production
facilities with over 1,100 employees in the United States, Canada, Mexico,
Germany, India and Italy. The Company has a network of more than 1,000 select
independent distributors with over 3,000 locations in North America.
History
TB Wood's Incorporated was founded in 1857, and entered the power
transmission industry at the turn of the century. The Company was incorporated
in 1995. In January 1996, a subsidiary of the Company merged with TB Wood's
Incorporated ("TBW"), the original Pennsylvania Corporation that was formed in
1857, with TBW as the surviving corporation in the merger.
Since 1992, the Company has introduced 25 new electronic products or
product line extensions, including seven such introductions in the most recent
two years. These include a new line of full-featured drives which improve motor
performance; extension to 20 horsepower of the Company's successful line of
micro-inverters; and drives for motor sizes up to 700 horsepower. The Company
introduced a unique and high performance integrated motor-drive combination; and
a line of customizable, cost-effective drives targeted for industrial Original
Equipment Manufacturer ("OEM") applications. Since 1992, the company has
introduced nine new mechanical products and product line extensions, including
three mechanical belted drive products and four new coupling products.
The Company uses acquisitions and strategic alliances to enhance
product offerings, gain access to technology and products, leverage fixed costs,
and extend the Company's global reach. Since 1993 the Company has completed
eight acquisitions. In the electronics business the Company acquired Plant
Engineering Consultants, Inc., an established supplier of integrated drive
systems for the fibers industry; Ambi-Tech Industries, Inc., a leading
manufacturer of electronic brakes; and Graseby Controls Inc., a supplier of
high-frequency drives for machine tool applications. In December 1997, the
Company acquired Berges electronic GmbH in Germany, and its subsidiary Berges
electronic S.r.l. in Italy. The Berges companies are well-established drive
developers, manufacturers and marketers, and are located in the two most
important machinery markets in Europe. The Company's mechanical business
acquisitions include several lines of flexible couplings and variable speed
drives from Dana Corporation; Grupo Blaju S.A. de C.V., the leading Mexican
manufacturer and marketer of belted drives; and Deck Manufacturing, a producer
of gear couplings. During July, 1999, the Company entered into a joint venture
with Electron, located in Littleton, Colorado in the belted drive business to
leverage fixed costs, provide additional foundry capacity, and open new customer
opportunities. The Company has strategic alliances with companies in Finland,
France, Switzerland, Australia, New Zealand and Japan.
Industry Overview
The power transmission industry provides electronic and mechanical
products used in manufacturing and material processing activities that transfer
controlled power from a motor or engine to a machine. The power transmission
industry consists of three product categories: mechanical power transmission
components, gear boxes and electronic drives. The Company competes in the
electronic drives and mechanical power transmission component's product
categories.
4
Products
The products manufactured by the Company are classified into two
segments, mechanical business and electronics business. The mechanical business
segment includes belted drives and couplings. The electronics business segment
includes electronic drives and electronic drive systems. Products of these
segments are sold to distributors, original equipment manufacturers, and end
users for manufacturing and commercial applications.
For further product information, refer to the consolidated financial
statements and footnote No. 9 included in this Form 10-K.
1999 1998 1997
---- ---- ----
Net Sales % Net Sales % Net Sales %
--------- ----- --------- ----- --------- ------
Electronic Power $49.7 40.2% $57.0 42.6% $44.0 35.5%
Transmission
Products
Mechanical Power 74.0 59.8% 76.9 57.4% 80.0 64.5%
Transmission
Products
$123.7 100.0% $133.9 100.0% $124.0 100.0%
Electronic Product Offering
The Company designs and manufactures Alternating Current ("AC") and
Direct Current ("DC") electronic drives and integrated electronic drive systems
that are marketed throughout North America and internationally. These products
are used to control the speed, acceleration, and other operating characteristics
of electric motors in manufacturing processes. The Company's standard AC
electronic drive products, which represent most of its net sales of electronic
drive product offering, are programmable to meet the needs of specific
applications with particular strengths in food processing, materials handling,
packaging and general machinery applications. The Company's electronic products
are designed to meet both North American and European standards. The Company's
integrated electronic drive systems consist of uniquely configured AC and/or DC
electronic drives, programmable logic controllers and in-house designed custom
software. These systems are packaged in custom enclosures to meet the
requirements of specific applications.
Mechanical Product Offering
The Company's mechanical product offering includes a full line of stock
and made-to-order products including V-belt drives, synchronous drives, open
belted variable speed drives and a broad line of flexible couplings, as well as
hydrostatic drives, clutches and brakes. These products are used in a variety of
industrial applications to transmit power from motors and engines to machines.
The primary markets for these products are the construction, oil field and
specialized industrial machinery, food processing, material handling, pumps,
compressors, mining, pulp and paper and agricultural equipment industries.
Marketing and Distribution
The Company's products are sold principally throughout North America
and, to a lesser extent, internationally. In North America, the Company sells to
selected, authorized, industrial distributors who resell the Company's products
to industrial consumers and Original Equipment Manufacturers ("OEMs"). The
Company also sells directly to approximately 1,300 OEMs. The Company's marketing
alliances include licensing agreements and distribution agreements with
distributors and manufacturers who, in some cases, market the Company's products
under private label agreements. In North America, the Company has its own
technical sales force of more than 40 people and several specialized
manufacturers' representatives.
5
The Company operates central distribution centers in Chambersburg,
Pennsylvania; Stratford, Ontario and Mexico City, Mexico and regional
distribution centers in Atlanta, Georgia; Elk Grove, Illinois; Dallas, Texas;
Los Angeles, California; Portland, Oregon; Littleton, Colorado; Montreal,
Quebec; Orlando, Florida; Edmonton, Alberta; Marienheide, Germany; Bangalore,
India; and Naturns, Italy.
The Company's products are manufactured to maintain stock inventories
and on-time delivery is important. Order backlogs are generally less than one
month's customer shipments and are not considered to be material in amount.
Customers
The Company's products are consumed principally by industrial users.
The Company's OEM customers include a number of Fortune 500 companies. The
Company's distributor customers include, among others, Motion Industries and
Kaman Industrial Technologies who are among the largest distributors in the
power transmission industry. In addition, the Company's distributors also sell
to OEMs. Management believes that the Company is one of the leading suppliers of
power transmission products, based on sales volume, to its distributors. The
Company's five largest customers accounted for approximately 29% of the
Company's net sales in 1999.
Competition
The power transmission industry is highly competitive. Competition in
the AC and DC electronic drive product categories is based on product
performance, physical size of the product, tolerance for hostile environments,
application support, availability and price. The Company's competitors in these
electronic product categories include large multi-national companies in North
America, Europe and Asia, as well as many small, domestic niche manufacturers.
The integrated electronic drive system market is driven by increased demand from
end users for greater speed and process control. This market includes sales of
products used in the maintenance and replacement of existing systems, upgrades
to existing systems and new capacity expansion. Competition is based on process
knowledge and engineering, software design, product durability and price. Major
systems competitors include Asea Brown Boveri, Allen Bradley and Siemens Corp.
The Company competes with several divisions of large industrial companies as
well as many small to mid-sized independent companies in the mechanical product
category. Competition in the mechanical product offering is based on
availability, quality, price, size capability, engineering and customer support.
The Company's most significant competitors in the mechanical product category
include Rockwell, Emerson Electric Co. Inc., Martin Sprocket and Gear, Rexnord
Corp. and Lovejoy Industries Inc. Management believes that there are no
significant foreign competitors in the North American mechanical product market
because of a fragmented customer base, prohibitive freight costs as compared to
selling price and difficult access to existing distribution channels.
Research and Development
The Company's research and development efforts include the development
of new products, the testing of products, and the enhancement of manufacturing
techniques and processes. The Company's annual expenditures for research and
development (including royalties and payments to third parties) as a percent of
net sales during the last three fiscal years have been 3.0% for 1999, 2.6% for
1998, and 3.0% for 1997. The Company is completing a new Technology Center at
the Chambersburg facility which is designed to make the research and development
investment more productive by making it easier for engineers to share insights
and collaborate on projects.
6
Raw Materials
The Company uses standard purchased components in all of its
electronics products. The Company also purchases specialized components designed
by its engineers. Purchased components include power transistors, capacitors,
printed circuit boards, aluminum heat sinks, plastic enclosures and sheet metal
stampings. These electronic parts and components are purchased from a number of
suppliers and management has taken steps to qualify multiple sources for key
items. The principal raw materials used in the Company's mechanical
manufacturing operations are various types of steel, including pig iron, metal
stampings, castings, forging and powdered metal components. The Company also
designs, tools and out-sources special components made of aluminum, powdered
metal and polymers. The Company purchases the materials used in its mechanical
manufacturing operations from a number of suppliers and management believes that
the availability of its materials is adequate.
Patents and Trademarks
The Company owns patents relating to its coupling, composite,
synchronous drive, open belted variable speed drive electronic drive and
clutch/brake product lines. The Company also owns several patents relating to
the design of its products. From time to time, the Company will grant licenses
to others to use certain of its patents and will obtain licenses under the
patents of others. In addition, the Company owns or has the right to use
registered United States trademarks for the following principal products:
Sure-Flex(R), Formflex(R), Ultra-V(R), Roto-Cone(R), Var-A-Cone(TM), True
Tube(TM), E-trAC(R), Ultracon(R), Fiberlink(TM), Dura-Flex, Disc-O-Torque, DST,
E-Trol, HST, IST, NLS, Roto-Cam, Softron, and Sure-Grip.
Employees
As of December 31, 1999, the Company employed over 1,100 people. Over
30 of the Company's hourly employees located at its Stratford, Ontario, Canada
facility are represented by the United Steelworkers of Canada pursuant to a
collective bargaining agreement dated January 20, 1998 that expires on January
19, 2001. Over 110 of the Company's employees located at its Mexico City, Mexico
facility are represented by the National Metal Workers' Union of Mexico pursuant
to a collective bargaining agreement that expires on January 31, 2001. The
Company has created the TB Wood's Institute, which offers training programs to
improve employees' operating, management and team-building skills.
Environmental Matters
As with most industrial companies, the Company's operations and
properties are required to comply with, and are subject to liability under,
federal, state, local and foreign laws, regulations and ordinances relating to
the use, storage, handling, generation, treatment, emission, release, discharge
and disposal of certain materials, substances and wastes. The nature of the
Company's operations exposes it to the risk of claims with respect to
environmental matters and there can be no assurance that material costs will not
be incurred in connection with such liabilities or claims.
Both the Mt. Pleasant, Michigan (the "Mt. Pleasant Facility") and the
Chambersburg, Pennsylvania (the "Chambersburg Facility") facilities had been
listed on the Comprehensive Environmental Response, Compensation, and Liability
Information System ("CERCLIS") (a list of sites maintained by the United States
Environmental Protection Agency ("USEPA") for which a determination was to be
made concerning whether investigation or remediation under CERCLA would be
required). Both have been designated by USEPA as requiring no further action
under CERCLA; therefore, the Company does not believe that material expenditures
for these sites will be incurred under the CERCLA program. However, this does
not assure that such expenditures would not be required under other federal
and/or state programs.
