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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1998
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 March 16, 1998, was $65,530,916. On
March 16, 1998, there were 5,859,286 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 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.
TB WOOD'S CORPORATION
1997 FORM 10-K ANNUAL REPORT
1
TABLE OF CONTENTS
PART I ........................................................................3
Item 1. Business ............................................................3
Item 2. Properties ..........................................................8
Item 3. Legal Proceedings ...................................................8
Item 4. Submission of Matters to a Vote of Security Holders .................8
PART II .......................................................................9
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters .................................................9
Item 6. Selected Financial Data ............................................10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation .................................10
Item 8. Financial Statements and Supplementary Data ........................14
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ................................34
PART III .....................................................................34
Item 10. Directors and Executive Officers of the Registrant ................34
Item 11. Executive Compensation ............................................34
Item 12. Security Ownership of Certain Beneficial Owners
and Management ....................................................34
Item 13. Certain Relationships and Related Transactions ....................34
PART IV ......................................................................34
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ...............................................34
SIGNATURES ...................................................................37
2
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 was incorporated in 1995. In January
1996, a subsidiary of the Company merged with TB Wood's Incorporated ("TBW"), a
Pennsylvania Corporation that was formed in 1857, with TBW as the surviving
corporation in the merger. The Company's products are sold to North American and
international manufacturers and users of industrial equipment. Headquartered in
Chambersburg, Pennsylvania, the Company operates eleven production facilities
with over 1,100 employees in the United States, Canada, Mexico, Germany, and
Italy.
Industry Overview
The power transmission industry provides electronic and mechanical products
and systems used in automated manufacturing and material processing activities
that transfer 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 components product
categories.
Products
The Company designs, manufactures and markets electronic and mechanical
power transmission products and systems. During 1997, 1996 and 1995, net sales
for these product offerings were as follows:
1997 1996 1995
---- ---- ----
Net Sales % Net Sales % Net Sales %
--------- - --------- - --------- -
Electronic power transmission
products and systems $44.0 35.5% $32.9 32.1% $34.2 33.4%
Mechanical power transmission
products and systems 80.0 64.5% 69.6 67.9% 68.1 66.6%
------------ ---------- ------------ ---------- ------------ ----------
$124.0 100.0% $102.5 100.0% $102.3 100.0%
------------ ---------- ------------ ---------- ------------ ----------
Electronic Product Offering
The Company designs and manufactures Alternating Current ("AC") and Direct
Current ("DC") electronic drives, AC motor soft starters and brakes, and
integrated electronic drive systems which are marketed throughout North America
and internationally. These products are used to start, stop, and control the
speed of electric motors. The Company's standard AC electronic drive products,
which represent most of its electronic drive product offering net sales, are
programmable to meet the needs of general requirements 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.
3
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, a broad line of flexible couplings, as well as
hydrostatic drives, mechanical 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.
New Products
Since 1993, the Company has introduced a significant number of new
products. In 1993, the Company introduced the XFC E-trAC (registered trademark)
micro-electronic drive product line to complement the WFC E-trAC (registered
trademark), NEMA 4, AC Electronic drive product line. The Company introduced six
new electronic products during the past five years, including the new WFCHT line
of full-featured electronic drives that improve motor performance at low speeds,
thereby expanding the applications for these products. The Company also extended
its very successful line of XFC micro-inverters to 20 horsepower and the WFC
inverters to 75 horsepower. The Company introduced a line of electronic drives
for specific Original Equipment Manufacturer (OEM) applications that are more
cost-effective than using a general purpose electronic drive, a series of 575
volt electronic drives for the Canadian market, a new DVC line of
high-performance electronic drives for motor sizes up to 700 horsepower, and a
new step-precision winding technology for electronic drive systems used in the
synthethic fibers industry.
During the last five years, several new mechanical products (two
synchronous drives, one hydrostatic drive, and four couplings) have been
introduced. The new mechanical products include the Dura-Flex (registerd
trademark) coupling that expands the flexible coupling product line into higher
performance applications. During 1997, the Company expanded its coupling product
line by introducing axially-split and composite couplings.
Marketing and Distribution
The Company markets its products in North America and internationally. In
North America, the Company sells to selected, authorized, industrial
distributors which resell the Company's products to industrial consumers and
Original Equipment Manufacturers ("OEMs"). The Company also sells directly to
OEMs. The Company's products are sold principally throughout North America and,
to a lesser extent, internationally. The Company's marketing alliances include
licensing agreements and distribution agreements with distributors and
manufacturers which, in some cases, market the Company's products under private
label agreements. The Company has a technical sales force of approximately 40
people and several specialized manufacturers' representatives.
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; Montreal, Quebec, Edmonton, Alberta
and Marienheide, Germany.
Most of the Company's products are manufactured to maintain stock
inventories, and on-time delivery is important, therefore order backlogs are
generally less than one month's shipments.
Acquisitions
TB Wood's seeks acquisitions that enhance product offerings, leverage fixed
costs, and extend global reach. In April 1993, the Company acquired several
lines of business including a flexible coupling and mechanical variable speed
drive product line as well as two manufacturing facilities. In January 1994, the
Company acquired Plant Engineering Consultants, Inc. ("PEC"), an integrated
electronic drive systems manufacturer and marketer.
4
In early 1996, the Company acquired Grupo Blaju S.A. de C.V., providing a
leading market share position in belted drive components in Mexico and a strong
and cost-effective Mexican manufacturing operation. In October 1996, the Company
acquired the assets of Ambi-Tech Industries, Inc., a leading manufacturer of
electronic brakes. Ambi-Tech provides an important electronic product extension,
as well as new technical capability to support the Company's aggressive growth
plans in the electronics business. In November 1996, the Company acquired
certain assets of Deck Manufacturing, a producer of gear couplings. Deck
provides a valuable addition to the Company's line of couplings, the fastest
growing area of the Company's mechanical business. In May 1997 the Company
acquired Graseby Controls Inc. located in Greensboro, North Carolina. Graseby
Controls has a leading position in the machine tool spindle drive market with
its well-established Volkmann (TM) brand of high frequency, AC drives. In
December, 1997 the Company acquired Berges electronics GmbH headquartered in
Marienheide, Germany with operations in Germany and Italy. Berges designs,
manufactures and markets AC drives for the European markets.
The Company uses strategic alliances to gain access to technology and
products that can not be as easily or effectively obtained through internal
development or acquisition and to expand international market penetration. Since
1993 the Company has entered into six strategic alliances, the most recent being
TB Wood's Enertec Ltd. an electronic joint venture in India.
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 which are among the largest distributors in the
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 30% of the Company's net sales in 1997.
Motion Industries accounted for approximately 20% of the Company's total net
sales in 1997 and has been a significant customer of the Company for more than
15 years.
