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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
PREFORMED LINE PRODUCTS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-0676895
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
660 BETA DRIVE, MAYFIELD VILLAGE, OHIO 44143
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(440) 461-5200
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(NONE)
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON SHARES, $2 PAR VALUE PER SHARE
(TITLE OF CLASS)
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TABLE OF CONTENTS
PAGE
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Cautionary Statement With Respect to Forward-Looking Statements....... 1
Item 1. Business.................................................... 2
Item 2. Financial Information....................................... 12
Item 3. Properties.................................................. 15
Item 4. Security Ownership of Certain Beneficial Owners and
Management.................................................. 17
Item 5. Directors and Executive Officers............................ 18
Item 6. Executive Compensation...................................... 19
Item 7. Certain Relationships and Related Transactions.............. 23
Item 8. Legal Proceedings........................................... 24
Item 9. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters...................... 24
Item 10. Recent Sales of Unregistered Securities..................... 24
Item 11. Description of Registrant's Securities to Be Registered..... 25
Item 12. Indemnification of Directors and Officers................... 26
Item 13. Financial Statements and Supplementary Data................. 28
Item 14. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
Item 15. Financial Statements and Exhibits........................... 41
SIGNATURES............................................................ 43
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CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This Form 10 contains forward-looking statements regarding the Company's
and management's beliefs and expectations. As a general matter, forward-looking
statements are those focused upon future plans, objectives or performance (as
opposed to historical items) and include statements of anticipated events or
trends and expectations and beliefs relating to matters not historical in
nature. Such forward-looking statements are subject to uncertainties and factors
relating to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the Company's control. Such
uncertainties and factors could cause the Company's actual results to differ
materially from those matters expressed in or implied by such forward-looking
statements.
The Company believes that the factors set forth under the heading "Risk
Factors" and the following factors, among others, could affect the Company's
future performance and cause the Company's actual results to differ materially
from those expressed or implied by forward-looking statements made in this
registration statement:
- The overall demand for cable anchoring and control hardware for
electrical transmission and distribution lines on a worldwide basis,
which has a slow growth rate in mature markets such as the United States,
Canada, Japan and Western Europe;
- The effect on the Company's business resulting from economic uncertainty
within Asia-Pacific and Latin American regions;
- Technology developments that affect longer-term trends for communication
lines such as wireless communication;
- The Company's success at continuing to develop proprietary technology to
meet or exceed new industry performance standards and individual customer
expectations;
- The rate of progress in continuing to reduce costs and in modifying the
Company's cost structure to maintain and enhance the Company's
competitiveness;
- The Company's success in strengthening and retaining relationships with
the Company's customers, growing sales at targeted accounts and expanding
geographically;
- The extent to which the Company is successful in expanding the Company's
product lines into new areas for inside plant;
- The Company's ability to identify, complete and integrate acquisitions
for profitable growth;
- The potential impact of consolidation and deregulation among the
Company's suppliers, competitors and customers;
- The relative degree of competitive and customer price pressure on the
Company's products;
- The cost, availability and quality of raw materials required for the
manufacture of products;
- The effects of fluctuation in currency exchange rates upon the Company's
reported results from international operations, together with
non-currency risks of investing in and conducting significant operations
in foreign countries, including those relating to political, social,
economic and regulatory factors;
- Changes in significant government regulations affecting environmental
compliance;
- The Company's ability to continue to compete with larger companies who
have acquired a substantial number of the Company's former competitors;
and
- The continued limited availability of optical fiber in the marketplace
that is used in conjunction with the Company's fiber optic products.
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ITEM 1. BUSINESS
BACKGROUND
Preformed Line Products Company ("the Company") is an international
designer and manufacturer of products and systems employed in the construction
and maintenance of overhead and underground networks for the energy,
communications, cable (TV) provider, information (data communication) and other
similar industries. The Company's primary products support, protect, connect,
terminate and secure cables and wires. The Company also manufactures a line of
products serving the voice and data transmission markets. The Company's goal is
to continue to achieve profitable growth as a leader in the innovation,
development, manufacture and marketing of technically advanced products and
services related to energy, communications and cable systems and to take
advantage of this leadership position to sell additional quality products in
familiar markets.
The Company serves a worldwide market through strategically located
domestic and international manufacturing facilities. Each of the Company's
domestic manufacturing facilities and many of the Company's foreign
manufacturing facilities are International Standards Organization ("ISO") 9001
certified. The ISO 9001 certification is an internationally recognized quality
standard for manufacturing and assists the Company in marketing its products in
certain markets. The Company's customers include public and private energy
utilities and communication companies, cable operators, financial institutions,
governmental agencies, original equipment manufacturers, contractors and
subcontractors, distributors and value-added resellers. The Company is not
dependent on a single customer or a few customers. No single customer accounts
for more than ten percent of the Company's consolidated revenues.
The Company's products include:
- Formed Wire and Related Hardware Products
- Protective Closures
- Data Communication Interconnection Devices
Formed Wire Products are used in the energy, communications and cable
industries to support, protect, terminate and secure both power conductor and
communication cables and to control cable dynamics (e.g., vibration). These
products are based on the principle of forming a variety of stiff wire materials
into a helical (spiral) shape. Advantages of using the Company's helical formed
wire products are that they are economical, dependable and easy to use. The
Company introduced formed wire products to the power industry over 50 years ago
and such products enjoy an almost universal acceptance in the Company's markets.
Formed wire and related hardware products accounted for 46%, 52%, and 47% of the
Company's revenues in 1998, 1999 and 2000, respectively.
Protective Closures, including splice cases, are used to protect copper
cable or fiber optic cable from moisture, environmental hazards and other
potential contaminants. Protective closures accounted for 30%, 28% and 29% of
the Company's revenues in 1998, 1999 and 2000, respectively.
Data Communication Interconnection Devices are products used in high-speed
data systems to connect electronic equipment. Data communication interconnection
devices accounted for 24%, 20% and 24% of the Company's revenues in 1998, 1999
and 2000, respectively.
CORPORATE HISTORY
The Company was incorporated in Ohio in 1947 to manufacture and sell
helically shaped "armor rods," which are sets of stiff helically shaped wires
applied on an electrical conductor at the point where it is suspended or held.
Thomas F. Peterson, the Company's founder, developed and patented a unique
method to manufacture and apply these armor rods to protect electrical
conductors on overhead power lines. Over a period of years Peterson and the
Company developed, tested, patented, manufactured and marketed a variety of
helically shaped products for use by the electrical and telephone industries.
Although all of the Peterson
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patents have now expired, those patents served as the nucleus for licensing the
Company's formed wire products abroad.
The success of the Company's formed wire products in the United States led
to expansion abroad. The first international license agreement was established
in the mid-1950s in Canada. In the late 1950s the Company's products were being
sold through joint ventures and licensees in Canada, England, Germany, Spain and
Australia. Additionally, the Company began export operations and promoted
products into other selected offshore markets. The Company continued its
expansion program, bought out most of the original licensees, and, by the
mid-1990s, owned complete operations in Australia, Brazil, Canada, Great
Britain, Mexico, South Africa and Spain and held a minority interest in two
joint ventures in Japan.
Recognizing the need for a stronger presence in the fast growing Asian
market, in 1996 the Company also formed a joint venture in China and, in 2000,
became sole owner of this venture. All of the Company's international
subsidiaries operate as independent business units with the necessary
infrastructure (manufacturing, engineering, marketing and general management) to
support local business activities. Each is staffed with local personnel at all
levels to ensure that the Company is well versed in local business practices,
cultural constraints, technical requirements and the intricacies of local client
relationships.
In 1968, the Company expanded into the underground telecommunications field
by acquisition of the Smith Company located in California. The Smith Company had
a patented line of buried closures and pressurized splice cases. These closures
and splice cases protect copper cable openings from environmental damage and
degradation. The Company continued to build on expertise acquired through the
acquisition of the Smith Company and in 1995 introduced the highly successful
Coyote closure line of products. Since 1995 nine domestic and three foreign
patents have been granted to the Company on the Coyote closure. None of the
Coyote patents has expired. The earliest Coyote patent was filed on April 1995
and will not expire until April 2015.
In 2001, the Company introduced its new Armadillo closure, a plastic
pressurized underground, buried and aerial splice case for copper voice, data
and video cables. This new product is an alternative to the Company's stainless
steel splice case, which for over 30 years has set an industry standard for
waterproof, re-enterable underground and buried closures and aerial
applications.
In 1993, the Company purchased the assets of Superior Modular Products
Company. Located in Asheville, North Carolina, Superior Modular Products is a
technical leader in the development and manufacture of high-speed
interconnection devices for voice, data and video applications. This acquisition
was the catalyst to expand the Company's range of communication products to
components for structuring cabling systems used inside a customer's premises.
In 2000, the Company acquired Rack Technologies Pty., Limited,
headquartered in Sydney, Australia. Rack Technologies is a specialist
manufacturer of rack system enclosures for the communications, electronics and
securities industries. This acquisition complements and broadens the Company's
existing line of data communication products used inside a customer's premises.
The Company's corporate headquarters is located at 660 Beta Drive, Mayfield
Village, Ohio 44143, telephone number (440) 461-5200.
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RISK FACTORS
THE OBSOLESCENCE OF EXISTING PRODUCTS COULD RESULT IN DECLINING REVENUES
The energy, communications and cable operators industries are characterized
by rapid technological change. The introduction of products embodying new
technologies or the emergence of new industry standards can render existing
products or products under development obsolete or unmarketable. For example,
satellite, wireless and other communication technologies currently being
deployed may represent a threat to copper, coaxial and fiber optic-based systems
by reducing the need for wire-line networks. To date, however, the Company
believes that these technologies have not had a significant impact on the demand
for traditional wire-line network based services, and the Company anticipates
that a number of factors, including network capacity requirements, existing
investments in wire-line networks, security and long-term cost effectiveness,
will result in continued growth of wire-line networks. However, there can be no
assurance that future advances or further development of these or other new
technologies will not have a material adverse effect on the Company's business,
operating results and financial condition as a result of lost sales.
THE COMPANY'S BUSINESS WILL SUFFER IF THE COMPANY FAILS TO DEVELOP AND
SUCCESSFULLY INTRODUCE NEW AND ENHANCED PRODUCTS THAT MEET THE CHANGING NEEDS OF
THE COMPANY'S CUSTOMERS
The Company's ability to anticipate changes in technology and industry
standards and to successfully develop and introduce new products on a timely
basis will be a significant factor in the Company's ability to grow and remain
competitive. New product development often requires long-term forecasting of
market trends, development and implementation of new designs and processes and a
substantial capital commitment. The trend toward consolidation of the
communications and data communications industries may require the Company to
quickly adapt to rapidly changing market conditions and customer requirements.
Although the Company's manufacturing and marketing expertise has enabled it to
successfully develop and market new products in the past, any failure by the
Company to anticipate or respond in a cost-effective and timely manner to
technological developments or changes in industry standards or customer
requirements, or any significant delays in product development or introduction
or any failure of new products to be widely accepted by the Company's customers,
could have a material adverse effect on the Company's business, operating
results and financial condition as a result of reduced net revenues.
BECAUSE THE COMPANY IS DEPENDENT ON THE ENERGY, COMMUNICATIONS AND CABLE
INDUSTRIES, THE COMPANY IS SUSCEPTIBLE TO NEGATIVE TRENDS RELATING TO THOSE
INDUSTRIES THAT COULD ADVERSELY AFFECT THE COMPANY'S OPERATING RESULTS
The Company's sales to the energy, communications and cable industries
represent a substantial portion of the Company's historical sales and are
expected to continue to do so for the foreseeable future. Demand for products to
these industries depends primarily on capital spending by customers for
constructing, rebuilding, maintaining or upgrading their systems. The amount of
capital spending and, therefore, the Company's sales and profitability are
affected by a variety of factors, including general economic conditions, access
by customers to financing, government regulation, demand for energy and cable
services and technological developments in the broadband communications
industry. In addition, deregulation, consolidation and market factors in these
sectors have caused some of the Company's customers and potential customers to
experience financial difficulties. As a result some may not continue as going
concerns, which could have a material adverse effect on the Company's business,
operating results and financial condition. Consolidation and deregulation
present the additional risk to the Company that combined or deregulated
customers will continue supply relationships with a source other than the
Company. It may also increase the pressure on suppliers, such as the Company, to
sell products at lower prices.
PRICE FLUCTUATIONS OF RAW MATERIALS COULD RESULT IN LOWER EARNINGS
The Company's cost of sales may be materially adversely affected by
increases in the market prices of the raw materials used in the Company's
manufacturing processes. There can be no assurance that price increases
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in raw materials can be passed on to the Company's customers through increases
in product prices. As a result, the Company's operating results could be
adversely affected.
THE COMPANY'S INTERNATIONAL OPERATIONS SUBJECT THE COMPANY TO ADDITIONAL
BUSINESS RISKS
International sales account for a substantial portion of the Company's net
sales and profits and the Company expects that international sales may increase
as a percentage of sales in the future. Due to its international sales, the
Company is subject to the risks of conducting business internationally,
including unexpected changes in, or impositions of, legislative or regulatory
requirements, fluctuations in the U.S. dollar which could materially adversely
affect U.S. dollar revenues or operating expenses, tariffs and other barriers
and restrictions, potentially longer payment cycles, greater difficulty in
accounts receivable collection, reduced or limited protection of intellectual
property rights, potentially adverse taxes and the burdens of complying with a
variety of international laws and communications standards. The Company is also
subject to general geopolitical risks, such as political and economic
instability and changes in diplomatic and trade relationships, in connection
with its international operations. There can be no assurance that these risks of
conducting business internationally will not have a material adverse effect on
the Company's business, operating results and financial condition.
THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE BUSINESSES THAT IT MAY
ACQUIRE IN THE FUTURE
A portion of the Company's growth in sales and earnings has been generated
from acquisitions. The Company expects to continue a strategy of identifying and
acquiring businesses with complementary products. In connection with this
strategy, the Company faces certain risks and uncertainties relating to
acquisitions. The factors affecting this exposure are in addition to the risks
faced in the Company's day-to-day operations. Acquisitions involve a number of
special risks, including the risks pertaining to integrating acquired
businesses. In addition, the Company may incur debt to finance future
acquisitions, and the Company may issue securities in connection with future
acquisitions that may dilute the holdings of current and future shareholders.
Covenant restrictions relating to such indebtedness could restrict the Company's
ability to pay dividends, fund capital expenditures, consummate additional
acquisitions and significantly increase the Company's interest expense. Any
failure to successfully complete acquisitions or to successfully integrate such
strategic acquisitions could have a material adverse effect on the Company's
business, operating results and financial condition.
THE INTENSE COMPETITION IN THE COMPANY'S MARKETS, PARTICULARLY THE DATA
COMMUNICATIONS MARKET, MAY LEAD TO REDUCED SALES AND REDUCED PROFITS
The markets in which the Company operates are highly competitive. Further,
in connection with the anticipated growth in the communications industry, the
level and intensity of competition may increase in the future. The Company's
competitors in the data communications market are larger companies with
significant influence over the distribution network. The product lines within
this market have thin profit margins. Success in this product line depends upon
the Company's ability to increase volume and reduce the cost structure. There
can be no assurance that the Company will be able to compete successfully
against its competitors, many of which may have access to greater financial
resources than the Company. In addition, the pace of technological development
in the data communications market is rapid and the Company can not assure that
these advances (wireless networking, fiber optic network infrastructure, etc.)
will not adversely affect the Company's ability to compete in this market.
CONTROL BY PRINCIPAL SHAREHOLDERS COULD INHIBIT POTENTIAL CHANGE OF CONTROL
The Company's officers and directors as a group own or control
approximately 55% of the Company's issued and outstanding Common Shares. As a
result of such ownership, the officers and directors as a group will be able to
elect all of the directors of the Company and to control the Company's affairs.
See "Security Ownership of Certain Beneficial Owners."
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DEPENDENCE ON KEY PERSONNEL
The future success of the Company depends in part on its ability to attract
and retain key executive, engineering, marketing and sales personnel.
Competition for qualified personnel is intense, and the loss of certain key
personnel could have a material adverse effect on the Company's business,
operating results and financial condition.
ANY NON-COMPLIANCE BY THE COMPANY WITH THE ENVIRONMENTAL LAWS GOVERNING THE
COMPANY COULD RESULT IN A MATERIAL LIABILITY
The Company is subject to a wide variety of federal, state and local
environmental laws and regulations and uses a limited number of chemicals that
are classified as hazardous or similar substances. Although management believes
that the Company's operations are in compliance in all material respects with
current environmental laws and regulations, the Company's failure to comply with
such laws and regulations could have a material adverse effect on the Company's
business, operating results and financial condition.
THE MARKET PRICE FOR THE COMPANY'S STOCK MAY BE VOLATILE
The market price of shares of the Company's Common Shares may be highly
volatile. Factors such as announcements of technological innovations or new
products by the Company or its competitors, developments in patent or other
proprietary rights by the Company or its competitors, litigation, fluctuations
in the Company's operating results, market conditions for emerging growth stocks
or communications industry stocks in general, regulatory developments affecting
the communications and energy industries, and other factors outside the control
of the Company could have a significant impact on the future price of the Common
Shares.
BUSINESS
The demand for the Company's products comes primarily from new, maintenance
and repair construction for energy, communication and data communication
customers. Over the past several years a significant portion of the Company's
growth has been generated by customers of the Company's power transmission and
fiber optic products. Maintenance construction by the Company's customers uses
many of the Company's products, including formed wire products, to revitalize
the aging outside plant infrastructure. Many of the Company's products are used
on a proactive basis by the Company's customers to reduce and prevent lost
revenue because a single malfunctioning line could cause the loss of thousands
of dollars per hour for a power or communication customer. A malfunctioning
fiber cable could also result in substantial revenue loss. Repair construction
by the Company's customers generally occurs in the case of emergency or natural
disasters, such as hurricanes, tornadoes, earthquakes, floods or ice storms.
Under these circumstances, the Company provides 24-hour service to get the
repair products to customers as quickly as possible.
The Company has adapted the formed wire products' helical technology for
use in a wide variety of fiber optic cable applications that have special
requirements. The Company's formed wire products are uniquely qualified for
these applications due to the gentle gripping over a greater length of the fiber
cable. This is an advantage over traditional pole line hardware clamps that
compress the cable to the point of possible fatigue and optical signal
deterioration.
The Company's protective closures and splice cases are used to protect
cable from moisture, environmental hazards and other potential contaminants. The
Company's splice case is an easily re-enterable closure that allows utility
maintenance workers access to the cable splice closure to repair or add
communications services. Over the years, the Company has made many significant
improvements in the splice case that have greatly increased its versatility and
application in the market place. The Company also designs and markets custom
splice cases to satisfy specific customer requirements. This has allowed the
Company to remain a strong partner with several primary customers and has earned
the Company the reputation as a responsive and reliable supplier.
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In the early 1980s, fiber optic cable was first deployed in the outside
plant environment. Through fiber optic technologies, a much greater amount of
both voice and data communication could be transmitted reliably. In addition,
this technology solved the cable congestion problem that the large count copper
cable was causing in underground, buried and aerial applications. The Company
developed and adapted copper closures for use in the emerging fiber optic world.
In the late 1980s, the Company developed a series of splice cases designed
specifically for fiber application. In the mid-1990s, the Company developed its
plastic Coyote closure. The Coyote closure is an example of the Company
developing a new line of proprietary products to meet the changing needs of its
customers.
The Company also designs and manufactures data communication interconnect
devices and enclosures for data communications networks, offering a
comprehensive line of copper and fiber optic cross-connect systems. The product
line offers a comprehensive network system within a building or premise.
JOINT VENTURES AND LICENSE AGREEMENTS
The Company is currently a minority partner in two joint ventures in Japan,
holding a 49% ownership interest in Japan PLP Co. LTD. and a 24% ownership
interest in Toshin Denko Kabushiki Kaisha. Neither of these joint ventures is
believed to be significant to the Company's overall business. The Company
receives royalties under fifteen separate license agreements. The Company does
not believe that its business is materially dependent on any one license
agreement.
MARKETS
The Company markets its products to the energy, communications, cable
provider and information (data communication) industries. While rapid changes in
technology have blurred the distinctions between telephone, cable, and data
communication, the energy industry is clearly separate. The Company's role in
the energy industry is to supply formed wire products and related hardware used
with the electrical conductors, cables and wires that transfer power from the
generating facility to the ultimate user of that power. Formed wire products are
used to support, protect, terminate and secure both power conductor and
communication cables and to control cable dynamics.
Electric Utilities -- Transmission. The electric transmission grid is the
interconnected network of high voltage aluminum conductors used to transport
large blocks of electric power from generating facilities to distribution
networks. Currently, there are three major power grids in the United States: the
Eastern Interconnect, the Western Interconnect and the Texas Interconnect.
Virtually all electrical energy utilities are connected with at least one other
utility by one of these major grids. The Company believes that the transmission
grid has been neglected throughout much of the United States for more than a
decade. Additionally, because of deregulation, many electric utilities have
turned this responsibility over to Independent System Operators (ISOs), who have
also been slow to add transmission lines. With demand for power now exceeding
supply in some areas like California, the need for the movement of bulk power
from the energy-rich states to the energy-deficient areas means that new
transmission lines will likely be built and many existing lines will likely be
refurbished. In addition, consolidations are also driving the demand for new
transmission lines, because merged utilities need to tie their systems together.
The Company believes that this will generate growth for the Company's products
in this market over at least the next several years. In addition, construction
of international transmission grids is occurring in all regions of the world,
including North America. However, consolidation in the markets the Company
serves may also have an adverse impact on the Company's revenues. See the third
risk factor on page 4.
Electric Utilities -- Distribution. The distribution market includes those
utilities that distribute power from a substation where voltage is reduced to
levels appropriate for the consumer. Unlike the transmission market in this era
of deregulation, distribution is still handled primarily by local electric
utilities. These utilities are motivated to reduce cost in order to maintain and
enhance their profitability. The Company believes that its growth in the
distribution market will be achieved primarily as a result of incremental gains
in market share driven by emphasizing the Company's quality products and service
over price. Internationally, in the developing regions there is increasing
political pressure to extend the availability of electricity to additional
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populations. To address this demand, the electricity network providers continue
to expand through increased construction and investment.
Communication and Cable. The communications and cable industries continue
the rapid evolution and expansion they have been experiencing for a number of
years, both domestically and worldwide. Major developments, including the
Internet and other high-speed data communications technologies, ongoing
convergence between the cable and communications industries, and demand for
enhanced communications services, have led to a changing regulatory and
competitive environment in many markets throughout the world. The deployment of
new networks or improvements to existing networks for advanced applications is a
national priority for many countries, permitting them to participate and compete
in the rapidly emerging information-based global economy.
To meet today's demands and anticipating future demand, cable operators,
local communications operators and power utilities are building, rebuilding or
upgrading signal delivery networks around the world. These networks are designed
to deliver video and voice transmissions and provide Internet connectivity to
individual residences and businesses. Operators deploy a variety of network
technologies and architectures, to carry broadband and narrowband signals.
These architectures are constructed of electronic hardware connected via
coaxial cables, copper wires or optic fibers. The Company manufactures closures
that these industries use when they require connections or splice housings in a
secure, protective closure and cable management connectivity systems.
As critical components of the outdoor infrastructure, closures provide
protection against weather and vandalism and permit ready access to devices for
technicians who maintain and manage the system. Cable operators and local
telephone network operators place great reliance on manufacturers of protective
closures because any material damage to the signal delivery networks is likely
to disrupt communications services. In addition to closures, the Company
supplies the communication and cable industry with its formed wire products to
hold, support, protect and terminate the copper wires and cables and the fiber
optic cables used by that industry to transfer voice or data signals.
Due to the growing demand for communication bandwidth, the industry is
finding new technological methods to increase the usage of copper-based plant
through high-speed digital subscriber lines (DSLs). The primary driver of this
increase is the Internet and data-related communications. This is also
contributing to the increased deployment of fiber and coaxial cable in all areas
of the communication industry. The Company has been actively pursuing the
development of products for the communication operating companies, the Inter-
Exchange Carriers (IXCs), and the Competitive Local Exchange Carriers (CLECs),
as well as cable operator companies.
Fiber Optic Hardware. Companies seeking to serve the burgeoning Internet
needs of their customers are providing substantially increased access speed by
installing fiber optic cable onto all types of utility poles and rights-of-way
including those used by energy and communication companies. Customers serving
the Internet represent an opportunity for the Company to increase its sales of
helical formed wire products specifically designed for fiber applications.
Data Communication. The data communication market is being driven by the
continual demand for increased bandwidth. Growing Internet Service Providers
(ISPs), construction in Wide Area Networks (WANs) and demand for data
communication in the workplace are all key elements to the increased demand for
the connecting devices made by the Company. This market will be increasingly
focused on the systems that provide the highest speed and highest quality
signal, such as fiber optic and copper networks. The Company's connecting
devices are sold to a number of categories of customers including (i) original
equipment manufacturers (OEMs), which use the Company's "patch panels" to make
their electronic components, (ii) ISPs, (iii) large companies and organizations
which have their own LAN (local area network) for data communication, and (iv)
national and international distributors of electronic products for use in the
above markets.
Other Markets. The Company's formed wire products can also be used in
other industries which require a method of securing or terminating cables,
including the metal building and tower and antenna industries, the
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arborist industry, and various applications within the marine systems industry.
Products other than formed wire products are also marketed to other industries.
For example, the Company's urethane capabilities allow it to market products to
the light rail industry, while plastic processes are utilized to manufacture
products for the toy industry. The Company continues to explore new and
innovative uses of its manufacturing capabilities; however, these markets remain
a small portion of overall consolidated sales.
FOREIGN OPERATIONS
Except for geography, the foreign business segment of the Company is
essentially the same as its domestic business. It manufactures in its foreign
plants the same types of products as are sold domestically, it sells to the same
types of customers and faces the same types of competition (and in some cases
the same competitors). Sources of supply of raw materials are not significantly
different internationally. See Note J to the Consolidated Financial Statements
for information relating to certain foreign and domestic financial data of the
Company.