The Mt. Pleasant Facility is currently listed on Michigan's inactive
hazardous waste site list pursuant to the Michigan version of CERCLA (formerly
known as "Act 307", amended and recodified on June 5, 1995 as Part 201 of the
Natural Resources and Environmental Protection Act ("Part 201")). The Mt.
Pleasant Facility was first placed on the Michigan hazardous waste site list in
1991, when the Facility was owned by Dana Corporation. When the Company acquired
7
the Mt. Pleasant Facility from Dana Corporation, the Asset Purchase Agreement
dated March 31, 1993 (the "Asset Purchase Agreement") included an environmental
indemnity provision. Pursuant to this provision, Dana Corporation agreed to
indemnify the Company with respect to any environmental liabilities to the
extent they arose out of environmental conditions first occurring on or before
the closing date, including the presence or release of any hazardous substances
at, in, or under the Mt. Pleasant Facility and with respect to the
identification of the Mt. Pleasant Facility on the Michigan list of inactive
hazardous waste sites. The Dana Corporation is conducting a limited remediation
with respect to volatile organic compounds found in soils and groundwater. The
Company has not been notified by the Michigan Department of Natural Resources or
any other governmental agency or person that it has any responsibility for
investigating or remediating such environmental conditions. Although the Company
has no reason to believe Dana Corporation cannot fulfill its remediation and
indemnification obligations under the Asset Purchase Agreement, if Dana
Corporation is unable to fulfill such commitments, then the Company may incur
additional costs.
The Company believes that its facilities are in substantial compliance
with current regulatory standards applicable to air emissions under the Clean
Air Act Amendments of 1990 ("CAAA"). At this time, the Company cannot estimate
when other new air standards will be imposed or what technologies or changes in
processes the Company may have to install or undertake to achieve compliance
with any applicable new requirements at its facilities. The Company has no
reason to believe that such expenditures are likely to be material.
Similarly, based upon the Company's experience to date, the Company
believes that the future cost of currently anticipated compliance with existing
environmental laws relating to wastewater, hazardous waste and employee and
community right-to-know should not have a material adverse effect on the
Company's financial condition.
Recent Developments
Self-Tender Offer
On December 17, 1999, the Company completed a "Dutch Auction"
self-tender offer. On November 12, 1999, the Company commenced the tender offer
for up to 400,000 shares of its Common Stock, or approximately 6.8% of its
then-outstanding shares, at a purchase price not greater than $12.50 nor less
than $9.00 per share. A total of 424,398 shares were tendered at $9.00 per
share. Due to the over-subscription, shares tendered were pro-rated. The Company
purchased 400,000 shares at $9.00 per share, resulting in a final pro-ration
factor of 94%. Following the purchase of shares of Common Stock tendered, the
Company had approximately 5,462,228 shares of Common Stock issued and
outstanding. The funds required to complete the offer and pay related expenses
were provided from borrowings incurred by the Company under its $52,500,000
unsecured revolving credit facility (the "Credit Facility") arranged by PNC
Bank, N.A. ("PNC") bearing a variable interest rate that is currently at LIBOR
plus 112.5 basis points and maturing October 2003.
8
Item 2. Properties.
The Company owns and operates the following facilities:
Location Operations Sq. Feet
-------- ---------- --------
Chambersburg, Foundry production of iron, and manufacturing and engineering 440,000
Pennsylvania of mechanical products. Central distribution, administrative
offices and corporate headquarters.
Scotland, Pennsylvania Manufacturing and engineering of electronic products. 51,300
Trenton, Tennessee Manufacturing of mechanical products. 60,000
Stratford, Ontario Manufacturing of mechanical products. Central distribution and 46,000
administrative offices for Canada.
San Marcos, Texas Manufacturing and engineering of mechanical products. 51,000
Mt. Pleasant, Michigan Manufacturing of mechanical products. 30,000
Chattanooga, Tennessee Manufacturing, engineering and sales of integrated electronic 60,000
drive systems. Headquarters of PEC.
Marienheide, Germany Manufacturing, engineering and sales of electronic products. 9,800*
Central distribution and administrative offices for Berges
electronic GmbH.
Naturns, Italy Manufacturing of electrical products. 19,500*
Elk Grove, Illinois Distribution center. 21,700
Bangalore, India Manufacturing, engineering and sales of integrated electronic 4,500*
drive systems.
- ------------------------------
*Includes certain leased space
In addition, the Company leases manufacturing facilities in Mexico
City, Mexico. The Company also has distribution facilities in: Atlanta, Georgia;
Dallas, Texas; Montreal, Quebec; Edmonton, Alberta; Los Angeles, California;
Portland, Oregon; Littleton, Colorado; and Orlando, Florida.
Item 3. Legal Proceedings.
The Company is a party to various legal actions arising in the ordinary
course of business. The Company does not believe that the outcome of any of
these actions will have a materially adverse affect on the consolidated
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted for a vote of the security holders during the
fiscal quarter ended December 31, 1999.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The Company consummated the Initial Public Offering ("IPO") of its
common stock on February 8, 1996 and its Common Stock is listed on the New York
Stock Exchange. The high and low prices for the Common Stock, and dividends paid
on Common Stock, during the period from January 2, 1998 through December 31,
1999 were as follows:
Sales Price Dividends
----------- ---------
High Low Declared Paid in Cash
---- --- -------- ------------
Fiscal Year 1998
----------------
1st quarter $23.12 $20.50 $.08 $.08
2nd quarter 24.50 20.81 .09 .09
3rd quarter 21.06 14.56 .09 .09
4th quarter 14.81 11.75 .09 .09
Fiscal Year 1999
----------------
1st quarter $12.75 $10.88 $.09 $.09
2nd quarter 12.00 10.63 .09 .09
3rd quarter 11.00 9.63 .09 .09
4th quarter 10.50 8.25 .09 .09
On February 11, 2000 there were 166 registered shareholders of the
Company's Common Stock, and the high and low sales prices for the Common Stock
were both $9.19. During fiscal year 1999, the Company declared and paid total
dividends of $.36 on the shares of its Common Stock. The Company declared a $.09
dividend on January 7, 2000 and paid it on January 31, 2000. The declaration of
any dividend, including the amount thereof, will be at the discretion of the
Board of Directors of the Company, and will depend on the Company's then current
financial condition, results of operations and capital requirements, and such
other factors as the Board of Directors deems relevant.
There were no sales of unregistered securities during the period of
January 2, 1999 through December 31, 1999.
Item 6. Selected Financial Data.
The following tables set forth selected historical financial and
operating data for the Company for each of the five years through fiscal year
1999 and have been derived from the Company's financial statements which have
been audited by the Company's independent public accountants. The information
set forth below should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operation."
10
Effective fiscal year 1995, the Company changed its year-end to the
Friday closest to the last day of December. Fiscal year-ends are as follows:
1999 December 31, 1999
1998 January 1, 1999
1997 January 2, 1998
1996 January 3, 1997
1995 December 29, 1995
1994 & prior December 31 of calendar year.
Selected Financial Data
(in thousands, except per share data) Fiscal Year
1999 1998 1997 1996 1995
Revenue and Income:
Net sales $123,737 $133,949 $124,027 $102,505 $102,307
Gross profit 44,357 47,589 45,012 37,747 36,111
Operating income 12,108 15,566 16,951 12,573 12,593
Minority interest 808 0 0 0 0
Operating income after minority interest 11,300 15,566 16,951 12,573 12,593
Net income 5,367 7,890 8,689 4,640 4,599
-------------- -------------- ------------ ------------ -----------
Cash Flow
Cash provided by operations $10,050 $6,228 $16,829 $9,090 $9,214
Capital expenditures 8,316 7,481 5,824 3,762 4,531
-------------- -------------- ------------ ------------ -----------
Assets and Liabilities:
Working capital* $34,245 $34,644 $27,682 $26,962 $26,160
Total assets 102,866 96,025 89,617 73,395 66,631
Total debt 36,924 32,469 26,539 22,227 41,463
Shareholders' equity (deficit) 27,692 28,515 23,606 16,875 (7,488)
-------------- -------------- ------------ ------------ -----------
Per Share Data
Net income $0.91 $1.33 $1.47 $0.83 $1.21
Cash dividends paid .36 .35 .32 .24 -
Book value 4.72 4.81 3.99 3.01 (1.97)
-------------- -------------- ------------ ------------ -----------
Weighted average shares outstanding 5,910 5,932 5,921 5,600 3,810
* Working capital is defined as the sum of accounts receivable, inventory, and
other current assets, less accounts payable and accrued expenses.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Year Ended December 31, 1999 Compared to Year Ended January 1, 1999
Net sales for fiscal 1999 decreased to $123.7 million from $133.9
million in 1998, a decrease of $10.2 million, or 7.6%. Based on data received
from industry trade associations, this reduction compares to, and management
believes was caused by, changes in the marketplace caused by overall economic
conditions.
Gross profit for 1999 decreased to $44.4 million from $47.6 million in
1998, a decrease of $3.2 million, or 6.7%. Gross profit as a percent of net
sales increased to 35.9% from 35.5%, due primarily to activities to reduce raw
materials and component costs, benefits from the belted drives joint venture,
lower machine set-up costs, increased output per man hour of wage costs, and
closing the Greensboro, North Carolina facility. These favorable results were
partially offset by wage inflation and lower fixed cost absorption, which
resulted in the decrease of gross profit.
11
Selling, general, and administrative ("SG&A") expense for fiscal 1999
increased to $32.2 million from $32.0 million in 1998, an increase of $0.2
million or 0.6%. SG&A expense as a percent of net sales increased to 26.1% from
23.9%, primarily as a result of lower sales. The major challenge in 1999 was to
control SG&A expenses in absolute dollars while spending on new product projects
which may generate benefits in future years.
Other expense (excluding minority interest) for fiscal 1999 increased
to $2.6 million from $2.4 million in 1998, an increase of $0.2 million or 8.3%.
Other expense for 1999 included $350 thousand of one-time charges to terminate
the proposed acquisition of Lincoln Motors. Interest expense, a component of
total other expense, decreased to $1.9 million in 1999 from $2.0 million in
1998. This decrease was due primarily to lower interest rates. The effective tax
rate for 1999 was 38.5%. Details of the provision for income taxes are discussed
in Note 5 to the financial statements.
Net income for fiscal 1999 decreased to $5.4 million from $7.9 million
in 1998, a decrease of $2.5 million, or 31.6%. The primary reason for this
reduction was the lower sales volume.