Competition
The power transmission industry is highly competitive. Competitive factors
in the AC and DC electronic drive product categories include product
performance, physical size of the product, tolerance for hostile environments,
application support, availability and price. The Company's competitors in these
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 for
greater speed and process control from end users. This market includes
maintenance and replacement of existing systems, upgrades to existing systems
and new capacity expansion. Competitive factors include process knowledge and
engineering, software design, product durability and price. Major competitors in
electronic products and systems include Control Techniques Drives, Inc./Emerson
Electric Co. Inc., 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. Competitive factors include availability, quality, price, size
capability, engineering and customer support. The Company's most significant
competitors in the mechanical product category include Dodge, Emerson Electric
Co. Inc., Martin Sprocket and Gear, Rexnord Corp. and Lovejoy Industries Inc.
Management believes there are no significant foreign competitors in the North
American mechanical product category market because of a fragmented customer
base, prohibitive freight costs as compared to selling price and difficult
access to existing distribution channels.
5
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) during the last
three fiscal years have averaged 3.0% of net sales, with a higher percentage
being spent on electronic products.
Raw Materials
The Company uses purchased standard components in all of its electronics
products. The Company also purchases components designed by its engineers. These
purchased components include transformers, 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, forgings and powdered metal
components. The Company also designs, tools and outsources 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 grants to others licenses under
certain of its patents and obtains 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)
and Fiberlink(TM).
Employees
As of January 2, 1998, the Company employed approximately 1,144 people.
Approximately 30 of the Company's hourly employees located at its Stratford,
Ontario facility are represented by the United Steelworkers of Canada pursuant
to a collective bargaining agreement dated January 20, 1995 that expired on
January 19, 1998. A new agreement is in effect as of January 20, 1998 and
expires on January 19, 2001. Approximately 100 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 expired on January 31, 1998. A new agreement is in effect as of January 31,
1998 and expires on January 31, 1999.
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
6
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
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. Dana Corporation has submitted a Remediation Plan to the
Michigan Department of Environmental Quality ("MDEQ") with respect to the
continued monitoring of the 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 waste water, hazardous waste and employee and
community right-to-know should not have a material adverse effect on the
Company's financial condition.
7
Item 2. Properties
The Company owns and operates the following facilities:
Location Operations Sq. Feet
-------- ---------- --------
Chambersburg, Pennsylvania Foundry production of iron, and manufacturing and engineering 440,000
of mechanical products. Central distribution, administrative
offices and corporate headquarters.
Scotland, Pennsylvania Manufacturing and engineering of electronic products. 40,400
Trenton, Tennessee Manufacturing of mechanical products. 60,000
Stratford, Ontario Manufacturing of mechanical products. Central distribution 46,000
and administrative offices for Canada.
San Marcos, Texas Manufacturing and engineering of mechanical products. *31,000
Mt. Pleasant, Michigan Manufacturing of mechanical products. 30,000
Chattanooga, Tennessee Manufacturing, engineering and sales of integrated electronic 56,000
drive systems. Headquarters of PEC.
Greensboro, North Carolina Manufacturing and engineering of electronic products and 20,000
administrative offices for TB Wood's North Carolina.
Elk Grove, Illinois Distribution center. 21,700
*Includes certain leased space
In addition, the Company leases manufacturing facilities in: Marienheide,
Germany; Naturns, Italy; Mexico City, Mexico; distribution facilities in:
Dallas, Texas; Montreal, Quebec; Edmonton, Alberta; and fee warehouses in Los
Angeles, California; Portland, Oregon; and Atlanta, Georgia.
Item 3. Legal Proceedings
The Company is a party to various lawsuits arising in the ordinary course
of business. The Company does not believe that the outcome of any of these
lawsuits will have a material adverse effect on the consolidated financial
position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company consummated the Initial Public Offering 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 February 8, 1996 though January 2, 1998 were as
follows:
Sales Price Dividends
----------- ---------
Fiscal Year 1997 High Low Paid in Cash
---------------- ---- --- ------------
1st quarter $14.13 $10.75 $.08
2nd quarter 16.50 12.75 .08
3rd quarter 19.50 14.00 .08
4th quarter 22.25 18.06 .08
Fiscal Year 1996
----------------
1st quarter $12.125 $10.875 $.00
2nd quarter 11.750 8.875 .08
3rd quarter 9.875 8.250 .08
4th quarter 11.750 7.625 .08
On March 16, 1998, there were 161 registered shareholders of the Company's
Common Stock, and the high and low sales prices for the Common Stock were $22.00
and $22.00, respectively. During fiscal year 1997, the Company paid total
dividends of $.32 and declared total dividends of $.24 on the shares of its
Common Stock. 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.
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 1997 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".
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:
1997 January 2, 1998
1996 January 3, 1997
1995 December 29, 1995
9
Selected Financial Data
(in thousands, except per share data) Fiscal Year
- ------------------------------------- -----------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenue and Income:
Net sales $124,027 $102,505 $102,307 $95,315 $72,375
Gross profit 45,012 37,747 36,111 32,886 24,922
Operating income 16,951 12,573 12,593 9,795 6,329
Net income, before one-time charges* 8,689 6,294 4,599 3,077 1,779
-------- -------- -------- ------- -------
Cash Flow:
Cash provided by operations $16,829 $9,090 $9,214 $5,379 $5,647
Capital expenditures 5,824 3,762 4,531 2,722 2,202
-------- -------- -------- ------- -------
Assets and Liabilities:
Working capital** $27,682 $26,962 $26,160 $24,931 $19,815
Total assets 89,617 73,395 66,631 61,075 57,237
Total debt 26,539 22,227 41,463 42,661 42,900
Shareholders' equity (deficit) 23,606 16,875 (7,488) (12,866) (16,537)
-------- -------- -------- ------- -------
Diluted Per Share Data:
Net income, before one-time charges* $1.47 $1.12 $1.21 $.82 $.50
Cash dividends declared .24 .32 - - -
Cash dividends paid .32 .24 - - -
Book value 3.99 3.01 (1.97) (3.43) (4.64)
-------- -------- -------- ------- -------
Weighted average shares outstanding 5,921 5,600 3,810 3,750 3,563
* Before $1,654 of one-time charges in 1996 related to the write-off of a
noncompete agreement and the early retirement of debt related to the Initial
Public Offering, $839 of one-time income in 1994 related to the sale of a
product line, and $9,477 of net one-time charges in 1993 related to
extraordinary income from the early repayment of debt and the cumulative effect
of changes in the accounting for postretirement benefits.
** 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 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 resulting from the integration of the recently acquired coupling
business.
10
Selling, general, and administrative ("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 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%.