While a number of the Company's foreign plants are in developed countries,
the Company believes it has strong market opportunities in developing countries
such as Brazil and Mexico and, in particular, China, where the need for the
transmission and distribution of electrical power is significant. The Company is
now serving the Far East market, other than China and Japan, primarily from
Australia. In addition, as the need arises, the Company is prepared to establish
new manufacturing facilities abroad. For example, in January 2001 the Company
moved its Mexican manufacturing operations from a leased facility in Mexico
City, Mexico to a newly constructed facility in Queretaro, Mexico.
SALES AND MARKETING
Nationally and internationally, the Company markets its products through a
direct sales force and manufacturer's representatives. The latter are
independent organizations that represent the Company as well as other
complementary product lines. These organizations are paid a commission based on
the sales amount. The direct sales force is employed by the Company and works
with the manufacturer's representatives as well as key direct accounts and
distributors, who also buy and resell the Company's products.
RESEARCH AND DEVELOPMENT
The Company is committed to providing technical leadership through
scientific research and product development in order to continue to expand the
Company's position as a supplier to the communications and power industries.
Research is conducted on a continuous basis using internal experience in
conjunction with outside professional expertise to develop state-of-the-art
materials for all of the Company's products that capitalize on cost-efficiency
while offering exacting mechanical performance that meets or exceeds industry
standards. The Company's research and development activities have resulted in
numerous patents being issued to the Company (see "Patents" below).
Early in its history the Company recognized the need to understand the
performance of its products and the needs of its customers. To that end, the
Company developed its own Research and Engineering Center in Cleveland, Ohio.
Using the Research and Engineering Center, engineers and technicians could
simulate a wide range of external conditions encountered by the Company's
products to ensure quality, durability and performance. The work performed in
the Research and Engineering Center included advanced studies and
experimentation with various forms of vibration. This work has contributed
significantly to the collective knowledge base of the industries the Company
serves and is the subject matter of many papers and seminars presented to these
industries. The Company also developed the industry's first mobile testing
laboratory, the Dynalab, to monitor the phenomena affecting overhead conductor,
wire and cable, allowing the Company's sales representatives to work directly
with customers in the field for training, problem identification and problem
solving.
In 1979, the Company relocated and expanded its Research and Engineering
Center as a 29,000-square-foot addition to its World Headquarters in Mayfield
Village, Ohio. The Company believes that this facility is one of the most
sophisticated in the world in its specialized field. The expanded Research and
Engineering
9
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Center also has an advanced prototyping technology machine on-site to develop
models of new designs where intricate part details are studied prior to the
construction of expensive production tooling. Today, the Company's reputation
for vibration testing, tensile testing, fiber optic cable testing, environmental
testing, field vibration monitoring and third-party contract testing is a major
asset. In addition to testing, the work done at the Company's Research and
Engineering Center continues to fuel product development efforts. For example,
the Company estimates that approximately 15% to 20% of 2000 revenues were
attributed to products developed by the Company in the past five years. In
addition, the Company's position in the industry is further reinforced by its
long-standing leadership role in many key international technical organizations
including IEEE (Institute of Electrical and Electronics Engineers), CIGRE
(Counsiel Internationale des Grands Reseaux Electriques a Haute Tension), and
IEC (International Electromechanical Commission). These organizations are
charged with the responsibility of establishing industrywide specifications and
performance criteria. See Note A to the Consolidated Financial Statements for
information relating to the Company's research and development expenses in 1998,
1999 and 2000.
PATENTS
The Company applies for patents in the United States and other countries,
as appropriate, to protect its significant patentable developments. As of March
1, 2001, the Company had in force 37 U.S. patents and 40 foreign patents in 10
countries and had pending three U.S. patent applications and one foreign
application. While such domestic and foreign patents expire from time to time,
the Company continues to apply for and obtain patent protection on a regular
basis. Patents held by the Company in the aggregate are of material importance
in the operation of the Company's business. The Company, however, does not
believe that any single patent, or group of related patents, is essential to the
Company's business as a whole or of any of its businesses. Additionally, the
Company owns and uses a substantial body of proprietary information and numerous
trademarks. The Company relies on nondisclosure agreements to protect trade
secrets and other proprietary data and technology. As of March 1, 2001, the
Company had obtained U.S. registration on 26 trademarks and four trademark
applications remained pending. Foreign registrations amounted to 146
registrations in 41 countries, with 26 pending foreign registrations.
Since June 8, 1995, United States patents have been issued for terms of 20
years beginning with the date of filing of the patent application. Prior to that
time, a U.S. patent had a term of 17 years from the date of its issuance.
Patents issued by foreign countries generally expire 20 years after filing. U.S.
and foreign patents are not renewable after expiration of their initial term.
U.S. and foreign trademarks are generally speaking perpetual, renewable in
10-year increments upon a showing of continued use.
In the normal course of business, the Company from time to time makes and
receives inquiries with regard to possible patent and trademark infringement.
The extent of such inquiries from third parties has been limited to verbal
remarks to Company representatives at industry trade shows. The Company believes
that it is unlikely that the outcome of these inquiries will have a material
adverse effect on the Company's financial position. To the knowledge of
management the Company has not been subject to any formal allegation or charges
of infringement of intellectual property rights by any organization.
COMPETITION
All of the markets that the Company serves are highly competitive. In each
market the principal methods of competition are price, performance, and service.
The Company believes, however, that several factors (described below) provide
the Company with a competitive advantage.
- The Company has a strong and stable workforce. This consistent and
continuous knowledge base has afforded the Company the ability to provide
superior service to the Company's customers and representatives.
- The Company's Research and Engineering Center maintains a strong
technical support function to develop unique solutions to customer
problems.
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13
- The Company is vertically integrated both in manufacturing and
distribution, continually upgrading equipment and increasing warehouse
space.
- The Company enjoys a reputation with the Company's customers as a
responsive and reliable supplier. For example, in each of the last 10
years Verizon Logistics (formally known as GTE Supply, Inc.) has awarded
the Company a "Quality Award of Excellence" and last year the Company was
one of only two vendors that received "A Decade of Excellence" award.
Verizon also awarded the Company "Best in Class" for Outside Plant
Products.
- The Company is sensitive to the marketplace and provides an extra measure
of service in cases of emergency, storm damage and other rush situations.
This high level of customer service and customer responsiveness has
become a hallmark of the Company.
Domestically, there are two competitors for formed wire products. Although
it has other competitors in many of the countries where it has plants, the
Company has leveraged its expertise and is very strong in the global market. The
Company believes that it is the world's largest manufacturer of formed wire
products. However, the Company's formed wire products compete against other pole
line hardware products manufactured by other companies.
Minnesota Manufacturing and Mining Company ("3M") is the primary domestic
competitor of the Company for pressurized copper closures. The Company believes
that 3M's market share for pressurized closures exceeds that of the Company.
Based on its experience in the industry the Company believes its market share
exceeds 30%. Internationally, with the exception of Canada, the Company is just
beginning to enter the closure market. The fiber optic closure market is one of
the most competitive product areas for the Company, with the Company competing
against, among others, Tyco International Ltd. and 3M. There are a number of
primary competitors and several smaller niche competitors that compete at all
levels in the marketplace. The Company believes that it is one of four leading
suppliers of fiber optic closures.
The Company's data communication competitors range from assemblers of low
cost, low quality components, to well-established multinational corporations.
This market is growing worldwide and competition continues to expand to meet
this demand. The Company's competitive strength is its technological leadership
and worldwide presence. Additionally, the Company provides product to its
licensees and other companies on a privately branded basis. Patented technology
developed by the Company is currently licensed to many of the largest
competitors. Low-cost Asian competitors, however, keep pressure on prices and
are expected to continue to do so.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal raw materials used by the Company are galvanized wire,
stainless steel, aluminized steel wire, aluminum re-draw rod, plastic
(polyethylene and PVC) resins, glass-filled plastic compounds, neoprene rubbers
and aluminum ingots. The Company also uses certain other materials such as
fasteners, packaging materials and communications cable. The Company believes
that it has adequate sources of supply for the raw materials used in its
manufacturing processes and it regularly attempts to develop and maintain
sources of supply in order to extend availability and encourage competitive
pricing of these products.
Most plastic resins are purchased under annual contracts to stabilize costs
and improve delivery performance. Neoprene rubber is purchased pursuant to
ordinary course purchase orders from a single supplier with whom the Company has
enjoyed a 25 year business relationship. That supplier has numerous plants in
North America and uses the Company's formulation. The Company is currently in
the process of qualifying two additional suppliers to produce neoprene rubber
using the Company's formulation in order to reduce costs. Aluminized steel wire
and aluminum re-draw rod are purchased in standard stock diameters and coils
under annual contracts available from a number of reliable suppliers. Rolled
stainless steel is purchased under annual contracts. Glass-filled plastic
compound is purchased under an annual blanket contract with GE Polymerland. The
Company is in the process of qualifying alternatives to the glass-filled plastic
compound purchased from GE Polymerland in order to improve the Company's cost
control efforts.
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The Company also relies on certain other manufacturers to supply products
that complement the Company's product lines, such as aluminum and ferrous
castings, fiber optic cable and connectors, circuit boards and various metal
racks and cabinets. The Company believes there are multiple sources of supply
for these products.
There have been no shortages in materials that have had a material adverse
effect on the business, and none are expected.
BACKLOG ORDERS
The Company's backlog is not material. The Company's business backlog is
generally two to four weeks. All customer orders entered are firm at the time of
entry. Substantially all orders are shipped within a two to four week period
unless the customer requests an alternative date.
SEASONALITY
The Company markets products that are used by utility maintenance and
construction crews worldwide. The products are marketed through distributors and
directly to end users, who maintain stock to ensure adequate supply for their
customers and construction crews. As a result, the Company does not have wide
variation in sales from quarter to quarter.
ENVIRONMENTAL
The Company is subject to extensive and changing federal, state, and local
environmental laws, including laws and regulations that (i) relate to air and
water quality, (ii) impose limitations on the discharge of pollutants into the
environment, (iii) establish standards for the treatment, storage and disposal
of toxic and hazardous waste, and (iv) require proper storage, handling,
packaging, labeling, and transporting of products and components classified as
hazardous materials. Stringent fines and penalties may be imposed for
noncompliance with these environmental laws. In addition, environmental laws
could impose liability for costs associated with investigating and remediating
contamination at the Company's facilities or at third-party facilities at which
the Company has arranged for the disposal treatment of hazardous materials.
Although no assurances can be given, the Company believes that the Company
and its operations are in compliance in all material respects with all
applicable environmental laws and the Company is not aware of any noncompliance
or obligation to investigate or remediate contamination that could reasonably be
expected to result in a material liability. The Company does not expect to make
any material capital expenditure during the remainder of 2001 or during 2002 for
environmental control facilities. The environmental laws continue to be amended
and revised to impose stricter obligations, and compliance with future
additional environmental requirements could necessitate capital outlays.
However, the Company does not believe that these expenditures should ultimately
result in a material adverse effect on its financial position or results of
operations. The Company cannot predict the precise effect such future
requirements, if enacted, would have on the Company, although the Company
believes that such regulations would be enacted over time and would affect the
industry as a whole.
EMPLOYEES
At March 31, 2001, the Company and its consolidated subsidiaries had 1,857
employees. Approximately 51% of the Company's employees are located in the
United States.
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ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA
NET SALES AND INCOME
Net sales........................... $207,332 $195,245 $216,244 $204,644 $184,778
Operating income.................... 17,370 12,743 24,993 23,694 22,954
Income before income taxes.......... 17,135 14,729 28,464 27,060 22,340
Net income.......................... 11,051 10,201 19,006 17,796 15,245
Net income to net sales............. 5.3% 5.2% 8.8% 8.7% 8.3%
PER SHARE AMOUNTS*
Net income.......................... $ 1.91 $ 1.71 $ 3.10 $ 2.90 $ 2.48
Dividends declared.................. 0.60 0.60 0.575 0.50 0.485
Shareholders' equity................ 21.47 20.45 19.91 17.78 15.88
OTHER FINANCIAL INFORMATION
Current assets...................... $ 87,783 $ 84,531 $ 84,250 $ 75,217 $ 65,610
Total assets........................ 170,611 159,664 157,717 144,821 133,451
Current liabilities................. 26,244 24,790 24,002 21,711 20,961
Long-term Debt...................... 20,160 14,507 11,110 13,077 15,102
Shareholders' equity................ 123,856 119,194 121,776 109,079 97,388
---------------
* Reflects adjustment for two-for-one stock split effected in the form of a 100%
stock dividend on June 10, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In 2000, domestic operations comprised 60% of the Company's consolidated
sales and 28% of operating income. Domestic operating income was 3.8% of
domestic sales while foreign operating income was 15.4% of foreign sales in
2000. Operating income as a percentage of sales is lower for domestic operations
because gross profits on the domestic data communication product line are lower
and a higher percentage of domestic sales are subject to sales commissions. This
discussion and analysis of the Company's results of operations and financial
condition is generally focused on the Company as a whole because the Company
believes this presentation provides the most appropriate understanding of the
Company's business. Note J to the Consolidated Financial Statements contains a
description of the Company's operations and related financial disclosure for
domestic and foreign operations.