Year Ended January 1, 1999 Compared to Year Ended January 2, 1998
Net sales for fiscal 1998 increased to $133.9 million from $124.0
million in 1997, an increase of $9.9 million, or 8.0%. The increase in sales was
primarily due to increased electronics business sales resulting from the
acquisition of Berges electronic GmbH on December 1, 1997. The year 1998 started
off with record sales in the first quarter, but beginning in the second quarter,
a softening in our North American market resulted in lower sales levels for the
remainder of the year.
Gross profit for 1998 increased to $47.6 million from $45.0 million in
1997, an increase of $2.6 million, or 5.7%. Gross profit as a percent of net
sales decreased to 35.5% from 36.3%, due primarily to lower margins in the
mechanical business resulting from expenditures for tooling and start-up costs
related to new business, training of new employees, and consolidation of the
gear coupling product line in our San Marcos facility.
Selling, general, and administrative expense for fiscal 1998 increased
to $32.0 million from $28.1 million in 1997, an increase of $3.9 million or
14.1%. SG&A expense as a percent of net sales increased to 23.9% from 22.6%,
primarily as a result of higher SG&A expense as a percent of sales at Berges
electronic GmbH which was not included in 1997 operating results.
Other expense for fiscal 1998 decreased to $2.4 million from $2.5
million in 1997, a decrease of $0.1 million or 1.9%. Interest expense, a
component of total other expense, increased to $2.0 million in 1998 from $1.7
million in 1997. This increase was due primarily to higher debt levels in 1998,
offset by lower interest rates. The effective tax rate for 1998 was 40.0%.
Details of the provision for income taxes are discussed in Note 5 to the
financial statements.
Net income for fiscal 1998 decreased to $7.9 million from $8.7 million
in 1997, a decrease of $.8 million, or 9.2%.
12
Year Ended January 2, 1998 Compared to Year Ended January 3, 1997
Net sales for fiscal 1997 increased to $124.0 million from $102.5
million in 1996, an increase of $21.5 million or 21.0%. The improvement was
broad-based with sales from existing businesses increasing $15.8 million or
15.4% and sales from businesses acquired in late 1996 and 1997 contributing an
additional $5.7 million.
Gross profit increased to $45.0 million from $37.7 million in 1996, an
increase of $7.3 million or 19.2%. Gross profit as a percent of net sales
decreased to 36.3% from 36.8%, due primarily to shifts in product mix and higher
costs of sales in the mechanical business resulting from the integration of the
gear coupling acquisition.
SG&A expense for fiscal 1997 increased to $28.1 million from $25.2
million in 1996, an increase of $2.9 million or 11.5%. SG&A expense as a percent
of net sales decreased to 22.6% from 24.6%, primarily as a result of the
significantly higher sales volume and implementation of cost reduction
initiatives.
Other expense, excluding extraordinary items, for fiscal 1997 decreased
to $2.5 million from $2.6 million in 1996, a decrease of $0.1 million or 4.2%.
Interest expense, a component of total other expense, decreased to $1.7 million
in 1997 from $2.0 million in 1996. This decrease was due primarily to lower
borrowings in the first part of 1997. The effective tax rate for 1997 was 40.0%.
Details of the provision for income taxes are discussed in Note 5 to the
financial statements. In 1996, an extraordinary item of $1.3 million, net of
tax, was related to early repayment of debt with the proceeds from the Initial
Public Offering ("IPO").
Net income for fiscal 1997 increased to $8.7 million from $6.3 million
in 1996, before one-time charges, an increase of $2.4 million, or 38.1%.
Liquidity and Capital Resources
The Company's principal sources of funds are cash flows from operations
and borrowings under the Company's revolving credit agreement. Cash provided
from operations in 1999 was $10.1 million, an increase of $3.9 million from the
prior year. Net cash used for investing activities during fiscal years 1999,
1998, and 1997 was $7.8 million, $7.7 million and $16.7 million, respectively.
The Company's investing activities in 1999 and 1998 were primarily capital
expenditures. In 1997, the Company acquired Graseby Controls, Inc. through a
purchase of stock, and acquired the assets of Berges electronic GmbH for a total
of $9.9 million, net of acquired cash.
Capital expenditures for fiscal years 1999, 1998, and 1997 were $8.3
million, $7.5 million, and $5.8 million, respectively. During the last three
fiscal years, the Company has made significant capital investments in computer
controlled surface mount production ("SMT") lines for populating semiconductors
onto circuit boards, test and production equipment at the Company's foundry in
Chambersburg, and other equipment to improve and modernize production
facilities. In 1999, the Company completed the new San Marcos, Texas facility
and upgraded some of the machine tool equipment base for mechanical product
business. In 1998, the Company initiated two major facility projects: 1) an
engineering center in Chambersburg scheduled for completion in mid-2000 and 2) a
new plant in San Marcos, Texas to manufacture flexible couplings, which was
operational in the first quarter of 1999. In 1997, the Company purchased a $2.1
million facility for its electronics systems business in Chattanooga, Tennessee.
These capital expenditures are intended to reduce costs, improve product
quality, and provide additional capacity for meeting the Company's growth
objectives.
In March 1999, the Company borrowed $3.0 million by using Variable Rate
Demand Revenue Bonds, under the authority of the Industrial Development
Corporation City of San Marcos, Texas to finance a new facility for the
mechanical products business.
In April 1997, the Company borrowed $2.6 million by issuing Variable
Rate Demand Revenue Bonds, under the authority of The Industrial Revenue Board
of the City of Chattanooga, Tennessee, to finance a new facility for the
electronics systems business.
13
The Company paid $2.1 million in dividends during 1999. The Company
paid a $0.09 per share dividend in the first, second, third, and fourth quarters
of 1999, and declared a $0.09 dividend on January 7, 2000 and paid it on January
31, 2000. The Company paid $2.1 million in dividends during 1998. The Company
paid an $0.08 per share dividend in the first quarter and a $0.09 per share
dividend in the second, third, and fourth quarters of 1998.
The Company believes that it will have sufficient cash flows from
operations and available borrowings to meet its future short-term and long-term
cash needs for interest, operating expenses, and capital expenditures.
Derivative Financial Instruments
Market risk is the potential change in an instrument's value caused,
for example, by fluctuations in interest and currency exchange rates. The
Company's primary market risk exposures are interest rate and unfavorable
movements in exchange rates between the U.S. dollar and each of the Mexican
peso, Canadian dollar, German deutsche mark, Indian rupee and Italian lira.
Monitoring and managing these risks is a continual process carried out by senior
management. Market risk is managed based on an ongoing assessment of trends in
interest rates, foreign exchange rates, and economic developments, giving
consideration to possible effects on both total return and reported earnings.
The Company's financial advisors, both internal and external, provide ongoing
advice regarding trends that affect management's assessment.
Interest Rate Derivatives at 1999 2000 2001
---------------------------------------------------------------------
Interest Rate Swap:
Variable to Fixed
Fixed Rate U.S. $.................... 10,000 10,000 10,000
Average Pay Rate..................... 5.75% 5.75% 5.75%
Year 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 compliance issue. The
Company implemented a five-step process to evaluate the impact of the Year 2000
compliance issue. These steps involve an inventory of Company systems, an
evaluation and analysis of systems regarding the Year 2000 compliance impact,
implementation of modifications to specified systems, unit testing, and finally,
systems or integration testing to validate compliance. The Company relies upon
third-party vendors which supply goods and services to the Company and, although
the Company has consulted with various vendors in order to minimize the risk of
the Year 2000 compliance issue, such third parties may be affected by the Year
2000 compliance issue. While the Company believes its actions have ameliorated
the Year 2000 risk, there can be no assurance that the Company's internal
systems or equipment or those of third parties on which the Company relies will
be Year 2000 compliant or that the Company's or third parties' contingency plans
will mitigate the effects of noncompliance. No problems have been experienced as
of yet because of this issue. There is still uncertainty regarding the scope of
the Year 2000 compliance issue and, at this time, the Company is unable to
quantify the impact of potential Year 2000 compliance failures. As of the date
of this filing, the Company has not experienced any material Year 2000 problems
in any of the Company's facilities or operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133), effective for fiscal years beginning
after June 15, 1999. SFAS No. 133 requires derivatives to be recorded on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in values of derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of SFAS No. 133." SFAS
No. 137 delays the standard effective date to the beginning of the first quarter
of the fiscal year beginning after June 15, 2000. Adoption of this statement is
not expected to have a material effect on the Company's financial statements.
Safe Harbor Statement
Under the Private Securities Litigation Reform Act of 1995, except for
the historical information contained herein, this annual report contains
forward-looking statements about matters which involve risks and uncertainties,
including but not limited to economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices, and other factors discussed in the Company's filings with
the Securities and Exchange Commission.
14
Item 8. Financial Statements and Supplementary Data.