Year Ended January 3, 1997, Compared to Year Ended December 29, 1995
Net sales for fiscal 1996 increased to $102.5 million from $102.3 million
in 1995, an increase of $0.2 million or 0.2%. The Company's overall 1996 sales,
excluding sales from the three businesses acquired during the year, declined by
approximately $2.3 million compared to 1995. This decline resulted primarily
from reduced sales of electronic drive products to distributors who delayed
purchases in anticipation of the Company's introduction of a higher performance
series of electronic drives during the second half of 1996.
Gross profit increased to $37.7 million from $36.1 million in 1995, an
increase of $1.6 million or 4.5%. Gross profit as a percent of net sales
increased to 36.8% from 35.3%, due primarily to productivity improvements and
cost reductions resulting from the Company's capital expenditure and Total
Quality Management programs.
SG&A expense for fiscal 1996 increased to $25.2 million from $23.5 million
in 1995, an increase of $1.7 million or 7.0%. SG&A expense as a percent of net
sales increased to 24.6% from 23.0%. The increase in SG&A expense resulted
primarily from increases in research and development and marketing expenses
related to new product introductions in the Company's electronics business, as
well as additional SG&A expenses from acquired operations.
Other expense for fiscal 1996 decreased to $2.6 million from $4.9 million
in 1995, a decrease of $2.4 million or 47.7%. This decrease was due primarily to
lower interest costs as a result of debt repayment from the proceeds of the IPO,
prepayment of a subordinated note at a discount, and reduced interest rates on
the Company's revolving line of credit. Other expense included a $0.6 million
write-off of a noncompete agreement. The effective tax rate for 1996 was 40.5%.
Details of the provision for income taxes are discussed in Note 5 to the
financial statements. An extraordinary item of $1.3 million, net of tax, was
related to early repayment of debt with the proceeds from the IPO.
Net income for fiscal 1996 was $4.6 million, unchanged from 1995. In 1996
net income before one-time charges, net of tax, increased by $1.7 million or
36.9% over 1995.
Liquidity and Capital Resources
The Company's principal sources of funds are cash flow from operations and
borrowings under the Company's revolving credit agreement. Cash provided from
operations in 1997 was $16.8 million, an increase of $7.7 million over $9.1
million in 1996.
11
Net cash used for investing activities during fiscal years 1997, 1996, and
1995 was $16.4 million, $9.2 million, and $6.4 million, respectively. The
Company's investing activities were primarily acquisitions and capital
expenditures. In 1997, the Company acquired the assets of Graseby Controls, Inc.
and Berges electronic GmbH for a total of $9.9 million, net of acquired cash. In
1996, the Company acquired the assets of Deck Manufacturing Corp. and Ambi-Tech,
Inc., and purchased the stock of Grupo Blaju S.A. de C.V. for a total of $3.7
million in cash and notes. Also in 1996, the Company purchased 21% of TB Wood's
Canada Ltd. for $1.6 million to make the Company's Canadian operations a wholly
owned subsidiary.
Capital expenditures for fiscal years 1997, 1996, and 1995 were $5.8
million, $3.8 million, and $4.5 million, respectively. During the last three
fiscal years, the Company has made significant capital investments in computer
controlled surface mounts, production lines for populating semi-conductors onto
circuit boards, computer numerically controlled ("CNC") machine tools, test and
production equipment at the Company's foundry in Chambersburg, and equipment to
improve and modernize plants acquired through recent purchases of businesses. In
1997, the Company purchased a $2.1 million facility for it's electronics systems
business in Chattanooga, Tennessee. These capital expenditures reduce costs,
improve product quality, and provide additional capacity for meeting the
Company's growth objectives.
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, to finance a new production facility for the electronics
systems business. In 1997, the net proceeds from the new revolving credit
facility were $2.3 million which included borrowings of approximately $5.0 and
$5.7 million to finance the purchase of Graseby Controls, Inc. and Berges
electronic GmbH, respectively. On February 8, 1996, the Company completed an
Initial Public Offering of its Common Stock that raised approximately $22.5
million in aggregate gross proceeds for the Company. The proceeds, net of
issuance costs of $19.8 million, were used to repay debt. The Company paid $1.9
million in dividends during 1997. The Company paid an $.08 per share dividend
following the first, second, and third quarters of 1997, and declared an $.08
dividend on January 8, 1998, paid on January 30, 1998, to shareholders of record
on January 16, 1998.
The Company believes that it will have sufficient cash flow from operations
and available borrowings to meet its future cash needs for interest, operating
expenses, and capital expenditures.
Derivative Financial Instruments
Market risk is the potential change in an instrument's value caused by, for
example, fluctuations in interest and currency exchange rates. The Company's
primary market risk exposures are interest rate risk and the risk of unfavorable
movements in exchange rates between the U.S. dollar and each of the Mexican
peso, Canadian dollar, German mark, 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.
The Securities and Exchange Commission has qualified Mexico as a highly
inflationary economy under the provisions of SFAS No. 52. As of January 2, 1998,
the remeasurement of the Mexico operation did not have a material effect on the
Company's statement of operations.
12
Year 2000
Based on a review of the implications of the Year 2000 on the Company,
although final cost estimates have yet to be determined, management does not
currently believe that the costs related to the Company's compliance with the
Year 2000 issue will have material adverse effect on the Company's financial
position, results of operations or cash flows. However, in the event that the
Company or any of the Company's significant suppliers or customers experience
disruptions due to the Year 2000 issue, the Company's operations could be
adversely affected.
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share," ("EPS") which the Company adopted for the year ended
January 2, 1998. Basic net 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. All prior year EPS amounts have been restated to conform to the
provisions of SFAS 128.
For the year ended January 2, 1998, the Company adopted Statement of
Financial Accounting Standards No. 129 ("SFAS 129") "Disclosure of Information
and Capital Structure". SFAS 129 requires disclosure of the pertinent rights and
privileges of all securities other than ordinary common stock. The Company has
disclosed such information in previous years' annual reports filed in Form 10-K.
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS 130"), "Reporting Comprehensive Income".
The statement addresses the reporting and display of changes in equity that
result from transactions and other economic events, excluding transactions with
owners. Management has not evaluated the impact of this statement on the
financial statements.
During 1998, the Company plans to adopt Statement of Financial Accounting
Standard No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information". The statement addresses reporting of segment information.
Management has not evaluated the impact of this statement on the financial
statements.
Safe Harbor Statement
Under the Private Securities Litigation Reform Act of 1995, except for the
historical information contained herein, the matters discussed in this annual
report are forward-looking statements which involve risks and uncertainties,
including but not limited to economic, competitve, 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.