In April 2000, the Company acquired the assets of Rack Technologies, an
Australian manufacturer of rack system enclosures and accessories for the
communications, electronics and security industries, to expand and complement
the Company's communications product lines. In addition, in order to focus the
Company's attention on more profitable product lines, in February 2000 the
Company disposed of its foundry business located in Alabama. Sales associated
with Rack Technologies of $4.1 million in 2000 approximately offset the $4.7
million decrease in sales resulting from the divestiture of the Company's
foundry business. However, the gross profit of Rack Technologies is $3.2 million
better than the gross profit previously realized on sales of products from the
foundry business. General and administrative expenses of the two operations
approximately offset each other.
2000 RESULTS OF OPERATIONS COMPARED TO 1999
In 2000, consolidated revenues were $207.3 million, an increase of $12.1
million, or 6%, over 1999. The impact of volume and price (including mix) were
favorable in the domestic market in 2000 and the increase in
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foreign sales was primarily volume-driven. In 2000, the relatively stronger
dollar had a negative impact on sales of $3.3 million when foreign sales were
converted from foreign currency to U.S. dollars.
Gross profit improved $5.2 million, or 9%, in 2000 compared to 1999 on a
sales increase of 6%. This increase was equally attributable to (i) the
elimination of the foundry business that carried a negative gross profit, (ii)
the additional sales volume associated with Rack Technologies, and (iii) the
increase in sales throughout the world. The stronger dollar resulted in $1.0
million lower gross profit when international operations were translated from
foreign currencies to U.S. dollars. As a result of the above, gross profit as a
percent of sales improved from 29.9% in 1999 to 30.6% in 2000. Downward pressure
on prices in the data communications market will make it difficult to maintain a
similar percentage profit level in 2001.
Costs and expenses of $46.2 million in 2000 represents a modest increase of
$.6 million, or slightly more than 1%, from the $50.9 million incurred in 1999.
The stronger dollar resulted in a decrease in costs and expenses of $.6 million
and expenses associated with the foundry business eliminated $1 million of costs
and expenses. These two items reduced cost and expenses by 3% compared to 1999.
Partially offsetting these decreases in expenses was $1 million of costs and
expenses of Rack Technologies following the acquisition of its assets. The
Company expects costs and expenses to increase at a more significant rate in
2001. Selling expenses associated with introducing data communications products
in the international markets may increase expenses up to $2 million.
Operating income for 2000 increased $4.6 million, or 36%, compared to 1999.
This increase was a result of the 8% increase in gross profit while costs and
expenses were relatively flat.
Total other income of $2 million in 1999 decreased by $2.2 million
resulting in total other expense of $.2 million in 2000. This decrease is
comprised primarily of $.6 million lower equity earnings resulting from the
depressed markets in Japan and higher interest expense of $.5 million from
increased debt as discussed under the caption "Working Capital, Liquidity and
Capital Resources."
In 2000, income before income taxes increased $2.4 million compared to 1999
as a result of the $4.6 million increase in operating income offset by the
decrease in other income of $2.2 million.
The effective tax rate in 2000 was 35.5% compared to 30.7% in 1999. This
difference is primarily the result of the write-down in the partnership
investment which is not deductible for tax purposes and higher taxes in Canada
as a result of the full utilization of tax credits in 1999. See Note F to the
Consolidated Financial Statements for further discussion of the differences
between the statutory tax rate and the effective tax rate.
Overall, 2000 net income increased $.9 million, or 8%, from 1999. Earnings
per share were $1.91 in 2000 compared to $1.71 in 1999.
1999 RESULTS OF OPERATIONS COMPARED TO 1998
In 1999, consolidated sales were $195.2 million, which was a decrease of
$21.0 million, or 10%, from 1998. At the end of 1998, Lucent, a customer of the
Company's data communications products, decided to manufacture product in-house
that was previously purchased from the Company. This resulted in a decrease in
domestic sales of $17.6 million as compared to 1998 and represents a permanent
reduction in sales. Domestic sales, excluding the impact of the loss of the
Lucent sales, increased $1.8 million. In January 1999 there was a devaluation of
the currency in Brazil. This devaluation resulted in a decrease in sales of $7.2
million in 1999 after converting financial statements denominated in foreign
currency to dollars as compared to 1998. Excluding the impact of this
devaluation, Brazil's sales would have increased by $2.1 million. Sales
throughout the rest of the foreign operations were flat when taken as a whole.
Gross profit in 1999 decreased $13.3 million, or 18.5%, compared to 1998.
The decrease in sales to Lucent accounts for $6.3 million of this decrease. The
remaining decrease is primarily attributable to the Company's activities in
Brazil, lower export sales to Venezuela, higher manufacturing costs at the
Alabama foundry, and increased depreciation expense related to additional
manufacturing equipment for converting the outsourcing of raw materials to
in-house production.
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In 1999, costs and expenses were $45.6 million, a decrease of $1.0 million,
or 2%, from the $46.6 million incurred in 1998. This decrease is entirely
related to the devaluation in Brazil.
The decrease in gross profit of $13.3 million combined with the reduction
in costs and expenses of $1.0 million resulted in a decrease in operating income
of $12.3 million.
Other income -- net decreased from $3.0 million in 1998 to $1.4 million in
1999. The prior year amount included a gain on the sale of a plant of $1.2
million.
Income before income taxes decreased $13.7 million in 1999 as compared to
1998, primarily as a result of the decrease in gross profit.
Income taxes decreased $4.9 million in 1999 as compared to 1998 as a result
of the lower income. Earnings per share were $1.71 in 1999 compared to $3.10 in
1998.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the years 1998 through 2000 are presented in
the Company's statements of consolidated cash flows. Net cash provided by
operating activities increased $8.1 million, or 53%, in 2000 compared to 1999.
This increase was primarily a result of a reduction in working capital during
2000, compared to an increase in 1999. The reduction in working capital was a
result of the implementation of an initiative to reduce the rate of growth in
inventory levels during 2000.
Capital expenditures were $14.4 million in 2000, an increase of $1.3
million from 1999. The Company estimates that capital expenditures will be
slightly lower in 2001. During 2000 the Company acquired the assets of Rack
Technologies for $5.3 million and acquired 100% of the Company's subsidiary in
China by purchasing the minority partner's 20% interest. Under the terms of the
Rack Technologies acquisition, the Company is obligated to make additional
payments based upon a percentage of future profits earned by the ongoing
operation for the years 2000 and 2001. The payments will be recorded as goodwill
and amortized over the remaining life of the original goodwill. The Company will
make a payment of $.8 million in 2001 for the year ended December 31, 2000 and
anticipates making a payment of approximately $.8 million in 2002 for the year
ended December 31, 2001.
The above acquisitions were financed primarily with borrowings of $3.0
million. During 1999, the Company began an active share repurchase program
spending $5.5 million on repurchases for the year. During 2000 amounts expended
on the repurchase program was reduced to $.9 million in an effort to conserve
cash to finance potential future acquisitions. The Company expects that share
repurchases will decrease further in 2001.
In 2000, cash generated from operating activities of $23.5 million combined
with an increase in net borrowings of $3.0 million and $1.9 million from the
sale of the Alabama foundry business was used for capital expenditures of $14.4
million, acquisitions of $5.7 million, payment of dividends of $3.5 million and
stock repurchases of $.9 million. This activity resulted in positive cash flows
of $3.9 million during 2000. After decreasing cash by $1.3 million for
fluctuations in exchange rates, cash and cash equivalents increased $2.6 million
in 2000 compared to 1999.
The Company's financial position remains strong with a ratio of current
assets to current liabilities of 3.3:1 at December 31, 2000 and 3.4:1 at
December 31, 1999 and working capital of $61.5 million at December 31, 2000. The
Company's unused balance under its credit facilities at December 31, 2000 was
$22.6 million. The Company's long-term debt to equity ratio was only 16% at
December 31, 2000. The Company believes that its existing credit facilities,
internally generated funds and ability to obtain additional financing, if
desired, will be sufficient to meet the Company's growth and operating needs for
at least the next 12 months.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement, along with its amendments SFAS No. 137 and
SFAS No. 138, will become effective for the Company for fiscal year
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2001. The Company has evaluated the effects of these Statements on its
accounting and reporting policies, and the adoption of the Statement will not
have a material impact on the Company's consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company operates manufacturing facilities and offices around the world
and uses fixed and floating rate debt to finance the Company's global
operations. As a result, the Company is subject to business risks inherent in
non-U.S. activities, including political and economic uncertainty, import and
export limitations and market risk related to changes in interest rates and
foreign currency exchange rates. The Company believes the political and economic
risks related to the Company's foreign operations are mitigated due to the
stability of the countries in which the Company's largest foreign operations are
located. Currently the Company does not use derivative financial instruments
such as interest rate swaps or foreign currency forward exchange contracts to
manage the Company's market risks nor does the Company hold derivatives for
trading purposes.
The Company is exposed to market risk including changes in interest rates.
The Company is subject to interest rate risk on its variable rate revolving
credit facility, which consisted of borrowings of $17.4 million at December 31,
2000. A 100 basis point increase in the interest rate would have resulted in an
increase in interest expense of approximately $200,000 for the year ended
December 31, 2000.
The Company's primary currency rate exposures are to foreign denominated
debt, intercompany debt and cash and short-term investments. The calculation of
potential loss in fair values is based on an immediate change in the U.S. dollar
equivalent balances of the Company's currency exposures due to a 10% shift in
exchange rates. The potential loss in income before tax is based on the change
over a one-year period resulting from an immediate 10% change in currency
exchange rates. A hypothetical 10% change in currency exchange rates would have
a favorable/unfavorable impact on fair values of $1.9 million and income before
tax of $1 million.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO 2000
SELECTED FINANCIAL DATA
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA
NET SALES AND INCOME
Net sales................................................... $50,073 $49,820
Operating income............................................ 35,054 34,499
Income before income taxes.................................. 2,081 3,684
Net income.................................................. 1,121 2,831
Net income to net sales..................................... 2.2% 5.7%
PER SHARE AMOUNTS
Net income.................................................. $0.19 $0.49
Dividends declared.......................................... 0.15 0.15
For the three months ended March 31, 2001, consolidated revenues were $50.1
million, an increase of $.3 million over the prior year's three month period. A
12% increase in international revenues was partially offset by a decrease in
domestic sales of 6%. The increase in international sales was driven by Rack
Technologies which was acquired in April, 2000. Rack Technologies sales are
included in the first quarter of 2001 but not 2000 and accounts for 57% of the
international sales increase. The decrease in domestic sales is
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attributable to the sale of a foundry in February 2000 which sales are included
in the first quarter of 2000 but not 2001. This accounts for 70% of the domestic
sales decrease. The Company is also seeing softness in demand for its products
from its power utility customers. These customers are experiencing lower revenue
as a result of a decrease in demand for power from their industrial customers as
well as downward pressure on power prices as a result of deregulation in the
industry.
Gross profit of $15 million was an improvement of $.1 million or 1% for the
first quarter of 2001 compared to the prior year as a result of the increase in
revenues.
Costs and expenses of $12.9 million for the first quarter of 2001 were $1.4
million higher than the same period in the prior year. The majority of this 12%
increase was attributable to the introduction of the data communications product
line in the international market. The increase was related to new employees,
office rentals and travel expenses. The Company expects these selling expenses
to continue throughout the year at a level approximating $.5 million per
quarter. The increase in selling effort is expected to be reflected in sales
beginning in the second quarter of 2001. Also contributing to the increase in
costs and expenses is the inclusion of Rack Technologies in the first quarter of
2001.
Operating income was $2.2 million for the first quarter of 2001, a decrease
of $1.2 million compared to the first quarter of 2000. This decrease was caused
primarily by the increase in selling expenses related to launching the
datacommunication products in the international markets.
Total other expense of $.1 million in 2001 is a decrease of $.4 million
from other income included in the prior year. This decrease is a result of lower
equity earnings from the Company's joint ventures and higher interest expense
resulting from a higher borrowing level during the first quarter of 2001.
As a result of a $1.2 million decrease in operating income and a $.4
million decrease in other income, income before taxes decreased $1.6 million.
In 2000 the effective tax rate was reduced due to the sale of a foundry
business.
As a result of the above, net income was $1.1 million which represents a
decrease of $1.7 million from the prior year. Earnings per share for the first
three months of 2001 were 19 cents compared to 49 cents in the first three
months of 2000.
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $1.2 million for the first three
months of 2001 compared to cash provided by operating activities of $3.7 million
for the comparable period in 2000. This change of $4.9 million was caused
primarily by an increase in inventory of $1.8 million in 2001 compared to a
decrease of $.6 million in the prior year; a reduction in net income of $1.7
million; a reduction in income taxes payable of $1.5 million in 2001 compared to
an increase of $.1 million in 2000; an increase in payables and accruals of $1.1
million in 2001 compared to an increase of $1.9 million in 2000, offset by the
change in other -- net of $1.2 million year over year.
Net cash used in investing activities was approximately the same for the
three months ended March 31, 2001 and 2000. Although capital expenditures
decreased by $2.6 million in 2001 compared to 2000, the prior year includes $1.9
million in proceeds from the sale of property and equipment.
The $1.2 million net cash used for operating activities and the $3.1
million cash used in financing activities in 2001 were financed by a $1.8
million increase in notes payable to banks and a net increase in long-term debt
of $2.7 million.
The above activity combined with $.9 million in dividends, $.3 million
stock repurchases and a $.5 million negative foreign currency impact resulted in
a decrease in cash of $1.5 million.