Page
----
Report of Independent Public Accountants..................................................................... 16
Consolidated Balance Sheets as of December 31, 1999 and January 1, 1999...................................... 17
Consolidated Statements of Operations for the Years Ended December 31, 1999, January 1, 1999,
and January 2, 1998 ................................................................................. 18
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999,
January 1, 1999, and January 2, 1998................................................................. 18
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999,
January 1, 1999, and January 2, 1998 ................................................................ 19
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, January 1, 1999,
and January 2, 1998 ................................................................................. 20
Notes to Consolidated Financial Statements................................................................... 21
15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
TB Wood's Corporation:
We have audited the accompanying consolidated balance sheets of TB
Wood's Corporation (a Delaware corporation) and Subsidiaries as of December 31,
1999 and January 1, 1999 and the related consolidated statements of operations,
comprehensive income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. 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 financial position of TB Wood's
Corporation and subsidiaries as of December 31, 1999 and January 1, 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 11, 2000
16
TB Wood's Corporation And Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share and share amounts) 1999 1998
- -------------------------------------------------------------------------------------- ----------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,245 $ 2,521
Accounts receivable, less allowances for doubtful accounts, discounts,
and claims of $402 and $414 in 1999 and 1998, respectively 18,593 17,428
Inventories:
Finished goods 22,970 21,433
Work in process 9,708 8,370
Raw materials 7,465 5,982
LIFO reserve (5,983) (5,930)
----------- ---------------
34,160 29,855
Other current assets 1,834 2,705
----------- ---------------
Total current assets 55,832 52,509
----------- ---------------
Property, Plant, and Equipment:
Machinery and equipment 50,280 43,131
Land, buildings, and improvements 13,653 12,118
----------- ---------------
63,933 55,249
Less accumulated depreciation 32,326 27,553
----------- ---------------
31,607 27,696
----------- ---------------
Other Assets:
Deferred income taxes (Note 5) 3,454 3,570
Goodwill, net of accumulated amortization of
$1,672 and $1,418 in 1999 and 1998, respectively 9,805 10,059
Other 2,168 2,191
----------- ---------------
Total other assets 15,427 15,820
----------- ---------------
$102,866 $96,025
=========== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (Note 4) $ 273 $ 378
Accounts payable 12,407 6,332
Checks outstanding 1,003 1,705
Accrued expenses (Note 3) 7,935 9,012
Deferred income taxes (Note 5) 1,034 1,589
----------- ---------------
Total current liabilities 22,652 19,016
----------- ---------------
Long-term debt, less current maturities (Note 4) 36,651 32,091
Postretirement benefit obligation, less current portion 15,134 16,403
Minority interest 737 0
Commitments and Contingencies (Note 7)
Shareholders' Equity :
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued or outstanding 0 0
Common stock, $.01 par value; 40,000,000 shares authorized, 5,887,698
issued and 5,465,814 outstanding in 1999, and 5,909,286 issued and
5,899,168 outstanding in 1998 59 59
Common stock in treasury at cost; 421,884 in 1999 and 10,118 in 1998 (3,811) (158)
Additional paid-in capital 29,086 28,821
Retained Earnings 4,001 1,136
Accumulated other comprehensive income (1,643) (1,343)
----------- ---------------
Total shareholders' equity 27,692 28,515
----------- ---------------
$102,866 $96,025
=========== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
17
TB Wood's Corporation And Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts) 1999 1998 1997
- ----------------------------------------- ---- ---- ----
Net sales $123,737 $133,949 $124,027
Cost of sales 79,380 86,360 79,015
----------------- --------------- ---------------
Gross profit 44,357 47,589 45,012
Selling, general, and administrative expenses 32,249 32,023 28,061
----------------- --------------- ---------------
Operating income 12,108 15,566 16,951
Other (expense) income:
Minority Interest 808 0 0
----------------- --------------- ---------------
Operating income after minority interest 11,300 15,566 16,951
----------------- --------------- ---------------
Interest expense and other finance charges (1,915) (2,040) (1,695)
Other, net (657) (380) (773)
----------------- --------------- ---------------
Other expense, net (2,572) (2,420) (2,468)
----------------- --------------- ---------------
Income before provision for income taxes 8,728 13,146 14,483
Provision for income taxes (Note 5) 3,361 5,256 5,794
----------------- --------------- ---------------
Net income $ 5,367 $ 7,890 $ 8,689
================= =============== ===============
Per share of common stock:
Basic:
Net income per common share $ 0.91 $ 1.34 $ 1.49
================= =============== ===============
Weighted average shares of common stock and
equivalents outstanding 5,896 5,874 5,833
================= =============== ===============
Diluted:
Net income per common share $ 0.91 $ 1.33 $ 1.47
================= =============== ===============
Weighted average shares of common stock
and equivalents outstanding 5,910 5,932 5,921
================= =============== ===============
Statements of Comprehensive Income
1999 1998 1997
---- ---- ----
Net Income $5,367 $7,890 $8,689
Other comprehensive income, net of tax:
Foreign currency translation adjustment, net of tax of
$188, $760, and $122 in 1999, 1998, and 1997, respectively (300) (1,140) (168)
-------------- --------------- ---------------
Comprehensive income $5,067 $6,750 $8,521
================= =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
18
TB Wood's Corporation And Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Retained Accumulated
Additional Earnings Other
Common Treasury Paid-In (Accumulated Comprehensive
(in thousands) Stock Stock Capital Deficit) Income (Loss)
- -------------- ----- ----- ------- -------- -------------
Balance, January 3, 1997 $ 58 $ 0 $ 28,158 $ (11,306) $ (35)
Net income 0 0 0 8,689 0
Stock issuance for 401(k) plan 0 0 100 0 0
Dividends declared 0 0 0 (1,400) 0
Stock option compensation and proceeds
from
Options exercised 0 95 82 0 0
Treasury stock, net 0 (276) 0 (391) 0
Foreign currency translation adjustment 0 0 0 0 (168)
- ----------------------------------------- ------------ ----------- -------------- -------------- -----------------
Balance, January 2, 1998 58 (181) 28,340 (4,408) (203)
Net income 0 0 0 7,890 0
Dividends declared 0 0 0 (2,056) 0
Stock option compensation and proceeds
from
Options exercised 1 467 481 (257) 0
Treasury stock, net 0 (444) 0 (33) 0
Foreign currency translation adjustment 0 0 0 0 (1,140)
- ----------------------------------------- ------------ ----------- -------------- -------------- -----------------
Balance January 1, 1999 59 (158) 28,821 1,136 (1,343)
Net income 0 0 0 5,367 0
Stock issuance for 401(k) plan 0 323 0 (35) 0
Dividends declared 0 0 0 (2,120) 0
Stock option compensation and proceeds
from
Options exercised 0 426 265 (329) 0
Treasury stock, net 0 (4,402) 0 (18) 0
Foreign currency translation adjustment 0 0 0 0 (300)
- ----------------------------------------- ------------ ----------- -------------- -------------- -----------------
Balance December 31, 1999 $ 59 $(3,811) $29,086 $ 4,001 $(1,643)
============ =========== ============== ============== =================
The accompanying notes are an integral part of these consolidated financial
statements.
19
TB Wood's Corporation And Subsidiaries
Consolidated Statements Of Cash Flows
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------------- --------------- ---------------
Cash Flows from Operating Activities:
Net income $5,367 $7,890 $8,689
---------------- --------------- ---------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,706 4,687 4,097
Change in deferred income taxes, net (439) 1,892 837
Stock option compensation and employee stock benefit expense 648 1,222 101
Net (gain) loss on sale of assets (99) 5 10
Minority interest 808 0 0
Other, net (43) (28) 0
Changes in working capital, net of effects of acquisitions:
Accounts receivable (1,165) 2,746 (173)
Inventories (4,305) (4,157) 1,876
Other current assets 871 (2,402) (227)
Accounts payable 6,075 (2,278) 1,531
Accrued and other liabilities (2,374) (3,349) 88
---------------- --------------- ---------------
Total adjustments 4,683 (1,662) 8,140
---------------- --------------- ---------------
Net cash provided by operating activities 10,050 6,228 16,829
---------------- --------------- ---------------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired 0 0 (9,914)
Capital expenditures (8,316) (7,481) (5,824)
Proceeds from sales of fixed assets 791 414 65
Other, net (257) (658) (1,003)
---------------- --------------- ---------------
Net cash used in investing activities (7,782) (7,725) (16,676)
---------------- --------------- ---------------
Cash Flows from Financing Activities:
Change in checks outstanding (702) 90 83
Proceeds from (repayments of) long-term debt, net 2,633 (357) 2,003
Proceeds from the PNC revolving credit facility, net (Note 4) 2,200 6,287 2,300
Payment of dividends (2,120) (2,056) (1,866)
Proceeds from issuance of stock upon option exercise 250 70 17
Purchase of Treasury Stock, net (4,994) (754) (276)
Other (511) (674) 0
---------------- --------------- ---------------
Net cash (used in) provided by financing activities (3,244) 2,606 2,261
---------------- --------------- ---------------
Effect of changes in foreign exchange rates (300) (1,140) (168)
---------------- --------------- ---------------
(Decrease) increase in cash and cash equivalents (1,276) (31) 2,246
Cash and cash equivalents at beginning of year 2,521 2,552 306
---------------- --------------- ---------------
Cash and cash equivalents at end of year $1,245 $2,521 $2,552
================ =============== ===============
Income taxes paid during the year $2,052 $3,819 $6,307
================ =============== ===============
Interest paid during the year $1,915 $2,040 $1,573
================ =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements
20
TB Wood's Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(in thousands, except per share amounts)
1. NATURE OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
TB Wood's Corporation and subsidiaries (collectively, "Wood's" or the
"Company") is an established designer, manufacturer, and marketer of electronic
and mechanical industrial power transmission products which are sold to
distributors, domestic and international manufacturers and users of industrial
equipment. Principal products of the Company include electronic drives,
integrated electronic drive systems, mechanical belted drives, and flexible
couplings. The Company has operations throughout the United States, Canada,
Mexico, Germany, Italy and India. The accompanying consolidated financial
statements include the accounts of TB Wood's Corporation, its wholly owned
subsidiaries and its majority-owned joint venture. All inter company accounts
have been eliminated in consolidation.
Year-End
Fiscal year-ends are as follows:
1999......................December 31, 1999
1998......................January 1, 1999
1997......................January 2, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash
At December 31, 1999, $1,091 of cash is restricted under the Variable
Rate Demand Revenue Bonds (Note 4). This cash may be used for building
renovations, improvements, or other capital expenditures related to new
production facilities for the electronics systems business and a new production
facility for the mechanical division.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property, Plant, and Equipment
The Company depreciates its property, plant, and equipment principally
using the straight-line method over the estimated useful lives of the assets.
Equipment under capital leases is depreciated over the asset's estimated useful
life and is included in machinery and equipment. Maintenance and repair costs
are charged to expense as incurred, while major renewals and improvements are
capitalized. When property and equipment are retired or otherwise disposed of,
the related carrying value and accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in income. The depreciable
lives of the major classes of property, plant and equipment are summarized as
follows:
Asset Type Lives
------------------------------------------ ----------------------------
Machinery and equipment 3 - 15 years
Buildings and improvements 10 - 40 years
21
Inventories
Inventories are stated at the lower of cost or market primarily using
the last-in, first-out ("LIFO") method. Market is defined as net realizable
value. Cost includes raw materials, direct labor, and manufacturing overhead.
Approximately 79% and 77% of total inventories in years ending December 31, 1999
and January 1, 1999, respectively, were valued using the LIFO method. TB
Wood's-Canada, TB Wood's-Mexico and TB Wood's-Berges inventories are stated at
the lower of cost or market using the first-in, first-out ("FIFO") method.
Self-Insurance
The Company maintains workers' compensation insurance policies which
have the potential for retrospective premium adjustments and a partially
self-insured group health insurance policy which is subject to specific
retention levels. Insurance administrators assist the Company in estimating the
fully developed workers' compensation liability and group health insurance
reserves which are accrued by the Company. In the opinion of management,
adequate provision has been made for all incurred claims. At December 31, 1999
the Company has issued letters of credit totaling $735 to cover incurred claims
and other costs related to the workers' compensation.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries have
been translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation."
Translation adjustments, which result from the process of translating financial
statements into U.S. dollars, are accumulated as a separate component of other
comprehensive income. Exchange gains and losses resulting from foreign currency
transactions, primarily intercompany sales of products, are included in other
expense in the accompanying statements of operations and are not material.
Goodwill
The excess of cost over the net assets acquired ("Goodwill") is being
amortized on a straight-line basis over a period of 40 years. Goodwill relates
to the acquisition of TB Wood's Incorporated ("Wood's-US") in 1986 and the
acquisition of certain other businesses and product lines (Note 8).
Long-Lived Assets and Intangible Assets
The Company reviews the carrying values assigned to long-lived assets
and certain identifiable intangible assets based on expectations of undiscounted
future cash flows and operating income generated by the long-lived assets or the
tangible assets underlying certain identifiable intangible assets in determining
whether the carrying amount of such assets is recoverable.