13
Item 8. Financial Statements and Supplementary Data
Page
Report of Independent Public Accountants .....................................15
Consolidated Balance Sheets as of January 2, 1998 and
January 3, 1997 ............................................................16
Consolidated Statements of Operations for the Years
Ended January 2, 1998, January 3, 1997, and December 29, 1995 ..............17
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the Years Ended January 2, 1998,
January 3, 1997, and December 29, 1995 .....................................18
Consolidated Statements of Cash Flows for the Years Ended
January 2, 1998, January 3, 1997, and December 29, 1995 ....................19
Notes to Consolidated Financial Statements ...................................20
14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors 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 January 2, 1998, and
January 3, 1997, and the related consolidated statements of operations, changes
in shareholders' equity (deficit), and cash flows for each of the three years in
the period ended January 2, 1998. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 January 2, 1998 and January 3, 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
January 2, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)(2)
of this Form 10-K 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
audits 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
January 30, 1998
15
TB Wood's Corporation And Subsidiaries
Consolidated Balance Sheets
(in thousands, except per share and share amounts) 1997 1996
- -------------------------------------------------- ---- ----
ASSETS
Current Assets:
Cash and cash equivalents $2,552 $306
Accounts receivable, less allowances for doubtful accounts, discounts,
and claims of $476 and $437 in 1997 and 1996, respectively 20,174 15,518
Inventories:
Finished goods 15,417 16,293
Work in process 8,467 7,994
Raw materials 6,073 3,755
LIFO reserve (3,819) (4,057)
--------- ---------
26,138 23,985
Other current assets 967 1,053
--------- ---------
Total current assets 49,831 40,862
--------- ---------
Property, Plant, and Equipment:
Machinery and equipment 36,782 33,075
Land, buildings, and improvements 11,100 8,577
47,882 41,652
Less accumulated depreciation (23,794) (21,154)
--------- ---------
24,088 20,498
Other Assets:
Deferred income taxes (Note 5) 4,602 5,249
Goodwill, net of accumulated amortization of
$1,123 and $958 in 1997 and 1996, respectively 9,122 4,603
Other 1,974 2,183
--------- ---------
Total other assets 15,698 12,035
--------- ---------
$89,617 $73,395
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Current maturities of long-term debt (Note 4) $611 $520
Accounts payable 8,610 5,210
Checks outstanding 1,615 1,532
Accrued expenses (Note 3) 10,987 8,384
Deferred income taxes (Note 5) 729 539
--------- ---------
Total current liabilities 22,552 16,185
Long-term debt, less current maturities (Note 4) 25,928 21,707
Postretirement benefit obligation, less current portion 17,531 18,628
Commitments and Contingencies (Note 8)
Shareholders' Equity (Deficit):
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, 5,859,286 issued
and
5,849,772 outstanding in 1997, and 5,827,397 shares issued and 58 58
outstanding in 1996
Common stock held in treasury at cost; 9,514 in 1997 and 0 in 1996 (181) 0
Additional paid-in capital 28,340 28,158
Accumulated deficit (4,408) (11,306)
Foreign currency translation adjustment (203) (35)
--------- ---------
Total shareholders' equity 23,606 16,875
--------- ---------
$89,617 $73,395
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
16
TB Wood's Corporation And Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts) 1997 1996 1995
---------------------------------------- ---- ---- ----
Net sales $124,027 $102,505 $102,307
Cost of sales 79,015 64,758 66,196
---------- ---------- ----------
Gross profit 45,012 37,747 36,111
Selling, general, and administrative expenses 28,061 25,174 23,518
---------- ---------- ----------
Operating income 16,951 12,573 12,593
---------- ---------- ----------
Other expense:
Interest expense and other finance charges (1,695) (1,982) (4,461)
Other, net (773) (593) (467)
---------- ---------- ----------
Other expense, net (2,468) (2,575) (4,928)
---------- ---------- ----------
Income before provision for income taxes and extraordinary item 14,483 9,998 7,665
Provision for income taxes (Note 5) 5,794 4,053 3,066
---------- ---------- ----------
Income before extraordinary item 8,689 5,945 4,599
Extraordinary item, early extinguishment of debt
(less related income tax benefit of $870) 0 (1,305) 0
---------- ---------- ----------
Net income $8,689 $4,640 $4,599
========== ========== ==========
Per share of common stock:
Basic:
Income before extraordinary item $1.49 $1.08 $1.36
Extraordinary item .00 (.24) .00
---------- ---------- ----------
Net income per common share $1.49 $.84 $1.36
---------- ---------- ----------
Weighted average shares of common stock 5,833 5,520 3,375
========== ========== ==========
Diluted:
Income before extraordinary item $1.47 $1.06 $1.21
Extraordinary item .00 (.23) .00
---------- ---------- ----------
Net income per common share $1.47 $.83 $1.21
========== ========== ==========
Weighted average shares of common stock
and equivalents outstanding 5,921 5,600 3,810
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
17
TB Wood's Corporation And Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
Foreign
Additional Currency
Common Treasury Paid-In Accumulated Translation
(in thousands) Stock Warrants Stock Capital Equity(Deficit) Adjustment
- -------------- ----- -------- ----- ------- --------------- ----------
Balance, December 31, 1994 $33 $500 $0 $5,429 $(18,693) $(135)
Net income 0 0 0 0 4,599 0
Stock option compensation 0 0 0 675 0 0
Foreign currency translation adjustment 0 0 0 0 0 104
------ ------ ------ -------- ---------- -------
Balance, December 29, 1995 33 500 0 6,104 (14,094) (31)
Net income 0 0 0 0 4,640 0
Issuance of stock in connection with ------ ------ ------ -------- ---------- -------
the
Initial Public Offering 20 0 0 19,803 0 0
Investment in Wood's-Canada 0 0 0 (1,600) 0 0
Exercise of warrants 4 (500) 0 500 0 0
Gain on repayment of subordinated note 0 0 0 2,992 0 0
Dividends declared 0 0 0 0 (1,852) 0
Stock option compensation and proceeds
from
options exercised 1 0 0 359 0 0
Foreign currency translation adjustment 0 0 0 0 0 (4)
------ ------ ------ -------- ---------- -------
Balance, January 3, 1997 58 0 0 28,158 (11,306) (35)
Net income 0 0 0 0 8,689 0
Stock issuance for 401k plan 0 0 0 100 0 0
Dividends declared 0 0 0 0 (1,400) 0
Stock option compensation and proceeds
from
options exercised 0 0 95 82 0 0
Treasury stock, net 0 0 (276) 0 (391) 0
Foreign currency translation adjustment 0 0 0 0 0 (168)
------ ------ ------ -------- ---------- -------
Balance, January 2, 1998 $58 $0 $(181) $28,340 $(4,408) $(203)
====== ====== ======= ======== ======== =====
The accompanying notes are an integral part of these consolidated financial
statements.