ITEM 3. PROPERTIES
The Company currently owns or leases 16 facilities, which together contain
approximately 1.5 million square feet of manufacturing, warehouse, research and
development, sales and office space worldwide. Most of
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the Company's international facilities contain space for offices, research and
engineering (R&E), warehousing and manufacturing with manufacturing using a
majority of the space. The following table provides information regarding the
Company's facilities:
LOCATION USE OWNED/LEASED SQUARE FEET
-------- --- ------------ -----------
1. Mayfield Village, Ohio............. Corporate Headquarters Owned 62,000
Research and Engineering Center
2. Rogers, Arkansas................... Manufacturing Owned 310,000
Warehouse
Office
3. Melbourne, Florida................. Manufacturing Leased 21,000
R&E
Office
4. Albemarle, North Carolina.......... Manufacturing Owned 261,000
Warehouse
Office
5. Asheville, North Carolina.......... Manufacturing Owned 46,300
R&E Leased 34,250
Warehouse
Office
6. Sydney, Australia.................. Manufacturing Leased 17,200
R&E
Warehouse
Office
7. Sydney, Australia.................. Manufacturing Owned 90,950
R&E
Warehouse
Office
8. Sao Paulo, Brazil.................. Manufacturing Owned 146,250
R&E
Warehouse
Office
9. Cambridge, Ontario, Canada......... Manufacturing Owned 70,450
Warehouse
Office
10. Andover, Hampshire, England........ Manufacturing Owned 115,900
R&E
Warehouse
Office
11. Queretaro, Mexico.................. Manufacturing Owned 50,000
Warehouse
Office
12. Pietermaritzburg, South Africa..... Manufacturing Owned 74,200
R&E
Warehouse
Office
13. Sevilla, Spain..................... Manufacturing Owned 70,000
R&E
Warehouse
Office
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LOCATION USE OWNED/LEASED SQUARE FEET
-------- --- ------------ -----------
14. Beijing, China..................... Manufacturing Owned 37,700
Warehouse
Office
15. Lower Hutt, New Zealand............ Manufacturing Leased 10,350
Warehouse
Office
16. Glenrothes Fife, Scotland.......... Manufacturing Leased 30,000
Warehouse
Office
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the amount of the Company's Common Shares
beneficially owned as of March 30, 2001 by (a) the Company's directors, (b) each
other person known by the Company to own beneficially more than 5% of the
outstanding Common Shares, (c) the Company's Chief Executive Officer, and the
other four most highly compensated executive officers named in the Summary
Comparison Table, and (d) the Company's executive officers and directors as a
group.
NUMBER OF
COMMON SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
------------------------ ------------------ --------
Barbara P. Ruhlman(1)....................................... 1,537,430(2) 26.7%
Thomas F. Peterson, Jr. .................................... 631,132(3) 11.0%
3060 Lander Road
Pepper Pike, Ohio 44124
Jon R. Ruhlman(1)........................................... 509,463(4) 8.9%
The Royce Funds............................................. 360,000 6.3%
1414 Avenue of the Americas
New York, New York 10019
Robert G. Ruhlman(1)........................................ 394,312(4)(5) 6.8%
Randall M. Ruhlman.......................................... 226,266(6) 3.9%
John D. Drinko.............................................. 521,178(7) 9.1%
1900 East Ninth Street
3200 National City Center
Cleveland, Ohio 44114
Wilber C. Nordstrom......................................... 14,000 *
Frank B. Carr............................................... 6,000(8) *
Kenneth W. Brownell......................................... 9,500(4) *
Eric R. Graef............................................... 5,400(4) *
R. Jon Barnes............................................... 5,000(4) *
All Executive Officers and Directors as a Group (14
persons).................................................. 3,155,341 54.9%
---------------
* Represents less than 1%.
(1) The mailing address for each of Barbara P. Ruhlman, Jon R. Ruhlman and
Robert G. Ruhlman is 660 Beta Drive, Mayfield Village, Ohio 44143.
(2) Includes 112,776 shares held by The Thomas F. Peterson Foundation, of which
Barbara P. Ruhlman is President and a Trustee.
(3) Includes 123,240 shares over which Mr. Peterson exercises voting control
under a custodial arrangement for the benefit of Mr. Peterson's adult
children.
(4) Includes 5,000 shares that may be acquired pursuant to a currently
exercisable stock option.
(5) Includes 134,144 shares held by the Preformed Line Products Company Profit
Sharing Trust, and 60,000 shares held in trust for the benefit of Robert G.
Ruhlman and his children and for the benefit of
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Randall M. Ruhlman and his children (these 60,000 shares are also shown as
being beneficially owned by Randall M. Ruhlman) and 14,768 shares owned by
his wife or held by her as custodian or trustee.
(6) Includes 60,000 shares held in trust for the benefit of Randall M. Ruhlman
and his children and for the benefit of Robert G. Ruhlman and his children
(these 60,000 shares are also shown as being beneficially owned by Robert G.
Ruhlman).
(7) Includes 400,452 shares held in the Ethel B. Peterson Trust for which John
D. Drinko acts as Trust Advisor and has voting control. Also includes 10,400
shares held in Mr. Drinko's IRA and 2,000 shares held by his wife.
(8) Includes 2,000 shares held in Mr. Carr's IRA.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors are divided into two classes. Class I is comprised
of Mrs. Barbara P. Ruhlman and Messrs. Robert G. Ruhlman and Frank B. Carr.
Class II is comprised of Messrs. John D. Drinko, Wilber C. Nordstrom, Jon R.
Ruhlman and Randall M. Ruhlman. The current term of the Class I directors
expires at the Annual Meeting of Shareholders to be held in April 2003. The
current term of the Class II directors expires at the Annual Meeting of
Shareholders to be held in April 2002. The Company's Executive Officers serve at
the pleasure of the Board of Directors.
NAME AGE POSITION
---- --- --------
Jon R. Ruhlman............................ 73 Director, Chairman of the Company
Robert G. Ruhlman......................... 45 Director; President and Chief Executive
Officer
Frank B. Carr............................. 73 Director
John D. Drinko............................ 80 Director
Wilber C. Nordstrom....................... 82 Director
Barbara P. Ruhlman........................ 68 Director
Randall M. Ruhlman........................ 43 Director
R. Jon Barnes............................. 48 Vice President -- Marketing and Sales
Eric R. Graef............................. 49 Vice President -- Finance; Treasurer
William H. Haag........................... 38 Vice President -- International Operations
Robert C. Hazenfield...................... 47 Vice President -- Research and Engineering
Michael S. Pezo........................... 50 Vice President -- Manufacturing
Robert L. Weber........................... 60 Vice President -- Employee Relations
J. Richard Hamilton....................... 72 Secretary
Each of the officers has held the position identified above for at least
the last five years except as noted below.
Jon R. Ruhlman has been the Chairman of the Company since 1975. He served
as Chief Executive Officer from 1975 until July 2000. Jon R. Ruhlman joined the
Company in 1954 as an engineer in the Company's Research and Engineering Center.
He has served as a Director of the Company since 1956.
Robert G. Ruhlman became Chief Executive Officer in July 2000. He had
served as President since 1995 (a position he continues to hold) and Chief
Operating Officer from 1995 until July 2000. Robert G. Ruhlman joined the
Company in 1979 as an engineer in the Company's former Marine Products Division.
He served as Vice President, Corporate Planning from 1989 until becoming
Executive Vice President in 1992. He has served as a Director of the Company
since 1992.
Mr. Carr, a private investor, has served as a Director of the Company since
1975. From 1983 to 1996, Mr. Carr was a Managing Director of McDonald & Company
Securities, Inc., Cleveland, Ohio, an investment banking and brokerage firm, and
a partner in its predecessor firm (McDonald & Company) since 1968. Beginning in
1970 until 1994, Mr. Carr was responsible for management of McDonald's corporate
finance activities. Mr. Carr also serves as a director of Invacare, Inc.
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23
Mr. Drinko has been a senior partner in the national law firm Baker &
Hostetler LLP since 1986. He has served as a Director of the Company since 1954.
Wilber C. Nordstrom was Executive Vice President and a director of The
Standard Products Company until his retirement in 1983. He has served as a
Director of the Company since 1977.
Mrs. Barbara P. Ruhlman has been the President of the Thomas F. Peterson
Foundation since 1988. She is a director or trustee of a number of
Cleveland-based charitable and education organizations. She has served as a
Director of the Company since 1988.
Randall M. Ruhlman has been the President of Ruhlman Motorsports since
1987. He has served as a Director of the Company since 1998.
R. Jon Barnes was elected Vice President -- Marketing and Sales in January
1998. He held the position of Vice President -- Telecommunications Sales from
1993 until January 1998.
Eric R. Graef was elected Vice President -- Finance, Treasurer in December
1999. Prior to that time, Mr. Graef was employed by The Lubrizol Corporation, a
$1.7 billion specialty chemical manufacturer, in various financial positions
from 1986 until rejoining the Company in December 1999. Mr. Graef was previously
employed by the Company from 1978 through 1986.
William H. Haag was elected Vice President -- International Operations in
April 1999. He was managing director of the Company's Australian subsidiary in
1995 and 1996. From January 1997 until January 1999 he was a Regional Operations
Manager and from January 1999 until April 1999 he was the director of
International Operations.
Robert C. Hazenfield has served as Vice President -- Research and
Engineering since April 1998. He served as Director of Research and Engineering
from January 1998 until April 1998 and as Manager of Telecommunication
Engineering from 1987 until December 1997.
Michael S. Pezo was elected Vice President -- Manufacturing in April 1997.
Prior to that, from May 1995 until April 1997 he served as Director of
Manufacturing.
Robert L. Weber began his employment with the Company in 1960. He was
elected Vice President -- Employee Relations in 1986.
J. Richard Hamilton has served as the Secretary of the Company since 1991.
He has been a senior partner in the national law firm Baker & Hostetler LLP
since 1993.
Barbara P. Ruhlman and Jon R. Ruhlman are married and are the parents of
Randall M. Ruhlman and Robert G. Ruhlman.
ITEM 6. EXECUTIVE COMPENSATION
The following table shows the compensation for 2000 of the Chief Executive
Officer and the next four highest-paid executive officers of the Company.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION OTHER ----------------------
-------------------------- ANNUAL SHARE ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) # ($)(3)
------------------ ---- -------- -------- ------------ ------- ------------
Robert G. Ruhlman.............. 2000 $270,000 $108,000 -- 10,000 $ 52,347
President and Chief
Executive Officer
Jon R. Ruhlman................. 2000 480,000 192,000 -- 10,000 126,430(3)
Chairman of the Company(4)
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LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION OTHER ----------------------
-------------------------- ANNUAL SHARE ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) # ($)(3)
------------------ ---- -------- -------- ------------ ------- ------------
Eric R. Graef Vice............. 2000 172,500 69,000 -- 10,000 31,161
President -- Finance and
Treasurer
Kenneth W. Brownell............ 2000 190,000 37,620 -- 10,000 39,791
President -- Superior
Modular Products, Inc.
R. Jon Barnes.................. 2000 148,000 59,200 -- 10,000 29,183
Vice President -- Sales
and Marketing
---------------
(1) The Bonus Plan for all named executive officers except for Mr. Brownell is
discussed in the Compensation (Salary) Committee Report. The bonus for Mr.
Brownell is computed based on the percentage of attainment of the annual
earnings goal for Superior Modular Products Incorporated and its affiliated
company BBR Ltd.
(2) No named executive officer received perquisites and other personal benefits
above the threshold amounts specified in the regulations of the Securities
and Exchange Commission.
(3) Reflects the Company's contributions to the Profit Sharing Plan, including
accruals to the related Supplemental Plan. Also includes, for Jon R.
Ruhlman, premiums paid on "split dollar" life insurance policies covering
Mr. and Mrs. Ruhlman, which totaled $32,173, in 2000.
(4) Jon R. Ruhlman served as Chief Executive Officer until July 2000.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------
POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION FOR
GRANTED TO OPTION TERM
OPTIONS EMPLOYEES EXERCISE OR EXPIRATION -----------------------
NAME GRANTED(1) IN 2000(2) BASE PRICE DATE 5% 10%
---- ---------- ---------- ----------- ---------- --------- ----------
Robert G. Ruhlman........ 10,000 6.45% $16.638 2/15/05 $26,658 $ 72,210
Jon R. Ruhlman........... 10,000 6.45% 16.638 2/15/05 26,658 72,210
Eric R. Graef............ 10,000 6.45% 15.125 2/15/10 83,388 241,054
Kenneth W. Brownell...... 10,000 6.45% 15.125 2/15/10 83,398 241,054
R. Jon Barnes............ 10,000 6.45% 15.125 2/15/10 83,388 241,054
---------------
(1) Each of the options was granted on February 15, 2000 and is subject to a
three-year vesting schedule. The options become exercisable 50% one year
after the date of the grant, 75% after two years, and 100% after three years
from the date of the grant.
(2) Based on 155,000 share options granted to all employees in 2000.
(3) These amounts are based on hypothetical appreciation rates of 5% and 10% and
are not intended to forecast the actual future appreciation of our Common
Shares. No gain to optionees is possible without an actual increase in the
price of our Common Shares, which would benefit all of our shareholders. All
calculations are based on a 10-year option period, except for the Ruhlmans'
calculations, which are based upon five years.