Shareholders' Equity
In 1996, the board of directors authorized, subject to certain business
and market conditions, the purchase of up to 200,000 of the Company's common
shares. At December 31, 1999 the number of treasury shares purchased under this
authorization was 162,432. The number of treasury shares issued to employees
under option and purchase plans was 12,456 and under the 401(k) profit-sharing
plan was 21,557 for 1999. The Board of Directors authorized a self-tender "Dutch
Auction" for 400,000 of the Company's common shares at a price not to exceed
$12.50 per share and not lower than $9.00 per share. On December 17, 1999, the
Company accepted 400,000 shares at $9.00 per share and incurred related costs.
22
Fair Value of Financial Instruments
The fair value of financial instruments classified as current assets or
liabilities, including cash and cash equivalents, accounts receivable, and
accounts payable, approximate carrying value due to the short-term maturity of
the instruments. The fair value of short-term and long-term debt and deferred
compensation amounts approximate carrying value and are based on their effective
interest rates compared to current market rates.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, the
disclosures 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.
Cyclical Industry
The markets for some of the Company's products are cyclical, generally
following changes in the overall economy. Consequently, during periods of
economic expansion, the Company has experienced increased demand for its
products, and during periods of economic contraction, the Company has
experienced decreased demand for its products. Such changes in the general
economy affect the Company's results of operations in the relevant fiscal
periods.
Research and Development Costs
Research and development costs consist substantially of projects
related to new product development within the electronics business and are
expensed as incurred. Total research and development costs are $3,659 in 1999,
$3,482 in 1998, and $3,733 in 1997.
Major Customers
The Company's five largest customers accounted for approximately 29%,
25%, and 30% of net sales for fiscal years 1999, 1998, and 1997, respectively.
Of these customers, one accounted for close to 20% of net sales for the year
ended December 31, 1999. The loss of one or more of these customers would have
an adverse effect on the Company's performance and operations. Foreign and
export sales accounted for 23% and 22% of total sales in fiscal years 1999 and
1998, respectively. Inter company transactions are consummated on terms
equivalent to those that prevail in arms-length transactions.
Supply of Electronic Raw Materials and Purchased Components
Historically, the electronics component industry, which supplies
components for the Company's electronic products, has from time to time
experienced heavy demand for certain components during periods of growth in the
consumer electronic industry. The rapid growth of the AC electronic drive market
has also created heavy demand for power control electronics. While certain of
the Company's components are obtained from a single or limited number of
sources, the Company has potential alternate suppliers for most of the specialty
components used in its manufacturing operations. There can be no assurance,
however, that the Company will not experience shortages of raw materials or
components essential to the production of its products or be forced to seek
alternative sources of supply, which may increase costs or adversely affect the
Company's ability to obtain and fulfill orders for its products.
23
Net Income Per Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share", which the Company adopted for the year ended
January 2, 1998. Basic earnings per share ("EPS") is computed by dividing
reported earnings available to common shareholders by weighted average shares
outstanding. No dilution for any potentially dilutive securities is included in
basic EPS. Diluted EPS is computed by dividing reported earnings available to
common shareholders by weighted average shares and common equivalent shares
outstanding. The difference between primary and fully diluted net income per
share is not material for any of the periods presented and has therefore been
excluded.
The computation of weighted average shares outstanding and net income
per share is as follows for fiscal years 1999, 1998, and 1997:
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Common shares outstanding for basic EPS......................................... 5,896 5,874 5,833
Shares issued upon assumed exercise of outstanding stock options................ 14 58 88
-------------------------------------
Weighted average number of common and common equivalent
shares outstanding........................................................... 5,910 5,932 5,921
=====================================
Recent Accounting Pronouncements
Effective fiscal 1997, the Company adopted SFAS No. 129, "Disclosure of
Information and Capital Structure." SFAS No. 129 requires disclosure of the
pertinent rights and privileges of all securities other than ordinary common
stock. The Company has disclosed such information in its annual reports filed in
Form 10-K.
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", effective for fiscal years beginning after December 15, 1997. The
statement addresses the reporting and display of changes in equity that result
from transactions and other economic events, excluding transactions with owners.
The Company adopted SFAS No. 130 in 1998.
Effective fiscal 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The Company has
disclosed such information in Note 9 to the consolidated financial statements.
Effective January 3, 1998, the Company adopted SFAS No. 132,
"Employers' Disclosure about Pension and Other Postretirement Benefits." (See
Note 6).
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning after
June 15, 1999. SFAS No. 133 requires derivatives to be recorded on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in values of derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of SFAS No. 133." SFAS
No. 137 delays the standard effective date to the beginning of the first quarter
of the fiscal year beginning after June 15, 2000. Adoption of this statement is
not expected to have a material effect on the Company's financial statements.
24
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period presentation.
3. ACCRUED EXPENSES
Components of accrued expenses were as follows:
1999 1998
- --------------------------------------------------------- ----------- ----------
Accrued payroll and other compensation $2,311 $1,987
Accrued workers' compensation 404 934
Other accrued liabilities 5,220 6,091
----------- ----------
Total $7,935 $9,012
=========== ==========
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations as at the end of each
fiscal period consist of the following:
1999 1998
- --------------------------------------------------------- ---------- ----------
Unsecured Revolving Line of Credit $30,777 $28,954
Capital lease obligations 597 965
Industrial revenue bonds 5,550 2,550
---------- ----------
36,924 32,469
Less current maturities (273) (378)
---------- ----------
$36,651 $32,091
========== ==========
Aggregate future maturities of long-term debt and capital lease obligations as
of December 31, 1999 are as follows:
2000 273
2001 241
2002 62
2003 30,798
2004 0
Thereafter 5,550
---------------
$36,924
===============
The Company has a $52,500 unsecured revolving credit facility arranged
by PNC Bank, N.A. ("PNC") bearing variable interest of LIBOR plus 112.5 basis
points, maturing October 2003. The credit facility contains numerous restrictive
financial covenants which require the Company to comply with certain financial
tests including, among other things, maintaining minimum tangible net worth, as
defined, and maintaining certain specified ratios. The credit facility also
contains other restrictive covenants that include, among other things,
restrictions on outside investments and restrictions on capital expenditures.
In April 1997, the Company borrowed approximately $2.6 million by
issuing Variable Rate Demand Revenue Bonds under the authority of the Industrial
Revenue Board of the City of Chattanooga, bearing variable interest of 5.65% at
December 31, 1999 maturing April 2022. The bonds were issued to finance the new
production facility for the electronics systems business.
25
In August 1998, the Company entered into an interest rate swap
agreement that effectively converted the underlying variable rate debt in the
unsecured revolving credit facility to fixed rate debt. The notional principal
amount of the swap agreement is $10,000 with an effective fixed rate of 5.75%.
The swap agreement is settled each month and will expire in July 2001.
In February 1999, the Company borrowed approximately $3.0 million by
issuing Variable Rate Demand Revenue Bonds under the authority of the Industrial
Development Corporation City of San Marcos, bearing variable interest of 5.65%
at December 31, 1999, maturing April 2024. The bonds were issued to finance a
new production facility for the mechanical division.
The gross proceeds from (repayments of) the revolving credit facilities
are as follows:
1999 1998 1997
- --------------------------------------------------- ---------------- --------------- ---------------
Proceeds from revolving credit facility 47,400 40,300 46,400
Repayments of revolving credit facility (45,200) (34,013) (44,100)
---------------- --------------- ---------------
5. INCOME TAXES
The components of the provision (benefit) for income taxes are shown
below:
1999 1998 1997
- --------------------------------------------------- ---------------- --------------- ---------------
Current:
Federal and state $2,105 $2,300 $4,365
Foreign 817 1,064 592
---------------- --------------- ---------------
2,922 3,364 4,957
---------------- --------------- ---------------
Deferred:
Federal and state 439 1,892 837
Foreign 0 0 0
---------------- --------------- ---------------
439 1,892 837
---------------- --------------- ---------------
Provision for income taxes $3,361 $5,256 $5,794
================ =============== ===============
Under SFAS No. 109, deferred tax assets or liabilities at the end of
each period are determined by applying the current tax rate to the difference
between the financial reporting and income tax bases of assets and liabilities.
The deferred tax benefit is determined based on changes in deferred tax items
exclusive of deferred tax implications of the early extinguishment of debt and
reclassifications between deferred and current taxes.
26
The components of deferred income taxes are as follows:
1999 1998
- --------------------------------------------------- ----------- ----------------
Deferred income tax liabilities:
Book basis in property over tax basis $(2,709) $(2,337)
LIFO inventory basis differences (2,680) (3,042)
Other (604) (1,337)
--------- ----------------
Total deferred income tax liabilities (5,993) (6,716)
--------- ----------------
Deferred income tax assets:
Postretirement benefits not
currently deductible 6,019 6,772
Accrued liabilities not currently deductible 821 1,050
Allowance for doubtful accounts and
inventory reserves 861 742
Other 712 133
--------- ----------------
Total deferred income tax assets 8,413 8,697
--------- ----------------
Net deferred income tax asset $2,420 $1,981
========= ================
A reconciliation of the provision for income taxes at the statutory
federal income tax rate to the Company's tax provision as reported in the
accompanying statements of operations is shown below:
1999 1998 1997
- ---------------------------------- ----------- --------------- ----------------
Federal statutory income tax $2,966 $4,470 $4,924
State income taxes, net of
federal income tax benefit 139 592 651
Foreign taxes and other, net 256 194 219
--------- --------------- ----------------
$3,361 $5,256 $5,794
========= =============== ================
In 1999, 1998, and 1997 earnings before income taxes included $2,541,
$2,862, and $1,259, respectively, of earnings generated by the Company's foreign
operations. No federal or state income taxes have been provided on such
earnings, since undistributed earnings have been reinvested and are not expected
to be remitted to the parent company.
In September 1997, the Internal Revenue Service completed its review of
the Company's 1995, 1994, and 1993 federal income tax returns. The review did
not have a material effect on the Company's operations. The Internal Revenue
Service is currently in review of the Company's 1996 federal income tax return.
6. BENEFIT PLANS
Compensation Plans
Wood's maintains a discretionary compensation plan for its salaried and
hourly employees which provides for incentive awards based on certain levels of
earnings, as defined. Amounts awarded under the plan and charged to expense in
the accompanying statements of operations were $709, $1,238, and $2,002, for
fiscal years 1999, 1998, and 1997 respectively.