18
TB Wood's Corporation And Subsidiaries
Consolidated Statements of Cash Flows
(in thousands) 1997 1996 1995
- -------------- ---- ---- ----
Cash Flows from Operating Activities:
Net income $8,689 $4,640 $4,599
-------- -------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,097 3,427 3,618
Deferral of interest and management fees payable to 0 288 1,152
affiliates
Change in deferred income taxes, net 837 (1,095) 205
Stock option compensation expense 101 140 675
Net loss (gain) on sale of assets 10 (44) 0
Write-off of noncompete agreement 0 563 0
Extraordinary loss on early extinguishment of debt, net 0 1,305 0
Changes in working capital, net of effects of acquisitions:
Accounts receivable (173) (854) (115)
Inventories 1,876 (1,615) (1,612)
Prepaid expenses and other current assets (227) (751) (34)
Accounts payable 1,531 631 (467)
Accrued and other liabilities 88 2,455 1,193
-------- -------- --------
Total adjustments 8,140 4,450 4,615
-------- -------- --------
Net cash provided by operating activities 16,829 9,090 9,214
-------- -------- --------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired (9,914) (2,920) 0
Capital expenditures (5,824) (3,762) (4,531)
Purchase of minority interest in subsidiary 0 (1,600) 0
Proceeds from sales of fixed assets 65 128 44
Other, net (1,003) (1,004) (1,915)
-------- -------- --------
Net cash used in investing activities (16,676) (9,158) (6,402)
-------- -------- --------
Cash Flows from Financing Activities:
Change in checks outstanding 83 (516) (383)
Repayments of subordinated note and associated taxes 0 (13,094) 0
Proceeds from (repayments of ) long-term debt, net 2,003 (14,564) (2,131)
Repayments of original revolving credit facility, net 0 (10,721) (313)
Proceeds from new revolving credit facility, net (Note 4) 2,300 20,200 0
Proceeds from public sale of common stock 0 19,823 0
Payment of dividends (1,866) (1,386) 0
Proceeds from issuance of stock upon option exercise 17 219 0
Treasury Stock (276) 0 0
-------- -------- --------
Net cash provided by (used in) financing activities 2,261 (39) (2,827)
-------- -------- --------
Effect of changes in foreign exchange rates (168) (4) 103
-------- -------- --------
Net increase(decrease) in cash and cash equivalents 2,246 (111) 88
Cash and cash equivalents at beginning of year 306 417 329
======== ======== ========
Cash and cash equivalents at end of year $2,552 $306 $417
======== ======== ========
Income taxes paid during the year $6,307 $5,409 $2,140
======== ======== ========
Interest paid during the year $1,573 $2,040 $2,868
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
19
TB Wood's Corporation And Subsidiaries
Notes To Consolidated Financial Statements
(in thousands, except per share and 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 domestic
and international manufacturers and users of industrial equipment. Principal
products of TB Wood's Incorporated ("Wood's-U.S."), a wholly owned subsidiary of
TB Wood's Corporation, include electronic drives, integrated electronic drive
systems, mechanical belted drives, and flexible couplings. Plant Engineering
Consultants, Inc. ("PEC"), a wholly owned subsidiary of Wood's-U.S.,
manufactures integrated electronic drive systems. TB Wood's Canada, Ltd.
("Wood's-Canada" {Note 9}) and TB Wood's Mexico, S.A., de C.V. ("Wood's-Mexico"
{Note 9}), wholly owned subsidiaries of Wood's-U.S., manufacture and market
mechanical industrial power transmission products and act as distributors for
electronic and mechanical products manufactured by the domestic operations of
Wood's-U.S. TB Wood's North Carolina ("Wood's-NC" {Note 9}), a wholly owned
subsidiary of Wood's-U.S., manufactures and markets Volkmann (TM) brand of
high-frequency AC drives, other AC drives, Ambi-Tech brand and other electronic
brakes and Soft Starts. Berges electronic GmbH ("Berges" {Note 9}), a wholly
owned subsidiary of Wood's-U.S., designs, manufactures and markets its own line
of AC drives for the European market and acts as the European distributor for
electronic products manufactured by the domestic operations of Wood's-U.S. To
allow for more timely consolidation and reporting, Berges' operations will be
reported beginning in fiscal 1998 using a fiscal year starting December 1997 and
ending December 1998. Wood's-U.S. was organized in 1857 and was incorporated in
Pennsylvania in 1906.
The accompanying consolidated financial statements include the accounts of
TB Wood's Corporation and its wholly owned subsidiaries. The minority interest
in Wood's-Canada, purchased by Wood's-U.S. in connection with the Initial Public
Offering ("Offering" {Note 9}), was not separately classified in the
accompanying financial statements for 1995 because the minority owners were the
same individuals who owned the common stock of Wood's-U.S. All significant
intercompany balances and transactions have been eliminated.
Year-End
Fiscal year-ends are as follows:
1997 January 2, 1998
1996 January 3, 1997
1995 December 29, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash
At January 2, 1998, $420 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 the new production
facility for the electronics systems business. The funds will be used to repay
the bonds if not spent prior to April 1999.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
20
Property, Plant, and Equipment
The Company depreciates its property, plant, and equipment using
principally the straight-line method over the estimated useful lives of the
assets. Equipment under capital leases is depreciated over the assets estimated
useful life and is included in machinery and equipment. Maintenance and repair
costs are charged to expense as incurred, and major renewals and betterments 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.
Inventories
Wood's-U.S., PEC, and Wood's-NC inventories are stated at the lower of cost
or market using the last-in, first-out ("LIFO") method. Wood's-Canada,
Wood's-Mexico, and Berges inventories are stated at the lower of cost or market
using the first-in, first-out method. Market is defined as net realizable value.
Cost includes raw materials, direct labor, and manufacturing overhead.
Approximately 78% and 90% of total inventories were valued using the LIFO method
at January 2, 1998 and January 3, 1997, respectively.
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. The Company has issued
letters of credit totaling $950 to cover incurred claims and other costs related
to the workers' compensation policy.
Foreign Currency Translation
The financial statements of Wood's-Canada, Wood's-Mexico and the balance
sheet of Berges 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 shareholders' equity(deficit). Exchange gains and losses
resulting from foreign currency transactions, primarily intercompany sales of
products between Wood's-U.S., Wood's-Canada and Wood's-Mexico, are included in
other expense in the accompanying statements of operations and are not material.
The Securities and Exchange Commission has qualified Mexico as a highly
inflationary economy under the provisions of SFAS No. 52. As of January 2, 1998,
the remeasurement of the Mexico operation did not have a material effect on the
Company's statement of operations.
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 the Company in 1986 and the acquisition of certain
businesses and product lines (Note 9).
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.