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25
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS IN-THE-MONEY
AT FISCAL OPTIONS AT
SHARES VALUE YEAR-END YEAR-END ($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
---- ------------ -------- ------------- -------------
Robert G. Ruhlman........................... -- -- --/10,000 --/--
Jon R. Ruhlman.............................. -- -- --/10,000 --/--
Eric R. Graef............................... -- -- --/10,000 --/--
Kenneth W. Brownell......................... -- -- --/10,000 --/--
R. Jon Barnes............................... -- -- --/10,000 --/--
1999 STOCK OPTION PLAN
Under the 1999 Stock Option Plan, awards of options to purchase shares of
Common Stock, $2.00 par value, of the Company ("Common Shares") may be made to
certain employees of the Company or its subsidiaries. The options provided for
under the 1999 Stock Option Plan may be either incentive stock options intended
to qualify for favorable tax treatment under Section 422 of the Internal Revenue
Code or nonqualified stock options which do not qualify for such treatment.
The aggregate number of Common Shares with respect to which awards may be
made under the 1999 Stock Option Plan is 300,000. Such maximum number of Common
Shares is subject to appropriate adjustment upon the occurrence of certain
events, including stock dividends, recapitalizations, mergers, reorganizations,
consolidations, stock splits, stock consolidations or certain other changes in
the Common Shares. Common Shares which are not purchased under an option which
has terminated or lapsed may be used for the further grant of options under the
1999 Stock Option Plan.
The 1999 Stock Option Plan is administered by the Salary Committee, each
member of which is an "outside director" within the meaning of the Code. Subject
to the terms of the 1999 Stock Option Plan, the Salary Committee has sole
authority to determine and designate persons to whom awards are to be made under
the 1999 Stock Option Plan and the nature and terms, including vesting
schedules, of such awards.
Options granted under the 1999 Stock Option Plan may not be exercised more
than 10 years after the date of grant. The aggregate fair market value
(determined on the date of grant) of the Common Shares subject to incentive
stock options under all option plans of the Company (and its subsidiary
corporations) which are exercisable for the first time by an employee in any
calendar year may not exceed $100,000. In no event shall there be granted under
the 1999 Stock Option Plan to any employee in any calendar year options to
purchase more than 50,000 Common Shares. The Salary Committee, in its sole
discretion, will determine the vesting schedule of each option granted under the
1999 Stock Option Plan; provided, however, that options may not be exercised
during the first year after they are granted. The 1999 Stock Option Plan
provides that the option price shall not be less than 100% of the fair market
value of the Common Shares on the date such option is granted or 110% of such
fair market value in the case of an incentive stock option granted to an
employee holding more than 10% of the Company's outstanding Common Shares on the
date of grant. The purchase price of the Common Shares subject to options must
be paid in full by the employee at the time of exercise of such option in either
cash or Common Shares.
No cash consideration was received by the Company for granting options
under the 1999 Stock Option Plan. Stock options will be granted in consideration
of the services rendered or to be rendered to the Company by the employees
receiving the options.
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26
SALARIED EMPLOYEES' PROFIT SHARING PLAN
The Company maintains a tax-qualified profit-sharing plan. Any employee who
is paid on a salaried basis and who has completed two full years of service with
the Company is eligible to participate in the plan as of the date such service
is completed. A participating employee is fully vested in his or her account
balance at all times, including any interest or other income credited to the
participant's account. Each year, the Company contributes up to 15% of its
current net profits for the fiscal year coinciding with the plan year, or such
greater or smaller percentage as may from time to time be fixed by the Board of
Directors of the Company. Such contribution, however, cannot exceed the current
or accumulated net profits, except as may be necessary to provide statutory
mandated minimum contributions for non-highly-compensated employees.
Contributions are allocated based upon a formula dependent on years of service
and amount of compensation paid to the participant in a particular plan year.
Participants are permitted to direct the investment of their account balances in
a predetermined set of investment alternatives. One of the investment
alternatives is a Company stock fund, which holds both Company stock and cash.
The plan generally only makes distributions to vested participants upon their
termination of employment (for whatever reason), but does have a provision that
permits hardship distributions for employees prior to termination of employment.
The plan also permits loans in compliance with the Internal Revenue Code
requirements for such plan features.
SUPPLEMENTAL PROFIT SHARING PLAN
In January 1996, the Company adopted a Supplemental Profit Sharing Plan
(the "Supplemental Plan") that provided benefits for certain of its executive
officers and key employees whose contributions under the profit-sharing plan are
limited by the requirements of Internal Revenue Code Sections 401(a)17,
404(a)(3), and/or 415(c)(1).
In order to be eligible to participate in the Supplemental Plan, an
individual must be a participant under the Profit Sharing Plan who also is among
a select group of management or highly compensated employees within the meaning
of Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income
Security Act of 1974. The Board of Directors of the Company has complete
discretionary authority to make this determination. In order to be eligible for
contributions to be made under the Supplemental Plan for a particular year, an
otherwise eligible employee must have a Company contribution allocated for such
plan year under the profit-sharing plan limited or reduced by reason of
application of the limitations of the Code Sections cited above. In such case, a
participant will have credited or allocated to his account under the
Supplemental Plan a benefit equal to the difference between the amount of
Company contributions that the participant otherwise would have had allocated to
his account under the Profit Sharing Plan for such year (assuming the
participant's compensation would not otherwise have been limited under the Code
Sections cited above), over the amount of contributions actually allocated to
the participant's accounts under the profit sharing plan for such year.
All benefits under this Supplemental Plan are unfunded, and the Company is
not required to establish any special or separate fund, or make any other
segregation of assets in order to assure payment of any amounts under the Plan.
However, the Company is authorized, if it wishes, to create a trust fund for
such purpose. The accounts of participants are credited with interest, based on
U.S. Treasury obligations, as set by the Board of Directors of the Company from
time to time. Benefits generally are payable after termination of employment.
EMPLOYMENT CONTRACT
The Company has a five-year employment contract with Mr. Brownell to serve
as President and Chief Executive Officer of Superior Modular Products Inc.,
which expires December 2, 2003. His salary is established at not less than
$190,000 annually, plus a bonus calculated under a formula based upon the
percentage of attainment of annually established profit goals. The Agreement
includes a covenant not to compete during the term of the Agreement and for a
period of two years after its termination.
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27
COMPENSATION (SALARY) COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no Salary Committee interlocks. John D. Drinko, a member of the
Salary Committee, is senior partner of Baker & Hostetler LLP, which firm acts as
general legal counsel for the Company.
COMPENSATION (SALARY) COMMITTEE REPORT
The Company's executive compensation program is administered by the Salary
Committee, which has responsibility for reviewing all aspects of the
compensation program for the executive officers of the Company. The Committee is
comprised of the three directors listed at the end of this report, none of whom
is an employee of the Company.
The Committee's primary objective with respect to executive compensation is
to establish programs which attract and retain key managers and align their
compensation with the Company's overall business strategies, values, and
performance. To this end, the Committee has established and the Board of
Directors has endorsed an executive compensation philosophy to compensate
executive officers based on their responsibilities and the Company's overall
annual and longer-term performance.
Until 2000, when the Company's shareholders approved its Employee Stock
Option Plan, the primary components of the Company's executive compensation
program have been (a) base salaries, and (b) annual cash incentive
opportunities. These components are discussed below.
Base Salaries. Base salaries for each of the Company's executive officers
are reviewed every 18 to 24 months by the Committee using as a guide one or more
widely accepted salary evaluation systems, taking into account the size of the
Company, expectations for the annual bonus plan described below and company
performance, and competitive, inflationary, and internal equity considerations.
The salary of Robert G. Ruhlman, Chief Executive Officer, was set by the
Committee to be within a range that is competitive with the fixed salaries of
chief executive officers of similar size companies with comparable
profitability. At the time of his promotion on July 1, 2000, to Chief Executive
Officer, the Committee increased his salary from $240,000 to $300,000. This
brought Mr. Ruhlman's salary to what the Committee believes is nearly the
mid-level range of comparable salaries.
Annual Cash Incentives. All officers of the Company are eligible to
receive annual cash bonus awards based on a set percentage of their base salary
with a maximum bonus attainable equal to 50% of base salary. The percentage of
base salary is determined on a sliding scale, based on the return on
shareholders' equity. The bonus awards for all officers for the years 1998, 1999
and 2000 were 50%, 30% and 40%, respectively, of base salary.
Stock Options. The Committee has awarded options to purchase 155,000
shares of the Company's Common stock. While the Committee has only had the
opportunity to grant stock options for one year, it believes that option grants
are a valuable motivating tool and provide a long-term incentive to management.
Share option grants reinforce long-term goals by providing the proper nexus
between the interests of management and the interests of the Company's
shareholders. All options were awarded to retain qualified personnel in
positions of significant responsibility with the Company and its subsidiaries.
No options were granted to employees who had been with the Company for less than
three years and all options contained provisions for periodic vesting. All named
executive officers were granted options but no officer received options for more
than 10,000 shares. All option grants had exercise prices at least equal to the
fair market value of the Company's Common shares on the date of the grant.
John D. Drinko, Chairman
Wilber C. Nordstrom
Frank B. Carr
COMPENSATION OF DIRECTORS
Directors who are not employees receive a yearly cash retainer fee of
$12,000, plus $1,400 for each board meeting that they attend and $1,400 for each
committee meeting that they attend.
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28
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is a sponsor of Ruhlman Motorsports. Ruhlman Motorsports is
owned by Randall M. Ruhlman, a director of the Company, and by his wife. In
1998, 1999 and 2000, the Company paid $390,354, $707,738 and $691,004,
respectively, to Ruhlman Motorsports in sponsorship fees and for related
promotional materials. In addition, in 1998, 1999 and 2000, the Company's
Canadian subsidiary, Preformed Line Products (Canada) Ltd., paid $49,405,
$60,974 and $80,000, respectively, to Ruhlman Motorsports in sponsorship fees
and for related promotional materials. This sponsorship provides the Company
with a unique venue to entertain the Company's customers and to advertise on the
race car which participates on the Trans-Am racing circuit. The Company believes
that its sponsorship contract with Ruhlman Motorsports is as favorable to the
Company as a similar contract with a similar independent third-party racing team
would be. The Company and Preformed Line Products (Canada) Ltd. have continued
to sponsor Ruhlman Motorsports in 2001.
Mr. John D. Drinko, one of the Company's directors, is a senior partner in
Baker & Hostetler LLP, which acts as our general outside counsel. The Company
expects that Baker & Hostetler LLP will continue to provide legal services in
that capacity in 2001.
The Company paid fees of $268,475, $96,813 and $112,838 to
Liggett-Stashhower, Inc. during 1998, 1999 and 2000, respectively. The brother
of Jon R. Ruhlman, a director of the Company, is an officer of
Liggett-Stashhower. Liggett-Stashhower is a Cleveland, Ohio based advertising
and public relations firm which assists the Company with its advertising and the
publication of its annual report. The Company believes that the fees paid to
Liggett-Stashhower were substantially similar to the fees that would have been
required to be paid to an unaffiliated third-party public relations firm for
similar service. The Company has continued to contract for the services of
Liggett-Stashhower in 2001.
ITEM 8. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceedings that the Company
believes would, individually or in the aggregate, have a material adverse effect
on its financial condition, results of operations or cash flows.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Common Shares of the Company have been traded on the over-the-counter
market (OTC) under the ticker symbol PLIN. The Company intends to file an
application to have the Common Shares of the Company listed on the Nasdaq
System. The Common Share price history below is based on the high and low
selling price as quoted by McDonald Investments, Inc., a market maker for the
Company's Common Shares. The quotations do not reflect adjustments for retail
mark-ups, mark-downs, or commissions and may not necessarily reflect actual
transactions.
1999 HIGH LOW DIVIDEND
---- ------ ------ --------
First Quarter............................................... $28.25 $20.75 $0.15
Second Quarter.............................................. 22.75 18.25 0.15
Third Quarter............................................... 21.25 15.50 0.15
Fourth Quarter.............................................. 19.00 15.00 0.15
2000 HIGH LOW DIVIDEND
---- ------ ------ --------
First Quarter............................................... $16.50 $13.25 $0.15
Second Quarter.............................................. 19.00 14.00 0.15
Third Quarter............................................... 18.00 15.00 0.15
Fourth Quarter.............................................. 16.75 13.50 0.15
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29
2001 HIGH LOW DIVIDEND
---- ------ ------ --------
First Quarter............................................... $17.25 $13.00 $0.15
Second Quarter, through June 15, 2001....................... 22.00 13.88 0.15
While the Company expects to continue to pay dividends of a comparable amount in
the near term, the declaration and payment of future dividends will be made at
the discretion of the Company's Board of Directors in light of then current
needs of the Company. Therefore, there can be no assurance that the Company will
continue to make such dividend payments in the future.
The Company had approximately 220 shareholders of record on March 16, 2001.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
In 1999 and 2000, an aggregate of 33,301 Common Shares of the Company were
transferred to a total of 10 employees or retired former employees of the
Company as a distribution to them from the Company's Profit Sharing Plan. See
the description of the Plan in Item 6, Salaried Employees' Profit Sharing Plan.