27
Profit-Sharing Plans
Since January 1, 1988, the Company has maintained a separate defined
contribution 401(k) profit-sharing plan covering all domestic employees. Under
this plan, the Company matches a specified percentage of each eligible
employee's contribution and 50% of the match is invested in funds designated by
the employee and 50% of the match is used to purchase company common shares on
the open market. The Company contributed 21,557 shares of common stock held in
treasury in 1999, 35,990 in 1998, and 5,797 in 1997. Amounts contributed by the
Company under this profit-sharing plan were approximately $249, $580, and $530
for fiscal years 1999, 1998, and 1997, respectively. In addition, the Company
has a noncontributory profit-sharing plan covering its Canadian employees for
which $38, $17, and $37 were charged to expense for the fiscal years 1999, 1998,
and 1997, respectively.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan ("ESPP") enables employees
of the Company to subscribe for shares of common stock on quarterly offering
dates, at a purchase price which is the lesser of 90% of the fair value of the
shares on the first or last day of the quarterly period. Employee contributions
to the ESPP were $124, $152 and $63 for 1999, 1998, and 1997 respectively.
Pursuant to the ESPP, 12,456 shares were issued to employees during 1999, 8,775
during 1998 and 4,436 shares during 1997. At the annual meeting on April 11,
1997, the Company's shareholders approved the reservation of 500,000 shares to
be issued under the ESPP. As of December 31, 1999, 474,333 shares are available
for future issuance.
Stock Options
In March 1991, the Company granted nonqualified stock options to the
president of the Company to purchase 157,893 shares of the Company's common
stock at an option price of $6.33 per share. The options vested 30% in January
1993, 15% in each of January 1994, 1995, 1996, and 1997, and 10% in January
1998. The option agreement was amended on March 30, 1992 to set the option price
at $1.58 per share plus an amount equal to the average yield on the 30-year U.S.
Treasury bond maturing on the day closest to the fifteenth anniversary of the
option measurement date as defined in the agreement. The options are exercisable
on or after the seventh anniversary of the measurement date and expire one year
thereafter. During 1992, the controlling shareholder granted an additional
47,367 options on the controlling shareholder's shares to a director, with terms
similar to the 1991 options, as amended. Also in 1992, the Company granted an
additional 30,000 options to an employee with terms similar to the 1991 options,
as amended, with vesting beginning in 1994. The options are exercisable
beginning on the seventh anniversary of the measurement date, as defined, and
expire on the eighth anniversary of the measurement date. The option agreements
contain various fair value puts and calls, with fair value to be determined by
the board of directors or an independent appraiser. All of the above options
have expired or have been exercised as of December 31, 1999.
As a result of the above amendment, beginning in March 1992, the
Company began accounting for the options under variable plan accounting, whereby
increases in the value of the Company's common stock above the option price
resulted in the recording of compensation expense by the Company. Through
December 31, 1994, the Company recorded no compensation expense related to the
options as, in the opinion of management, the fair value of the Company's common
stock was equal to or below the option price, as adjusted. Due to increases in
the estimated fair value of the Company's common stock, as determined by an
independent appraiser, the Company recorded stock option compensation expense of
$675 for the year ended December 29, 1995. Additional stock option compensation
expense of approximately $230 will be recorded in future periods based on the
vesting schedule of options. In July 1995, the option agreements were amended to
remove features of the options that resulted in variable plan accounting.
Accordingly, subsequent to July 1, 1995, the options are being accounted for as
fixed options whereby future increases in the value of the Company's common
stock will not result in additional stock option compensation expense.
28
In February 1994, the Company granted an additional 105,000 options
with terms similar to those discussed above, except that the February 1994
options do not have a put feature and have an option price which escalates
during the vesting period at a fixed rate of 6% per year. The February 1994
options are exercisable at a fixed exercise price for a one-year period
following the vesting period. The Company accounts for the February 1994 options
as fixed options whereby future increases in the value of the Company's common
stock do not result in the recording of compensation expense by the Company. The
option agreements contain various fair value puts and calls, with fair value to
be determined by the board of directors or an independent appraiser.
In December 1994, the controlling shareholder of the Company granted
89,004 options on the controlling shareholder's shares to certain members of
management which contain terms similar to the February 1994 options, except that
the option price escalates during the vesting period at a fixed rate of 7.86%
per year.
The Company adopted a 1996 stock-based incentive compensation plan (the
"1996 Plan"), the purpose of which is to assist the Company in attracting and
retaining valued personnel by offering them a greater stake in the Company's
success and a closer identity with the Company, and to encourage ownership of
the Company's common stock by such personnel.
The 1996 Plan is administered by a committee (the "Committee")
designated by the board of directors. The aggregate maximum number of shares of
common stock available for awards under the 1996 Plan is 500,000, subject to
adjustment to reflect changes in the Company's capitalization. Awards under the
1996 Plan may be made to all officers and key employees of the Company. No
awards can be made under the 1996 Plan after January 31, 2006.
The Committee may grant shares of common stock in the form of either
deferred stock or restricted stock, as defined in the 1996 Plan. Options granted
under the 1996 Plan may be either incentive stock options ("ISOs") or
nonqualified stock options. ISOs are intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code. Unless
an option is specifically designated at the time of grant as an ISO, options
under the 1996 Plan will be nonqualified. The exercise price of the options will
be determined by the Committee. The maximum term of an option or Stock
Appreciation Right ("SAR") granted under the 1996 Plan shall not exceed ten
years from the date of grant or five years from the date of grant if the
recipient on the date of grant owns, directly or indirectly, shares possessing
more than 10% of the total combined voting power of all classes of stock of the
Company. No option or SAR may be exercisable sooner than six months from the
date the option or SAR is granted.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", for its stock options. SFAS No. 123 requires companies to
estimate the value of all stock-based compensation using a recognized pricing
model. However, it also allows an entity to continue to measure compensation
cost for those plans using the method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the method of accounting in APB No.
25 must make pro forma disclosures of net income and, if presented, earnings per
share, as if the fair value-based method of accounting defined in the statement
had been applied. The Company has elected to continue to account for options
under APB No. 25.
In June 1997, the Company granted options to purchase 46,250 shares of
common stock at an option price of $14 per share and 92,500 at an option price
of $23. The options vest evenly over a three-year period from the grant date.
The options may be exercised as they vest. The $14 options expire ten years from
the grant date, and the $23 options expire five years from the grant date.
In February and August 1998, the Company granted options to purchase
50,550 and 25,000 shares of common stock, respectively, at an option price of
$21 and $17.88 per share, respectively, and 101,100 and 50,000 options,
respectively, at $28 per share. The options vest evenly over a three-year period
from the grant date. The options may be exercised as they vest. The $21 and
$17.88 options expire ten years from the grant date and the $28 options expire
five years from the grant date. No compensation expense was incurred in 1998
because the strike price was higher than the market price.
29
In January 1999, the Company granted options to purchase 53,250 shares
of common stock at an option price of $12 per share and 106,500 options at $18
per share. The options vest evenly over a three-year period from the grant date.
The options may be exercised as they vest. The $12 options expire ten years from
the grant date and the $18 options expire five years from the grant date. No
compensation expense was incurred in 1999 because the strike price was higher
than the market price.
In February 2000, the Company granted options to purchase 79,250 shares
of common stock at an option price of $9.50 per share and 158,500 options at
$14.25 per share. The options vest evenly over a three-year period from the
grant date. The options may be exercised as they vest. The $9.50 options expire
in ten years from the grant date and the $14.25 options expire five years from
the grant date. No compensation expense was incurred in 2000 because the strike
price was higher than the market price.
The Company has elected to account for its stock-based compensations
plan under APB No. 25 using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Risk free interest rate 5.5% 5.5% 5.5%
Expected lives 5 & 10 years 5 &10 years 10 years
Expected volatility 9.5% 25.7% 31.3%
Dividend yield 4.0% 2.4% 2.3%
If the Company had accounted for these plans in accordance with SFAS
No. 123, the Company's reported pro forma net income and pro forma net income
per share for the fiscal years from 1997 to 1999 would have been as follows:
1999 1998 1997
---- ---- ----
Net income as reported $5,367 $7,890 $8,689
Pro Forma 5,235 7,715 8,646
EPS as reported
Basic 0.91 1.34 1.49
Diluted 0.91 1.33 1.47
Pro forma
Basic 0.89 1.31 1.48
Diluted 0.89 1.30 1.46
30
Stock option activity for the years ended December 31, 1999, January 1,
1999, and January 2, 1998 is as follows:
Number of shares Weighted average
subject to option exercise price
- --------------------------------------------------------------------------------
Options outstanding at
January 3, 1997 280,918 $ 3.56
Granted 138,750 20.00
Canceled 0 0.00
Exercised (58,166) 2.94
Options outstanding at
January 2, 1998 361,502 9.88
Granted 226,650 25.67
Canceled (6,000) 25.67
Exercised (80,887) 3.18
Options outstanding at
January 1, 1999 501,265 17.92
Granted 159,750 16.00
Canceled (43,977) 4.69
Exercised (78,227) 6.28
Options outstanding at
December 31, 1999 538,811 $ 20.20
The following table sets forth the range of exercise price, number of
shares, weighted average exercise price, and remaining contractual lives by
groups of similar price and grant date at December 31, 1999.
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of average average Average
exercise Number exercise contractual Number Exercise
price of shares price life of shares Price
- ------------------------------------------------------------------------------------------------------------
$ 3.87 - $ 7.74 34,961 $ 5.53 1.6 years 34,961 $ 5.53
$ 12.00 - $28.00 503,850 $ 21.22 4.9 years 159,650 $22.58
----------- -----------
538,811 194,611
=========== ===========
Postretirement Benefits
The Company sponsors a defined benefit postretirement medical plan that
provides coverage for retirees and their dependents. A portion of the plan is
paid for by retiree cost sharing. The accounting for the plan anticipates future
cost sharing increases to keep pace with health care inflation. The plan is
unfunded. The Company adopted the provisions of SFAS No. 132, "Employers
Disclosure About Pensions and Other Postretirement Benefits" effective January
3, 1998.
31
The following table summarizes the Company's postretirement benefit
obligations and the assumptions used in determining postretirement benefit cost:
1999 1998 1997
- ------------------------------------------------- ------------------- ------------------------ --------------------
Benefit obligation at beginning of year $16,992 $18,031 $19,128
Service cost 138 205 185
Interest cost 343 503 483
Amortization (1,535) (1,501) (1,521)
Retiree benefits (305) (246) (244)
------------------- ------------------------ --------------------
Benefit obligation at end of year $15,633 $16,992 $18,031
=================== ======================== ====================
Discount rate 7.75% 7.75% 7.75%
------------------- ------------------------ --------------------
Initial health care cost trend 6.50% 8.00% 8.00%
------------------- ------------------------ --------------------
Ultimate health care cost trend rate 5.00% 5.00% 5.00%
------------------- ------------------------ --------------------
Year ultimate health care cost
trend rate reached 2004 2004 2004
------------------- ------------------------ --------------------
Net periodic postretirement benefit includes the following components:
1999 1998 1997
------------- ------------- ------------------
Service cost $ 138 $ 205 $ 185
Interest cost 343 503 483
Amortization (1,535) (1,501) (1,521)
------------- ------------- ------------------
Net benefit $(1,054) $(793) $(853)
============= ============= ==================
In 1997, the Company changed the remaining amortization period for the
unrecognized prior service cost from 14.4 years to 5.4 years.