21
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 January 2, 1998 the number of treasury shares purchased under this
authorization was 20,100 and the number of treasury shares issued to employees
under option and purchase plans was 4,436 and under the 401(k) profit sharing
plan was 6,150.
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 market value of the
shares on the first day or the last day of the quarterly period. Employee
contributions to the ESPP were $63 for 1997. Pursuant to the ESPP, 4,436 shares
were issued to employees during 1997. At the annual meeting on March 10, 1997,
the Company's shareholders approved the reservation of 500,000 shares to be
issued under the ESPP. As of January 2, 1998, 495,564 shares are available for
future issuances.
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 amounts of assets and liabilities and 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.
22
Sales
The Company's five largest customers accounted for approximately 30%,
29%, and 28% of net sales for fiscal years 1997, 1996, and 1995, respectively.
Of these customers, one accounted for approximately 20% of net sales for the
year ended January 2, 1998. The loss of one or more of these customers could
have an adverse effect on the Company's performance and operations. Export sales
accounted for 17.0%, 17.7%, and 14.7% of total sales in fiscal years 1997, 1996,
and 1995, respectively. Intercompany transactions are consummated on terms
equivalent to those that prevail in arms-length transactions. Information
regarding the Company's domestic and foreign operations is as follows:
United Wood's- Foreign
States Canada Berges Other Eliminations Consolidated
------ ------ ------ ----- ------------ ------------
Year ended
January 2, 1998
Net Sales $122,613 $14,134 $0 $2,747 $(15,467) $124,027
Operating Profit 16,068 740 0 143 0 16,951
Identifiable Assets 95,101 5,221 10,636 2,220 (23,561) 89,617
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.
Net Income Per Share
In March 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share," ("EPS") which the Company adopted for the year ended
January 2, 1998. Basic net 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. All prior year EPS amounts have been restated to conform to the
provisions of SFAS 128.
23
The computation of weighted average shares outstanding and net income per share are as follows:
(in thousands, except per share data) 1997 1996 1995
- ------------------------------------- ---- ---- ----
Weighted average shares outstanding
Common shares outstanding for basic EPS 5,833 5,520 3,375
Shares issued upon assumed exercise of outstanding warrants 0 0 375
Shares issued upon assumed exercise of outstanding stock options 88 80 60
-------- -------- --------
Weighted average number of common and common equivalent shares
outstanding 5,921 5,600 3,810
-------- -------- --------
Income before extraordinary item $8,689 $5,945 $4,599
Extraordinary item 0 (1,305) 0
-------- -------- --------
Net income $8,689 $4,640 $4,599
======== ======== ========
Basic net income per common share:
Before extraordinary item $1.49 $1.08 $1.36
Extraordinary item 0.00 (0.24) 0.00
-------- -------- --------
Net Income $1.49 $.84 $1.36
======== ======== ========
Diluted net income per common share:
Before extraordinary item $1.47 $1.06 $1.21
Extraordinary item 0.00 (0.23) 0.00
-------- -------- --------
Net Income $1.47 $.83 $1.21
======== ======== ========
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 129 ("SFAS 129") "Disclosure of Information and Capital
Structure". SFAS 129 requires disclosure of the pertinent rights and privileges
of all securities other than ordinary common stock. The Company has disclosed
such information in previous years' annual reports filed in Form 10-K.
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
The statement addresses the reporting and display of changes in equity that
result from transactions and other economic events, excluding transactions with
owners. Management has not evaluated the impact of this statement on the
financial statements.
In 1998, the Company plans to adopt Statement of Financial Accounting
Standard No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information". The statement addresses reporting of segment information.
Management has not evaluated the impact of this statement on the financial
statements.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current period presentation.
24
3. ACCRUED EXPENSES
Components of accrued expenses were as follows:
1997 1996
---- ----
Accrued payroll and other compensation $3,428 $2,619
Other accrued liabilities 6,352 4,525
Accrued workers' compensation 1,207 1,240
--------- --------
Total $10,987 $8,384
========= ========
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
1997 1996
---- ----
Unsecured revolving line of credit $22,500 $20,200
Capital lease obligations 35 307
Industrial revenue bond 2,550 0
Other 1,454 1,720
--------- --------
26,539 22,227
Less current maturities (611) (520)
========= ========
$25,928 $21,707
========= ========
Aggregate future maturities of long-term debt and capital lease obligations
as of January 2, 1998 are as follows:
1998 $611
1999 306
2000 279
2001 225
2002 22,568
Thereafter 2,550
---------
$26,539
=========
On July 18, 1996, the Company repaid principal of approximately $16,674 on
a junior subordinated note payable to a company formerly related by common
ownership for approximately $10,677. The gain on extinguishment of $2,992, net
of tax, is reflected as a component of shareholders' equity.
In connection with the proceeds received from the Offering of the Company's
common stock (Note 9), the Company repaid a term loan with Fleet, a debt
agreement with USL, and a portion of a revolver loan with Fleet. An
extraordinary loss of approximately $1,305, net of taxes, was incurred in the
first quarter 1996 as a result of the repayment of certain indebtedness.
On October 10, 1996, the Company entered into a $40,000 unsecured revolving
credit facility arranged by PNC Bank, N.A. The Company used the proceeds of the
credit facility to repay the balance of a revolver loan with Fleet. The Company
realized an initial rate reduction of approximately 50 basis points with future
rates based on the ratio of total indebtedness to EBITDA, as defined. The loan
agreement 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 loan agreement also contains other restrictive covenants
which include, among other things, restrictions on outside investments and
restrictions on capital expenditures.
25
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, to finance the new production facility for the electronics
systems business.
The gross proceeds from (repayments of) the revolving credit facilities
are as follows:
1997 1996 1995
---- ---- ----
Proceeds from the Fleet
revolving credit facility $0 $88,507 $100,977
Repayments of Fleet
revolving credit facility 0 (99,228) (101,290)
Proceeds from the PNC
revolving credit facility 46,400 32,900 0
Repayments of the PNC
revolving credit facility (44,100) (12,700) 0
5. INCOME TAXES
The components of the provision (benefit) for income taxes are shown
below:
1997 1996 1995
---- ---- ----
Current:
Federal and state $4,365 $4,407 $2,837
Foreign 592 442 24
-------- -------- --------
4,957 4,849 2,861
-------- -------- --------
Deferred:
Federal and state 837 (796) 203
Foreign 0 0 2
-------- -------- --------
837 (796) 205
-------- -------- --------
Provision for income taxes $5,794 $4,053 $3,066
======== ======== ========
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 provision (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:
1997 1996
---- ----
Deferred income tax liabilities:
Book basis in property over tax basis $(2,163) $(1,536)
LIFO inventory basis differences (3,046) (3,127)
Other (1,085) (964)
--------- ---------
Total deferred income tax liabilities (6,294) (5,627)
--------- ---------
Deferred income tax assets:
Postretirement benefits not
currently deductible 7,212 7,652
Accrued liabilities not currently deductible 1,498 1,394
Allowance for doubtful accounts and
inventory reserves 825 662
Stock option compensation not
currently deductible 106 326
Other 526 303
--------- ---------
Total deferred income tax assets 10,167 10,337
--------- ---------
Net deferred income tax asset $3,873 $4,710
========= =========
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:
1997 1996 1995
---- ---- ----
Federal statutory income tax $4,924 $3,399 $2,606
State income taxes, net of
federal income tax benefit 651 456 460
Changes in the valuation
allowance 0 0 (112)
Other, net 219 198 112
-------- -------- --------
$5,794 $4,05 $3,066
======== ======= ========
In 1997, 1996, and 1995, earnings before income taxes included $1,259,
$884, and $283, 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 1993, 1994, and 1995 federal income tax returns. The review did not
have a material effect on operations.