All contributions into that Plan are funded entirely by the Company. The Plan
allows a participant to elect to receive a percentage of his account balance in
Company Common Shares when he is eligible to receive a distribution under the
Plan. The Company relies on Rule 701 of the Securities Act to exempt such
distributions from registration.
Options to purchase a total of 167,000 Common Shares have been granted to
employees of the Company pursuant to the 1999 Employees' Stock Option Plan (see
the description of the plan in the 1999 Stock Option Plan). None of such options
has to date been exercised. The Company relies on Rule 701 of the Securities Act
as an exemption from registration for the issuance of the options. In addition,
if these options are exercised, the Company expects to rely on Rule 701 of the
Securities Act as an exemption from registration, unless by then the 300,000
Common Shares allocated to the Plan have been registered under the Securities
Act of 1933. Options have been granted as follows:
- On February 16, 2000, options to purchase a total of 135,000 Common
Shares were granted to employees of the Company at an exercise price of
$15.125 per Common Share. A total of 50% of such options vested or first
became exercisable February 16, 2001, 25% of such options will become
exercisable February 16, 2002, and the remaining 25% of such options will
become exercisable February 16, 2003.
- On February 16, 2000, options to purchase a total of 20,000 Common Shares
were granted to employees of the Company holding more than 10% of the
Company's outstanding Common Shares on the date of grant at an exercise
price of $16.638 per Common Share. A total of 50% of such options vested
or first became exercisable February 16, 2001, 25% of such options will
become exercisable February 16, 2002, and the remaining 25% of such
options will become exercisable February 16, 2003.
- On April 30, 2001, options to purchase a total of 12,000 Common Shares
were granted to employees of the Company at an exercise price of $15.00
per Common Share. A total of 50% of such options will vest or first become
exercisable April 30, 2002, 25% of such options will become exercisable
April 30, 2003, and the remaining 25% of such options will become
exercisable April 30, 2004.
Each option granted under the 1999 Stock Option Plan may be exercised, to
the extent vested, for a period of ten years from the date of grant.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The Company is registering its Common Shares, $2 par value per share. The
Company's Amended and Restated Articles of Incorporation authorize the issuance
of 15 million shares. As of March 30, 2001, there were 5,747,687 Common Shares
issued and outstanding and approximately 220 shareholders of record. National
City Bank acts as transfer agent and registrant of the Company's Common Shares.
The Company has not authorized the issuance of any class of preferred shares.
Holders of the Company's Common Shares are entitled to receive dividends, when,
as and if declared by the Board of Directors of the Company, out of
27
30
funds legally available therefor. The holders of Common Shares, upon any
liquidation, dissolution or winding-up of the Company are entitled to share
ratably in any assets remaining after payment in full of all liabilities of the
Company. The Common Shares possess ordinary voting rights, each share entitling
the holder thereof to one vote. Holders of Common Shares do not have cumulative
voting rights in the election of directors and do not have preemptive rights.
In accordance with the Company's Code of Regulations, the Board of
Directors is divided into two classes, one class has three directors and one
class has four directors. Each class of directors is elected for a term of two
years. Therefore, at each annual meeting of shareholders, only a portion of the
Board is up for election. Furthermore, any amendment to the provisions of the
Company's Code of Regulations dealing with (i) classification of the Board of
Directors or (ii) the removal of any board members requires the affirmative vote
of at least two-thirds of the voting power of the Company. The Company's Code of
Regulation contains provisions relating to shareholder proposed business at an
annual meeting of shareholders. In summary, in order for a shareholder proposed
matter to be properly brought before the annual meeting shareholders must
provide the Secretary of the Company written notice of the matter containing the
required information not less than 90 and not more than 120 days prior to the
one year anniversary of the date of the annual meeting of the previous year.
CERTAIN PROVISIONS OF OHIO LAW
Section 1701.59 of the Ohio Revised Code (the "Ohio Code") provides, with
certain limited exceptions, that a director shall be held liable in damages for
any action he takes or fails to take as a director only if it is proved by clear
and convincing evidence that his action or failure to act involved an act or
omission undertaken with deliberate intent to cause injury to the corporation or
with reckless disregard for its best interest. In addition, Section 1701.59 of
the Ohio Code provides that a director of an Ohio corporation, in determining
what he reasonably believes to be in the best interests of the corporation,
shall consider the interests of the corporation's shareholders and may consider,
in his discretion, any of the following: (i) the interests of the corporation's
employees, suppliers, creditors and customers; (ii) the economy of the State of
Ohio and the nation; (iii) community and societal considerations; and (iv) the
long-term as well as short-term interests of the corporation and its
shareholders, including the possibility that these interests may be best served
by the continued independence of the corporation.
The Ohio Code also authorizes Ohio corporations to indemnify officers and
directors from liability if the officer or director acted in good faith and in a
manner reasonably believed by the officer or director to be in or not opposed to
the best interests of the corporation and, with respect to any criminal actions,
if the officer or director had no reason to believe his action was unlawful. In
the case of an action by or on behalf of a corporation, indemnification may not
be made (i) if the person seeking indemnification is adjudged liable for
negligence or misconduct, unless the court in which such action was brought
determines such person is fairly and reasonably entitled to indemnification or
(ii) if liability asserted against such person concerns certain unlawful
distributions. The indemnification provisions of the Ohio Code require
indemnification if a director or officer has been successful on the merits or
otherwise in defense of any action, suit or proceeding that he was a party to by
reason of the fact that he is or was a director or officer of the corporation.
The indemnification authorized under Ohio law is not exclusive and is in
addition to any other rights granted to officers and directors under the
articles of incorporation or code of regulations of the corporation or any
agreement between officers and director and the corporation. The Company's Code
of Regulations provides for the indemnification of directors and officers of the
Company to the maximum extent permitted by Ohio law as authorized by the Board
of Directors of the Company, and for the advancement of expenses incurred in
connection with the defense of any action, suit or proceeding that he was a
party to by reason of the fact that he is or was a director of the Company upon
the receipt of an undertaking to repay such amount unless it is ultimately
determined that the director is entitled to indemnification. A corporation may
purchase and maintain insurance or furnish similar protection on behalf of any
officer or director against any liability asserted against him and incurred by
him in his capacity, or arising out of the status, as an officer or director,
whether or not the corporation would have the power to indemnify him against
such liability under the Ohio Code.
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Chapter 1704 of the Ohio Code prohibits certain mergers, dispositions and
acquisitions of assets, issuances or purchases of securities, liquidations or
dissolutions, or reclassifications of the then outstanding shares of an Ohio
corporation with 50 or more shareholders (an issuing public corporation)
involving, or for the benefit of, certain holders of shares representing 10% or
more of the voting power (other than a current 10% shareholder that does not
increase its present proportional interest) (an "Interested Shareholder"),
unless (i) the applicable transaction is approved by the directors of the
Company prior to the shareholder becoming an Interested Shareholder, (ii) the
acquisition of 10% of the voting power is approved by the directors prior to the
shareholder becoming an Interested Shareholder, or (iii) the transaction
involves an Interested Shareholder who has been such for at least three years
and the transaction is approved by holders of two-thirds of the voting power of
the Company (or a lesser proportion provided in the articles of incorporation)
and the holders of a majority of the voting power not held by the Interested
Shareholder or certain minimum price and form of consideration requirements are
met.
Section 1707.041 of the Ohio Code regulates control bids for corporations
in Ohio having certain concentrations of Ohio shareholders and permits the Ohio
Division of Securities to suspend a control bid if certain information is not
provided to offerees. A control bid includes the purchase or offer to purchase
any equity security of the Company from a resident of Ohio if, after the
purchase of that security, the offeror would be directly or indirectly the
beneficial owner of more than 10% of any class of issued and outstanding equity
securities of the Company. Section 1707.043 of the Ohio Code, the so-called
"green mail disgorgement" statute, provides an Ohio corporation, or in certain
circumstances the shareholders of an Ohio corporation, the right to recover
profits realized under certain circumstances by persons who dispose of
securities of a corporation within 18 months of proposing to acquire such
corporation.
It is possible that the foregoing provisions, including the classified
Board of Directors, could discourage other persons from making a tender offer
for or acquisition of substantial amounts of the Company's Common Shares, or may
delay changes in control or management of the Company.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As stated above, in Item 11, Ohio Code authorizes Ohio corporations to
indemnify officers and directors from liability if the officer or director acted
in good faith and in a manner reasonably believed by the officer or director to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal actions, if the officer or director had no reason to believe his
action was unlawful. In the case of an action by or on behalf of a corporation,
indemnification may not be made (i) if the person seeking indemnification is
adjudged liable for negligence or misconduct, unless the court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnification, or (ii) if liability asserted against such person concerns
certain unlawful distributions. The indemnification provisions of the Ohio Code
require indemnification if a director or officer has been successful on the
merits or otherwise in defense of any action, suit or proceeding that he was a
party to by reason of the fact that he is or was a director or officer of the
corporation. The indemnification authorized under Ohio law is not exclusive and
is in addition to any other rights granted to officers and directors under the
articles of incorporation or code of regulations of the corporation or any
agreement between officers and directors and the corporation. A corporation may
purchase and maintain insurance or furnish similar protection on behalf of any
officer or director against any liability asserted against him and incurred by
him in his capacity, or arising out of the status, as an officer or director,
whether or not the corporation would have the power to indemnify him against
such liability under the Ohio Code.
The Company's Code of Regulations provides for the indemnification of
directors and officers of the Company to the maximum extent permitted by Ohio
law as authorized by the Board of Directors of the Company for the advancement
of expenses incurred in connection with the defense of any action, suit or
proceeding that he was a party to by reason of the fact that he is or was a
director of the Company upon the receipt of an undertaking to repay such amount
unless it is ultimately determined that the director is entitled to
indemnification. The Code of Regulations authorizes the Company to purchase and
maintain insurance on behalf of any director, officer, employee or agent of the
Company against any liability asserted against them in such capacity or arising
out of their status as such, whether or not the Company would have power to
29
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indemnify such officer, employee or agent against such liability under the
provisions of the Code of Regulations of the Company.
The Company maintains a directors' and officers' insurance policy which
insures the officers and directors of the Company from any claim arising out of
an alleged wrongful act by such persons in their respective capacities as
officers and directors of the Company.
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ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Preformed Line Products Company
We have audited the accompanying consolidated balance sheets of Preformed
Line Products Company and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Preformed Line
Products Company and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Cleveland, Ohio
February 12, 2001
31
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CONSOLIDATED BALANCE SHEETS
DECEMBER 31
----------------------
2000 1999
--------- ---------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
ASSETS
Cash and cash equivalents................................... $ 9,470 $ 6,907
Accounts receivables, less allowance of $910 ($690 in
1999)..................................................... 30,839 28,645
Inventories................................................. 43,648 45,608
Deferred income taxes....................................... 2,501 1,562
Prepaids and other.......................................... 1,325 1,809
-------- --------
Total Current Assets...................................... 87,783 84,531
Property and equipment -- net............................... 58,743 53,999
Investments in foreign joint ventures....................... 10,148 9,235
Deferred income taxes....................................... 1,323 1,558
Goodwill, patents and other intangibles -- net.............. 8,077 5,898
Other....................................................... 4,537 4,443
-------- --------
Total Assets.............................................. $170,611 $159,664
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to banks...................................... $ 1,704 $ 2,989
Trade accounts payable...................................... 10,289 8,114
Accrued compensation and amounts withheld from employees.... 3,292 3,237
Accrued expenses and other liabilities...................... 4,762 4,256
Accrued profit-sharing and pension contributions............ 2,811 2,343
Accrued dividends........................................... 865 874
Accrued income taxes........................................ 1,796 1,492
Deferred income taxes....................................... 180 230
Current portion of long-term debt........................... 545 1,255
-------- --------
Total Current Liabilities................................. 26,244 24,790
Long-term debt, less current portion........................ 20,160 14,507
Deferred income taxes....................................... 307 391
Minority interest........................................... 44 782
SHAREHOLDERS' EQUITY
Common stock -- $2 par value, 15,000,000 shares authorized,
5,768,086 and 5,829,308 issued and outstanding net of
387,562 and 326,340 treasury shares at par................ 11,536 11,659
Retained earnings........................................... 127,994 121,223
Accumulated foreign currency translation adjustment......... (15,674) (13,688)
-------- --------
Total Shareholders' Equity................................ 123,856 119,194
-------- --------
Total Liabilities and Shareholders' Equity................ $170,611 $159,664
======== ========
See notes to consolidated financial statements
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STATEMENTS OF CONSOLIDATED INCOME
YEAR ENDED DECEMBER 31
--------------------------------
2000 1999 1998
-------- -------- --------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
Net sales.................................................. $207,332 $195,245 $216,244
Cost of products sold...................................... 143,800 136,917 144,656
-------- -------- --------
Gross Profit.......................................... 63,532 58,328 71,588
Costs and expenses
Selling.................................................. 20,118 19,728 20,487
General and administrative............................... 20,335 20,343 20,566
Research and engineering................................. 5,709 5,514 5,542
-------- -------- --------
46,162 45,585 46,595
-------- -------- --------
Operating Income...................................... 17,370 12,743 24,993
Other income (expense)
Equity in net income of foreign joint ventures........... 335 928 771
Interest income.......................................... 682 713 729
Interest expense......................................... (1,608) (1,067) (988)
Other income -- net...................................... 356 1,412 2,959
-------- -------- --------
(235) 1,986 3,471
-------- -------- --------
Income Before Income Taxes............................ 17,135 14,729 28,464
Income taxes............................................... 6,084 4,528 9,458
-------- -------- --------
Net Income............................................ $ 11,051 $ 10,201 $ 19,006
======== ======== ========
Net income per share -- basic and diluted.................. $ 1.91 $ 1.71 $ 3.10
======== ======== ========
Average number of shares outstanding (in thousands)........ 5,790 5,975 6,125
======== ======== ========
See notes to consolidated financial statements.