7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is subject to a number of legal actions arising in the
ordinary course of business. In management's opinion, the ultimate resolution of
these actions will not materially affect the Company's financial position or
results of operations.
Environmental Risks
The Company's operations and properties are subject to federal, state,
and local laws, regulations, and ordinances relating to certain materials,
substances, and wastes. The nature of the Company's operations exposes it to the
risk of claims with respect to environmental matters. Based on the Company's
experience to date, management believes that the future cost of compliance with
existing environmental requirements will not have a material adverse effect on
the Company's operations or financial position.
32
Operating Lease Commitments
The Company leases office space, office equipment, and other items
under non-cancelable operating leases. The expense for non-cancelable operating
leases was approximately $520, $385, and $642, for fiscal years 1999, 1998, and
1997, respectively. At December 31, 1999, future minimum lease payments under
non-cancelable operating leases are as follows:
2000 $ 401
2001 274
2002 201
2003 197
2004 and thereafter 363
----------------------
$1,436
======================
8. ACQUISITIONS AND JOINT VENTURES
Acquisitions
In February 1996, the Company exercised an option to purchase the
outstanding shares of Grupo Blaju, S.A., de C.V. (subsequently renamed TB Wood's
Mexico, S.A., de C.V.) and its subsidiaries for approximately $458, including
legal and professional fees. There was no goodwill associated with the purchase.
In October 1996, the Company purchased the assets of Ambi-Tech
Industries, Inc., a leading manufacturer of electronic brakes for electric
motors, for approximately $991 cash, including legal and professional fees, and
an $800 note payable at 7% interest. Principal is due in five annual
installments of $160 beginning September, 1997. Goodwill associated with the
purchase is being amortized over 40 years using the straight-line method (Note
2).
In November 1996, the Company acquired certain assets of Deck
Manufacturing Corp. ("Deck"), an established designer and manufacturer of
industrial disc and gear couplings, for approximately $1,471 of cash, including
legal and professional fees. Goodwill associated with the purchase is being
amortized over 40 years using the straight-line method (Note 2). The Company
also loaned Deck $400 which is secured by the excess accounts receivable and the
inventory not acquired. The note receivable is included in other assets.
In May 1997, the Company purchased the stock of TB Wood's North
Carolina ("Wood's-NC"), formerly Graseby Controls Inc., a subsidiary of Graseby
plc, for cash of approximately $5,000. Wood's-NC manufactures and sells
industrial AC drives, including the Volkmann(TM) brand of high-frequency AC
drives, electronic brakes, and Soft Starts. Goodwill associated with the
purchase is being amortized over 40 years using the straight-line method (Note
2).
In November 1997, the Company purchased the stock of Berges electronic
GmbH ("Berges") for cash of approximately $1,480 and assumed liabilities of
$4,765. Berges designs, manufactures, and markets its own line of AC inverters
for the European market and sells TB Wood's inverters on a private-label basis.
Goodwill associated with the purchase is being amortized over 40 years using the
straight-line method (Note 2).
Joint Ventures
In December 1997, the Company purchased a 65% ownership in a joint
venture with TB Wood's (India) Private Limited ("TBWI") for $91. In November
1999, the Company increased its ownership percentage to 85.5% for $71. TBWI
distributes domestically manufactured electrical components and performs system
integration design in the India market. TBWI was not included in the 1997
financial statements as its impact was immaterial.
33
In July 1999, the Company entered into a joint venture agreement with
Electron Corporation ("Electron"), forming a Pennsylvania limited partnership
under the name TBWE Belt Drive Components LP (the "Joint Venture"). The parties
also formed a Pennsylvania limited liability company under the name TBWE Belt
Drive Systems LLC which serves as the general partner of the Joint Venture. The
Company and Electron hold a limited partner interest in the Joint Venture of
75.35% and 24.15%, respectively. The general partner holds a 0.5% interest in
the Joint Venture. The Company and Electron hold an interest in the general
partnership of 75.6% and 24.4%, respectively. The operations of the Joint
Venture have been consolidated with the Company as the Company has a controlling
interest in the Joint Venture.
The sole purpose of the Joint Venture is to manufacture, machine,
market, distribute and engineer belted drive components and such other products
having similar uses which may be developed by either the Company or Electron in
the future.
Operating income attributed to the Joint Venture from its inception
through the year ending December 31, 1999 was $3,246; $808 of this amount is the
minority partner's share.
9. BUSINESS SEGMENT INFORMATION
Description of the Types of Products from which Each Segment Derives its
Revenues
The Company is engaged principally in the design, manufacture and sale
of power transmission products. The products manufactured by the Company are
classified into two segments, mechanical business and electronics business. The
mechanical business segment includes belted drives and couplings. The
electronics business segment includes electronic drives and electric drive
systems. Products of these segments are sold to distributors, original equipment
manufacturers and end users for manufacturing and commercial applications.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on
profit or loss from operations before income taxes. The accounting policies of
the reportable segments are the same as described in the summary of significant
accounting policies. Intersegment sales are not material.
Factors Management Used to Identify the Company's Reportable Segments
The Company's reportable segments are business units that manufacture
and market separate and distinct products and are managed separately because
each business requires different processes, technologies, and market strategies.
34
The following table summarizes revenues, operating income, total assets
and expenditures for long-lived assets by business segment for fiscal years
1999, 1998, and 1997:
Mechanical Electronics
Business Business Total
- --------------------------------------------- ------------------- ------------------- -------------------
1999:
Revenues from external customer $73,990 $49,747 $123,737
Operating profit after minority interest 8,734 2,566 11,300
Depreciation 2,844 1,464 4,308
Segment assets 55,290 40,990 96,280
Expenditures for long-lived assets 6,989 1,327 8,316
1998:
Revenues from external customers $76,909 $57,040 $133,949
Operating profit 9,485 6,081 15,566
Depreciation 2,900 1,474 4,374
Segment assets 49,403 38,924 88,327
Expenditures for long-lived assets 5,359 2,122 7,481
1997:
Revenues from external customers $79,988 $44,039 $124,027
Operating profit 11,925 5,026 16,951
Depreciation 2,860 1,021 3,881
Segment assets 44,108 32,040 76,148
Expenditures for long-lived assets 2,050 3,774 5,824
The following table reconciles segment profit to consolidated income
before income taxes and extraordinary items for fiscal years 1999, 1998 and
1997:
1999 1998 1997
- ----------------------------------------------------- ----------------- ---------------- ------------------
Total operating profit for reportable segments $ 11,300 $ 15,566 $ 16,951
Interest, net (1,915) (2,040) (1,695)
Other unallocated amounts (657) (380) (773)
----------------- ---------------- -------------------
Income before income taxes $ 8,728 $ 13,146 $ 14,483
================= ================ ===================
The following table reconciles segment assets to consolidated total
assets as of December 31, 1999 and January 1, 1999:
1999 1998
- ----------------------------------------------------------------------- ---------------- -----------------
Total assets for reportable segments $96,280 $ 88,327
Cash 1,245 2,521
Corporate fixed assets 1,749 1,351
Deferred tax 3,340 3,570
Other unallocated assets 252 256
---------------- -----------------
Consolidated total $102,866 $ 96,025
================ =================
35
Information regarding the Company's domestic and foreign operations is as
follows:
Net Long-Lived
Sales Assets
- --------------------------- ----------------------- ---------------------
1999:
United States $ 94,873 $36,703
Canada 9,059 1,111
Germany 6,679 1,998
Italy 8,865 512
Mexico 3,675 990
India 586 98
----------------------- ---------------------
Consolidated $123,727 $41,412
======================= =====================
1998:
United States $103,906 $33,206
Canada 8,739 869
Germany 7,708 2,105
Italy 9,979 525
Mexico 3,482 966
India 135 84
----------------------- ---------------------
Consolidated $133,949 $37,755
======================= =====================
1997:
United States $107,186 $29,689
Canada 14,135 1,062
Germany 0 1,248
Italy 0 462
Mexico 2,706 749
----------------------- ---------------------
Consolidated $124,027 $33,210
======================= =====================
10. QUARTERLY FINANCIAL DATA
Fiscal Quarters
1999 First Second Third Fourth
- --------------------------------------- -------------- ------------------- ---------------- ------------------
Sales $30,058 $30,723 $32,293 $30,663
Gross profit 11,080 10,517 11,536 11,224
Gross profit % 36.9% 34.2% 35.7% 36.6%
Net income 1,176 1,287 1,495 1,409
Basic net income per share 0.20 0.22 0.25 0.24
Diluted net income per share 0.20 0.22 0.25 0.24
Dividends declared 0.09 0.09 0.09 0.09
Dividends paid 0.09 0.09 0.09 0.09
- --------------------------------------- -------------- ------------------- ---------------- ------------------
36
Fiscal Quarters
1998 First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------
Sales $36,051 $34,161 $34,150 $29,587
Gross profit 13,376 12,252 11,838 10,123
Gross profit % 37.1% 35.9% 34.7% 34.2%
Net income 2,383 2,259 1,759 1,489
Basic net income per share .41 .39 .30 .25
Diluted net income per share .40 .38 .30 .25
Dividends declared .08 .09 .09 .09
Dividends paid .08 .09 .09 .09
Fiscal Quarters
1997 First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------
Sales $30,489 $31,739 $31,257 $30,542
Gross profit 10,951 11,507 11,487 11,067
Gross profit % 35.9% 36.3% 36.8% 36.2%
Net income 2,137 2,145 2,199 2,208
Basic net income per share 0.37 0.37 0.38 0.38
Diluted net income per share 0.36 0.36 0.37 0.37
Dividends declared .08 .08 .08 .08
Dividends paid .08 .08 .08 .08
======================================================================
37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
38
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information called for by this Item regarding directors and
executive officers is set forth in the Company's definitive Proxy Statement for
the 2000 Annual Meeting in the Sections entitled "Election of Directors,"
"Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" and
is incorporated herein by reference.
Item 11. Executive Compensation.
The information called for by this Item is set forth in the Company's
definitive Proxy Statement for the 2000 Annual Meeting in the Section entitled
"Executive Compensation" and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by this Item is set forth in the Company's
definitive Proxy Statement for the 2000 Annual Meeting in the Section entitled
"Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information called for by this Item is set forth in the Company's
definitive Proxy Statement for the 2000 Annual Meeting in the Section entitled
"Certain Relationships and Related Transactions" and is incorporated herein by
reference.
39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) All financial statements;
The consolidated financial statements of the Company and its
subsidiaries on pages 15 through 37 hereof and the report thereon of
Arthur Andersen LLP appearing on page 16 hereof.