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 $2,002, $1,664, and $1,443 for
fiscal years 1997, 1996, and 1995, respectively.
27
Profit-Sharing Plans
Since January 1, 1988, the Company has maintained a separate defined
contribution 401(k) profit-sharing plan covering all salaried and nonproduction
unit domestic hourly employees. Under this plan, the Company matches a specified
percentage of each eligible employee's contribution. Amounts contributed by the
Company under this profit-sharing plan were approximately $530, $500, and $500,
for fiscal years 1997, 1996, and 1995, respectively. In addition, the Company
has other noncontributory profit-sharing plans covering its eligible production
employees and Canadian employees for which $37, $40, and $41, were charged to
expense for the fiscal years 1997, 1996, and 1995, respectively.
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 vest 30% in January
1993, 15% in January 1994, 1995, 1996, and 1997, and 10% in January 1998. On
March 30, 1992, the option agreement was amended 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. 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.
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.
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.
28
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 designated by the board of
directors (the "Committee"). 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 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 Rights ("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.
In June 1997, the Company granted 46,250 options at an option price of
$14.00 per share and 92,500 at an option price of $23.00. The options vest
evenly over a three-year period from the grant date. The options may be
exercised as they vest. The $14.00 options expire ten years from the grant date,
and the $23.00 options expire five years from the grant date.
As of January 2, 1998, 143,063 options have been exercised and 135,189
are exercisable under the above plans at prices ranging from $2.52 to $7.74.
Effective fiscal year 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." 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 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 account for its stock-based compensation plans
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options amended during 1995 and granted during 1997
using the Black Scholes option pricing model as prescribed by SFAS No. 123 using
the following assumptions:
1997 1995
---- ----
Risk free interest rate 5.5% 5.7%
Expected lives 10 years 4 years
Expected volatility 31.3% 33.0%
Dividend yield 2.3% 0%
29
The total value of the options granted in 1997 was $265, which would be
amortized over the vesting period. The total value of the options amended during
the year ended December 29, 1995 was $975, which would be amortized over the
vesting period of the options. 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 1997, 1996, and 1995 would
have been as follows:
1997 1996 1995
---- ---- ----
Net income as reported $8,689 $4,640 $4,599
Pro forma 8,646 4,629 4,575
EPS as reported
Basic 1.49 .84 1.36
Diluted 1.47 .83 1.21
Pro forma
Basic 1.48 .84 1.36
Diluted 1.46 .83 1.20
Postretirement Benefits
The Company sponsors a defined benefit postretirement medical plan which
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 following table summarizes the Company's postretirement benefit
obligations and the assumptions used in determining postretirement benefit cost.
1997 1996
---- ----
Accumulated postretirement benefit obligation:
Retirees $4,326 $4,061
Fully eligible active plan participants 999 938
Other active participants 1,572 1,474
--------- ---------
Total obligation 6,897 6,473
Unrecognized prior service gain
and actuarial gains 11,134 12,655
---------- ---------
Postretirement benefit obligation $18,031 $19,128
========= =========
Discount rate 7.75% 7.75%
---------- ---------
Initial health care cost trend 8.00% 8.00%
---------- ---------
Ultimate health care cost trend rate 5.00% 5.00%
---------- ---------
Year ultimate health care cost
trend rate reached 2004 2004
---------- ----------
The health care cost trend rate has an effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rate by 1.0% for each
year would increase the APBO as of January 2, 1998 by approximately $950 and the
aggregate of service and interest costs components of net periodic
postretirement benefit cost for fiscal year 1997 by approximately $135.
30
Net periodic postretirement benefit costs include the following components:
1997 1996
---- ----
Service cost $185 $140
Interest cost 483 762
Amortization (1,521) (475)
------- -------
Net benefit (income) cost $(853) $427
======= =======
In 1997, the Company changed the remaining amortization period for the
unrecognized prior service cost from 14.4 years to 5.4 years.
7. TRANSACTIONS WITH AFFILIATE
Prior to the Offering (Note 9), the Company had a management services
agreement and aircraft use agreement. The Company paid The NTC Group, Inc. an
aggregate of $36 and $400 in fiscal years 1996 and 1995, respectively.
8. 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.
Operating Lease Commitments
The Company leases office space, office equipment, and other items under
noncancelable operating leases. The expense for noncancelable operating leases
was approximately $642, $600, and $582, for fiscal years 1997, 1996, and 1995,
respectively. At January 2, 1998, future minimum lease payments under
noncancelable operating leases are as follows:
1998 $418
1999 260
2000 63
2001 20
2002 and thereafter 12
------
$773
======
31
9. ACQUISITIONS, MERGER AND PUBLIC OFFERING
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., an established designer and manufacturer of industrial disc and gear
couplings, for approximately $1,471 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 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 electronics
GmbH, 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).
The acquisitions of Wood's-NC and Berges are not material to the
consolidated financial statements. Accordingly, pro forma results of operations
for the year ended January 2, 1998 have not been presented.
Merger
In January 1996, the Company completed a merger (the "Merger") in
contemplation of an Initial Public Offering of the Company's common stock.
Pursuant to the Merger, a subsidiary of a newly formed holding company merged
with Wood's-U.S., with Wood's-U.S. as the surviving corporation. In the Merger,
the shareholders of Wood's-U.S. received three shares of the holding company's
stock in exchange for each share of Wood's-U.S. stock. The financial statements
of the Company prior to January 1996 have been restated to include the effects
of the Merger.
32
Initial Public Offering
Effective February 8, 1996, the Company completed an Offering of its common
stock that raised approximately $22,478 in aggregate gross proceeds for the
Company. The net proceeds (after deducting issuance costs) of approximately
$19,823 from the Offering were used to repay $4,767 of the Fleet Term Loan,
$5,203 of the Senior Fleet Revolver Loan, and $10,000 of the USL Fixed and
Floating Rate Notes ("USL"). In addition, the Company paid approximately $616 to
USL. In conjunction with the Offering, USL redeemed warrants to purchase 375,000
shares of the Company's stock, which were included in the shares of common stock
issued by selling shareholders. The Company also purchased the remaining 21.0%
interest of Wood's-Canada held by the shareholders of Wood's-U.S. for
approximately $1,600.
The effects of interest and other charges in fiscal 1996, prior to the
Offering, are not material to the consolidated financial statements.
Accordingly, pro forma results of operations for the year ended January 3, 1997
have not been presented.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
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 .00 .08 .08 .08
Dividends paid .08 .08 .08 .08
1996 First Second Third Fourth
- ---- ----- ------ ----- ------
Sales $23,813 $25,107 $25,849 $27,736
Gross profit 8,892 9,190 9,324 10,341
Gross profit % 37.3% 36.6% 36.1% 37.3%
Income before
extraordinary item 933 (1) 1,515 1,684 1,813
Basic net income per share
before extraordinary item .20 (1) .26 .29 .31
Basic net income (loss) per share (.08) .26 .29 .31
Diluted net income per share
before extraordinary item .19 (1) .26 .29 .31
Diluted net income (loss) per share (.08)(2) .26 .29 .31
Dividends declared - .08 .08 .16
Dividends paid - .08 .08 .08
- --------------------------------------------
(1) Includes a nonrecurring charge of $349 ($.07 per share) net of taxes,
related to the write-off of a noncompete agreement in February 1996.
(2) Includes extraordinary charges of $1,305 ($.27 per share), net of taxes, for
the early repayment of debt related to the Offering of stock in February 1996.
33
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information called for by this item regarding directors and executive
officers is set forth in the Company's definitive Proxy Statement for the 1998
Annual Meeting in the sections entitled "Election of Directors", "Management"
and "Compliance with Section 16(a) of the Exchange Act" 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 1998 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 1998 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
None.
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 14 through 34 hereof and the report thereon of
Arthur Andersen LLP appearing on page 15 hereof.
(2) Financial statement schedule
Schedule II for the fiscal year ended January 2, 1998 and the report of
Arthur Andersen thereon.
(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 Bylaws of the Company (incorporated by reference
to Form S-1 Exhibit 3.2).
34
4.1 Shareholders' Agreements by and among TB 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. Christenson, Harold L. Coder, III,
James E. Williams, Joseph S. Augustine (incorporated by reference to
Form S-1 Exhibit 4.2).
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).
10.31 Junior Subordinated Promissory Note dated March 31, 1993 issued by
T.B. Wood's Sons Company in favor of The Bibb Company (incorporated by
reference to Form S-1 Exhibit 10.31).
10.32 Warrant to Purchase Common Stock dated April 1993 issued by T.B.
Wood's Sons Company to The Bibb Company (incorporated by reference to
Form S-1 Exhibit 10.32).
10.33 Subordinated Promissory Note dated April 2, 1993 issued by T.B. Wood's
Sons Company in favor of Charles O. Wood, III, together with a
Subordination Agreement dated April 2, 1993 by T.B. Wood's Sons
Company, TB Wood's Canada, Ltd., Mr. Wood and the subordinated
creditors listed on the signature pages thereto (incorporated by
reference to Form S-1 Exhibit 10.33).
10.36 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).
10.37 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).
10.38 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).
10.39 TB Wood's Corporation 1996 Stock-Based Incentive Compensation Plan
(incorporated by reference to Form S-1 Exhibit 10.39).
10.40 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).
35
10.41 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).
10.43 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 10K, for fiscal year 1995, Exhibit 10.43).
10.44 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 10K, for fiscal year 1996, Exhibit 10.44).
10.45 TB Wood's Employee Stock Purchase Plan, dated March 1,
1997(incorporated by reference to form 10K, for fiscal year 1996,
Exhibit 10.45).
10.46 Stock Purchase Agreement by and between TB Wood's Incorporated and
Graseby Electro-Optics Inc., dated May 8, 1997
10.47 Translated Stock Purchase Agreement by and among TB Wood's
Incorporated and Berges Antriebstechnik GmbH and Karen Sarstedt, dated
October 23, 1997.
10.48 Form of the Non-Qualified Stock Option Agreements between TB Wood's
Corporation and Thomas C. Foley, Michael L. Hurt, Carl 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.
10.49 Form of the Non-Qualified Stock Option Agreements between TB Wood's
Corporation and Thomas C. Foley, Michael L. Hurt, Carl Christenson,
Michael H. Iversen, Willard C. Macfarland, Jr., and other key
employees dated January 29, 1998 issued under the 1996 Plan.
21.1 Subsidiaries of Registrant.
23.1 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 1997.
36
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 31, 1998.
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 and Director March 31, 1998
- -------------------
Thomas C. Foley (Principal Executive Officer)
/s/ MICHAEL L. HURT President and Director March 31, 1998
- -------------------
Michael L. Hurt (Principal Executive Officer)
/s/ JEAN-PIERRE L. CONTE Director March 31, 1998
- ------------------------
Jean-Pierre L. Conte
/s/ CRAIG R. STAPLETON Director March 31, 1998
- ----------------------
Craig R. Stapleton
/s/ ROBERT J. DOLE Director March 31, 1998
- ------------------
Robert J. Dole
/s/ PHILIP A. GARTON Vice President of Finance, March 31, 1998
- --------------------
Philip A. Garton Corporate Controller
(Principal Financial Officer and
Principal Accounting Officer)
37
TB Wood's Corporation And Subsidiaries
Schedule II
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
Additions
Balance at Deductions (write-offs
beginning of Charged to costs Charged to other of bad debts, discounts Balance at
Description period and expenses accounts and claims in excess of end of period
provision)(1)
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 29, 1995:
Allowance for doubtful $172 273 (81) $364
accounts
Allowance for discounts and 207 62 (123) 146
claims ----- ----- ----- -----
379 335 0 (204) 510
===== ===== ===== ===== =====
Year ended January 3, 1997:
Allowance for doubtful $364 65 (63) $366
accounts
Allowance for discounts and 146 (75) 71
claims ----- ----- ----- -----
510 65 0 (138) 437
===== ===== ===== ===== =====
Year ended January 2, 1998:
Allowance for doubtful $366 0 (32) $334
accounts
Allowance for discounts and 71 71 0 142
claims ----- ----- ----- -----
437 71 0 (32) 476
===== ===== ===== ===== =====
- --------------
Note:
(1) Represents write-off accounts to be uncollectible, less recoveries
of amounts previously written off.
38