(2) Financial Statement Schedule
Schedule II for the fiscal year ended December 31, 1999 and the report
thereon of Arthur Andersen LLP appearing on page 16 hereof. All other
schedules have been omitted because they are not applicable or are not
required. All other required schedules are included in the Consolidated
Financial Statements or notes therein.
(3) Exhibits
Number Description
- ------ -----------
3.1 Amended Certificate of Incorporation of the Company (incorporated by
reference to TB Wood's Corporation Registration Statement filed on Form
S-1, as amended, File No. 33-96498 ("Form S-1") Exhibit 3.1).
3.2 Amended and Restated By-laws of the Company (incorporated by reference
to Form S-1 Exhibit 3.2).
4.1 Shareholders' Agreements by and among T. B. Wood's Sons Company, Thomas
C. Foley and Gifford P. Foley, Barton J. Winokur, Kurt A. Herwald,
Michael L. Hurt, Michael H. Iversen, David H. Halleen, Stanley L. Mann,
Lee J. McCullough, Carl R. Christenson, Harold L. Coder, III, James E.
Williams, Joseph S. Augustine, Bernard M. Goldsmith, Harvey R. Heller,
Robert Patterson Saltsman, F. Philip Handy, F. Philip Handy, as
Guardian of the Property of Kate Elizabeth Handy, F. Philip Handy, as
Guardian of the Property of Philip Breckenridge Handy and F. Philip
Handy, as Guardian of the Property of Abigail Slocum Handy
(incorporated by reference to Form S-1 Exhibit 4.1).
4.2 Amendments to Shareholders' Agreements by and among TB Wood's
Incorporated (formerly known as "T. B. Wood's Sons Company"), Thomas C.
Foley and Gifford P. Foley, Barton J. Winokur, Kurt A. Herwald, Michael
L. Hurt, Michael H. Iversen, David H. Halleen, Stanley L. Mann, Lee J.
McCullough, Carl R. Chistenson, Harold L. Coder, III, James E.
Williams, Joseph S. Augustine (incorporated by reference to Form S-1
Exhibit 4.2).
9.1 Voting Trust Agreement dated March 31, 1989, among T. B. Wood's Son's
Company and Bernard M. Goldsmith, Harvey R. Heller, Robert Patterson
Saltsman, F. Philip Handy, F. Philip Handy, as Guardian of the Property
of Abigail Slocum Handy, Kate Elizabeth Handy, Philip Breckenridge
Handy and F. Philip Handy, as Trustee (incorporated by reference to
Form S-1 Exhibit 9.1).
10.1 Stock Purchase Agreement dated January 7, 1994 by and among T. B.
Wood's Sons Company, Plant Engineering Consultants, Inc. and John
Morris, Jesse Batten, Ralph Pedigo, Ronald Bingham, Walter Taeubel and
Cook Family Trust (incorporated by reference to Form S-1 Exhibit 10.1).
10.2 Asset Purchase Agreement dated May 12, 1994 by and between T. B. Wood's
Sons Company and Magnetic Power Systems, Inc. (incorporated by
reference to Form S-1 Exhibit 10.2).
40
10.3 Non-Qualified Stock Option Agreements between T. B. Wood's Sons Company
and Joseph S. Augustine, Michael H. Iversen, David H. Halleen, Stanley
L. Mann, Lee J. McCullough, Carl R. Christenson, Harold L. Coder, III
and James E. Williams (incorporated by reference to Form S-1 Exhibit
10.36).
10.4 Non-Qualified Stock Option Agreement dated as of March 15, 1991 between
T. B. Wood's Sons Company and Michael L. Hurt, together with Addendum
dated as of March 30, 1992 (incorporated by reference to Form S-1
Exhibit 10.37).
10.5 Asset Purchase Agreement between T. B. Wood's Sons Company and Dana
Corporation dated March 31, 1993 (includes Schedule 7.11 On-Site
Environmental Procedures) (incorporated by reference to Form S-1
Exhibit 10.38).
10.6 TB Wood's Corporation 1996 Stock-Based Incentive Compensation Plan
(incorporated by reference to Form S-1 Exhibit 10.39).
10.7 Amendments to the Non-Qualified Stock Option Agreements between TB
Wood's Incorporated (formerly known as "T. B. Wood's Sons Company") and
Joseph S. Augustine, Michael H. Iversen, David H. Halleen, Stanley L.
Mann, Lee J. McCullough, Carl R. Christenson, Harold L. Coder, III and
James E. Williams (incorporated by reference to Form S-1 Exhibit
10.40).
10.8 Second Addendum dated July 1, 1995 to the Non-Qualified Stock Option
Agreement dated as of March 15, 1991 between TB Wood's Incorporated
(formerly known as "T. B. Wood's Sons Company") and Michael L. Hurt
(incorporated by reference to Form S-1 Exhibit 10.41).
10.9 Stock Purchase Agreement by and among TB Wood's Incorporated and Grupo
Blaju, S.A. de C.V. and Jorge R. Kiewek, Ninfa D. de Callejas and
Marcela Kiewek G., dated February 14, 1996 (incorporated by reference
to Form 10-K, for fiscal year 1995, Exhibit 10.43).
10.10 Revolving Credit Agreement by and among TB Wood's Incorporated, Plant
Engineering Consultants, Inc., Grupo Blaju, S.A., de C.V., TB Wood's
Canada, Ltd. and the Banks Party thereto and PNC Bank, National
Association, as Agent, dated October 10, 1996 (incorporated by
reference to Form 10-K, for fiscal year 1996, Exhibit 10.44).
10.11 TB Wood's Employee Stock Purchase Plan, dated March 1, 1997
(incorporated by reference to Form 10-K, for fiscal year 1996, Exhibit
10.45).
10.12 Stock Purchase Agreement by and between TB Wood's Incorporated and
Graseby Electro-Optics Inc. dated May 8, 1997 (incorporated by
reference to Form 10-K, for fiscal year 1997, Exhibit 10.46).
10.13 Translated Stock Purchase Agreement by and among TB Wood's Incorporated
and Berges Antriebstechnic GmbH and Karen Sarstedt, dated October 23,
1997 (incorporated by reference to Form 10-K, for fiscal year 1997,
Exhibit 10.47).
10.14 Form of the Non-Qualified Stock Option Agreements between TB Wood's
Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson,
Michael H. Iversen, Willard C. Macfarland, Jr., and other key employees
dated June 17, 1997 and between TB Wood's Corporation and Robert J.
Dole dated July 29, 1997 issued under the 1996 Plan (incorporated by
reference to Form 10-K, for fiscal year 1997, Exhibit 10.48).
41
10.15 Form of the Non-Qualified Stock Option Agreements between TB Wood's
Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson,
Michael H. Iversen, Willard C. Macfarland, Jr., and other key employees
dated January 29, 1998 issued under the 1996 Plan (incorporated by
reference to Form 10-K, for fiscal year 1997, Exhibit 10.49).
10.16 Employment Agreement between TB Wood's Incorporated and Michael L. Hurt
dated April 14, 1998 (incorporated by Form 10-K, for fiscal year 1998.
10.17 Supplemental Executive Retirement Plan between TB Wood's Corporation
and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson, Michael H.
Iversen and other key employees dated May 7, 1998 (incorporated by
reference to Form 10-K, for fiscal year 1998).
10.18 Form of the Non-Qualified Stock Option Agreements between TB Wood's
Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson,
Michael H. Iversen, Willard C. Macfarland, Jr., and other key employees
dated January 26, 1999 issued under the 1996 Plan (incorporated by
reference to Form 10-K, for fiscal year 1998).
10.19 Form of the Non-Qualified Stock Option Agreements between TB Wood's
Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson,
Michael H. Iversen, Willard C. Macfarland, Jr., and other key employees
dated January 26, 1999 issued under the 1996 Plan (incorporated by
reference to Form 10-K, for fiscal year 1998).
10.20 Form of the Non-Qualified Stock Option Agreements between TB Wood's
Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson,
Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees
dated February 8, 2000 issued under the 1996 Plan.
10.21 Form of the Non-Qualified Stock Option Agreements between TB Wood's
Corporation and Thomas C. Foley, Michael L. Hurt, Carl R. Christenson,
Michael H. Iversen, Willard C. Macfarland, Jr. and other key employees
dated February 8, 2000 issued under the 1996 Plan.
10.50 Joint Venture Agreement dated July 3, 1999 by and between TB Wood's
Incorporated and The Electron Corp.
10.51 Operating Agreement of TBWE Belt Drive Systems LLC dated July 3, 1999
by and between TB Wood's Incorporated and The Electron Corp.
11.1 Statement regarding Computation of Per Share Earnings.
21.2 Subsidiaries and Joint Ventures of Registrant.
23.2 Consent of Independent Public Accountants.
(b) Reports on Form 8-K.
There were no reports on Form 8-K by the Registrant during the fourth
quarter of fiscal year 1999.
27.0 Financial Data Schedule
42
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, in the City of
Chambersburg and Commonwealth of Pennsylvania, on March 30, 2000.
TB WOOD'S CORPORATION
By: /s/ MICHAEL L. HURT
-------------------
Michael L. Hurt
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
/s/ THOMAS C. FOLEY Chairman of the Board March 30, 2000
- ------------------- (Principal Executive Officer)
Thomas C. Foley
/s/ MICHAEL L. HURT President and Director March 30, 2000
- ------------------- (Principal Executive Officer)
Michael L. Hurt
/s/ JEAN-PIERRE L. CONTE Director March 30, 2000
- ------------------------
Jean-Pierre L. Conte
/s/ ROBERT DOLE Director March 30, 2000
- ---------------
Senator Robert Dole
/s/ CRAIG R. STAPLETON Director March 30, 2000
- ----------------------
Craig R. Stapleton
/s/ THOMAS F. TATARCZUCH Vice President-Finance, March 30, 2000
- ------------------------ (Principal Financial Officer and
Thomas F. Tatarczuch Principal Accounting Officer)
43
TB Wood's Corporation And Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
Additions
---------
Deductions (write-offs of bad
Balance at Charged to debts, discounts and
beginning of costs Charged to claims in excess Balance at
Description period and expenses other accounts of provision)(1) end of period
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended January 2, 1998:
Allowance for doubtful accounts $366 26 (58) $334
Allowance for discounts and 71 71 142
claims
------------------------------------------------------------------------------------------------
437 97 0 (58) 476
================================================================================================
Year ended January 1, 1999:
Allowance for doubtful accounts $334 2 (74) $262
Allowance for discounts and 142 10 152
claims
------------------------------------------------------------------------------------------------
476 12 (74) 414
================================================================================================
Year ended December 31, 1999:
Allowance for doubtful accounts $262 (30) $232
Allowance for discounts and 152 18 170
claims
------------------------------------------------------------------------------------------------
414 18 (30) 402
================================================================================================
- --------------
Note:
(1) Represents write-off of accounts determined to be uncollectible, less
recoveries of amounts previously written off.
44