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STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
ACCUMULATED
FOREIGN
OUTSTANDING CURRENCY
COMMON RETAINED TRANSLATION
STOCK EARNINGS ADJUSTMENT TOTAL
----------- -------- ----------- --------
(THOUSAND OF DOLLARS, EXCEPT PER SHARE DATA)
BALANCE AT JANUARY 1, 1998................... $ 6,133 $110,644 $ (7,698) $109,079
Net income................................... 19,006 19,006
Foreign currency translation
adjustment -- net.......................... (2,267) (2,267)
--------
Total comprehensive income......... 16,739
Purchase of 15,922 treasury shares........... (32) (490) (522)
Stock split effected as dividend............. 6,134 (6,134) --
Cash dividends declared -- $.575 per share... (3,520) (3,520)
------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998................. 12,235 119,506 (9,965) 121,776
Net income................................... 10,201 10,201
Foreign currency translation
adjustment -- net.......................... (3,723) (3,723)
--------
Total comprehensive income......... 6,478
Purchase of 288,018 treasury shares.......... (576) (4,906) (5,482)
Cash dividends declared -- $.60 per share.... (3,578) (3,578)
------- -------- -------- --------
BALANCE AT DECEMBER 31, 1999................. 11,659 121,223 (13,688) 119,194
Net income................................... 11,051 11,051
Foreign currency translation
adjustment -- net.......................... (1,986) (1,986)
--------
Total comprehensive income......... 9,065
Purchase of 61,222 treasury shares........... (123) (812) (935)
Cash dividends declared -- $.60 per share.... (3,468) (3,468)
------- -------- -------- --------
BALANCE AT DECEMBER 31, 2000................. $11,536 $127,994 $(15,674) $123,856
======= ======== ======== ========
See notes to consolidated financial statements.
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STATEMENTS OF CONSOLIDATED CASH FLOWS
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income.................................................. $ 11,051 $ 10,201 $ 19,006
Adjustment to reconcile net income to net cash provided by
operations
Depreciation and amortization............................. 11,411 9,786 8,754
Impairment charges........................................ -- 1,000 1,100
Deferred income taxes..................................... (838) 325 (1,650)
Equity in earnings of joint ventures -- net of dividends
received............................................... (103) 309 484
Loss (gain) on sale of property and equipment............. 44 1,034 (2,275)
Changes in operating assets and liabilities
Receivables............................................ (1,870) 589 (1,132)
Inventories............................................ 561 (5,064) (6,743)
Trade payables and accrued expenses.................... 2,681 (959) (1,329)
Income taxes........................................... 304 166 1,959
Other -- net........................................... 263 (2,004) (1,820)
-------- -------- --------
Net Cash Provided by Operating Activities............ 23,504 15,383 16,354
INVESTING ACTIVITIES
Capital expenditures........................................ (14,388) (13,136) (14,980)
Business acquisitions....................................... (5,724) -- (248)
Proceeds from the sale of property and equipment............ 1,887 79 3,298
-------- -------- --------
Net Cash Used in Investing Activities................ (18,225) (13,057) (11,930)
FINANCING ACTIVITIES
(Decrease) increase in notes payable to banks............... (1,285) 937 1,668
Proceeds from the issuance of long-term debt................ 24,443 20,584 14,216
Payments of long-term debt.................................. (20,140) (16,190) (16,341)
Dividends paid.............................................. (3,479) (3,622) (3,369)
Purchase of treasury stock.................................. (935) (5,482) (522)
-------- -------- --------
Net Cash Used in Financing Activities................ (1,396) (3,773) (4,348)
Effects of exchange rate changes on cash and cash
equivalents............................................... (1,320) (2,121) (741)
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ 2,563 (3,568) (665)
Cash and cash equivalents at beginning of year.............. 6,907 10,475 11,140
-------- -------- --------
Cash and Cash Equivalents at End of Year............. $ 9,470 $ 6,907 $ 10,475
======== ======== ========
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
On June 10, 1998 the Company effected a two-for-one stock split in the form
of a 100% stock dividend. Accordingly, all per share amounts and average shares
outstanding used in the calculation of per share amounts have been adjusted
retroactively to reflect the stock split.
Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries where ownership is greater than 50%. All intercompany
accounts and transactions have been eliminated upon consolidation. Investments
in joint ventures, where the Company owns at least 20% but less than 50%, are
accounted for by the equity method. Dividends received from joint-ventures
totaled $.4 million in 2000, $1.3 million in 1999 and $1.3 million in 1998.
Cash Equivalents
Cash equivalents are stated at fair value and consist of highly liquid
investments with remaining maturities of three months or less at the time of
acquisition.
Inventories
Inventories are carried at the lower of cost or market.
Depreciation and Amortization
Depreciation for the majority of the Company's assets is computed using
accelerated methods over the estimated useful lives. The estimated useful lives
used are: land improvements, ten years; buildings, forty years; and machinery
and equipment, three to ten years; with the exception of personal computers
which are depreciated over three years using the straight line method. Goodwill
is amortized by the straight-line method over periods ranging from ten to twenty
years. Patents and other intangible assets primarily represent the value
assigned to patents acquired with purchased businesses and are amortized using
the straight-line method over their useful lives.
Goodwill and other long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount may not be
recoverable. Events or circumstances that would result in an impairment review
primarily include operations reporting losses or a significant change in the use
of an asset. The asset would be considered impaired when the future net
undiscounted cash flows estimated to be generated by the asset are less than its
carrying value. An impairment loss would be recognized based on the amount by
which the carrying value of the asset exceeds its fair value.
Research and Development
Research and engineering costs are expensed as incurred. Company sponsored
research and development of new products costs were $2.3 million in 2000, $2.1
million in 1999 and $2.2 million in 1998.
Foreign Currency Translation
Asset and liability accounts are translated into U.S. dollars using
exchange rates in effect at the date of the consolidated balance sheet; revenues
and expenses are translated at weighted average exchange rates in effect during
the period. Translation gains and losses arising from exchange rate changes on
transactions denominated in a currency other than the functional currency are
included in income or expense as incurred. Such transactions have not been
material. Unrealized translation adjustments are recorded as accumulated foreign
currency translation adjustment in shareholders' equity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from these
estimates.
Revenue Recognition
Revenue is recognized when products are shipped and title has passed to
unaffiliated customers.
Acquisitions
During April 2000, the Company acquired assets and assumed certain
liabilities of Rack Technologies Pty. Limited whose results of operations, which
were not material, are included in the consolidated financial statements from
the date of acquisition. Rack Technologies Pty. Limited has two foreign
locations and one domestic location. The Company accounted for this acquisition
using the purchase method. The initial cash payment for this acquisition was
$5.3 million. Under the terms of the acquisition agreement, the Company is
obligated to make additional payments based on the acquired company's
profitability of ongoing operations for the years 2000 and 2001. These
additional payments will be recorded as goodwill and will be amortized over the
remaining life of the original goodwill. The Company will make a payment of $.8
million in 2001 for the year 2000. Due to the immateriality of the impact on the
Company's results of operations, no supplemental pro forma results of operations
of Rack Technologies Pty. Limited have been provided for 2000 and 1999.
In addition during April 2000, the Company acquired the remaining twenty
percent minority interest in its subsidiary in the Peoples' Republic of China
for $.4 million. This subsidiary's net sales and the Company's total investment
in this subsidiary are not material.
New accounting pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement, along with its amendments SFAS No. 137 and
SFAS No. 138, will become effective for the Company for fiscal year 2001. The
Company has evaluated the effects of these Statements on its accounting and
reporting policies, and the adoption of the Statement will not have a material
impact on the Company's consolidated financial statements.
NOTE B - SUPPLEMENTAL INFORMATION
DECEMBER 31,
------------------
2000 1999
------- -------
INVENTORIES
Finished products........................................... $20,209 $21,517
Work-in-process............................................. 1,592 2,223
Raw materials............................................... 24,174 24,068
------- -------
45,975 47,808
Excess of current cost over LIFO cost....................... (2,327) (2,200)
------- -------
$43,648 $45,608
======= =======
The Company uses the last-in, first-out (LIFO) method of determining cost
for the majority (approximately $21.1 million in 2000 and $23.2 million in 1999)
of its inventories in the United States. All other inventories are determined by
the FIFO method.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
DECEMBER 31,
--------------------
2000 1999
-------- --------
PROPERTY AND EQUIPMENT -- AT COST
Land and improvements....................................... $ 6,623 $ 5,989
Buildings and improvements.................................. 36,070 32,168
Machinery and equipment..................................... 73,171 66,967
Construction in progress.................................... 5,560 5,873
-------- --------
121,424 110,997
Less accumulated depreciation............................... 62,681 56,998
-------- --------
$ 58,743 $ 53,999
======== ========
Depreciation of property and equipment was $8.4 million in 2000, $8.0
million in 1999 and $7.5 million in 1998.
DECEMBER 31,
------------------
2000 1999
------- -------
GOODWILL AND INTANGIBLE ASSETS
Goodwill.................................................... $ 9,183 $ 8,716
Patents and other intangible assets......................... 7,339 3,555
------- -------
16,522 12,271
Less accumulated amortization............................... 8,445 6,373
------- -------
$ 8,077 $ 5,898
======= =======
NOTE C - PENSION PLANS
Domestic hourly employees of the Company and certain employees of foreign
subsidiaries who meet specific requirements as to age and service are covered by
defined benefit pension plans. Net periodic benefit cost and obligations of the
Company's foreign plans are not material. Net periodic benefit cost for the
Company's domestic plan included the following components for the year ended
December 31:
2000 1999 1998
----- ----- -----
Service cost............................................... $ 487 $ 568 $ 520
Interest cost.............................................. 530 498 435
Expected return on plan assets............................. (569) (516) (428)
Amortization of the unrecognized transition asset -- net... 13 13 17
----- ----- -----
Net periodic benefit cost.................................. $ 461 $ 563 $ 544
===== ===== =====
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
The following table sets forth benefit obligations, assets and the prepaid
(accrued) benefit cost of the Company's domestic defined benefit plan at
December 31:
2000 1999
------ -------
Projected benefit obligation at beginning of the year....... $6,967 $ 7,112
Service cost................................................ 487 568
Interest cost............................................... 530 498
Actuarial loss (gain)....................................... 314 (1,097)
Curtailment................................................. (121) --
Benefits paid............................................... (141) (114)
------ -------
Projected benefit obligation at end of the year............. $8,036 $ 6,967
====== =======
Fair value of plan assets at beginning of the year.......... $7,445 $ 7,192
Actual return on plan assets................................ 197 (96)
Employer contributions...................................... -- 463
Benefits paid............................................... (141) (114)
------ -------
Fair value of plan assets at end of the year................ $7,501 $ 7,445
====== =======
Plan assets in excess of (less than) benefit obligations.... $ (535) $ 478
Unamortized:
Net loss (gain)........................................... 387 (257)
Transition asset.......................................... 25 38
------ -------
Prepaid (accrued) benefit cost.............................. $ (123) $ 259
====== =======
In determining the projected benefit obligation, the assumed discount rate
was 7.5% for 2000 and 1999, the rate of increase in future compensation levels
was 4.0% for 2000 and 1999, and the expected long-term rate of return on plan
assets was 7.5% in 2000 and 7.0% in 1999. The Company's policy is to fund
amounts deductible for federal income tax purposes. Expense for defined
contribution plans was $2.5 million in 2000, 1999 and 1998.
NOTE D - DEBT AND CREDIT ARRANGEMENTS
DECEMBER 31,
------------------
2000 1999
------- -------
Revolving credit agreement.................................. $17,400 $12,500
Australian dollar denominated term loans (A$3,900 and
A$2,600), at 7.3 to 7.46% currently, due annually
2001-2006................................................. 2,141 1,690
Other loans in various denominations, currently ranging from
5.4% to 18.5%, due 2001-2005.............................. 1,164 1,572
------- -------
20,705 15,762
Less current portion........................................ (545) (1,255)
------- -------
$20,160 $14,507
======= =======
The revolving credit agreement makes $40 million available through December
31, 2002 at an interest rate at the lower of the lender's prime rate, 1/2% above
the London interbank rate (LIBOR) or the lender's cost of funds plus 1/2%. The
effective rate at December 31, 2000 was 7.125%. The revolving credit agreement
contains among other provisions, requirements for maintaining levels of working
capital and net worth. Under the most restrictive of the covenants approximately
$54.5 million of net worth (exclusive of accumulated foreign currency
translation adjustment) was available for payment of dividends as of December
31, 2000.
39
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Aggregate maturities of long-term debt during the next five years are as
follows: 2001, $.5 million; 2002, $18.8 million; 2003, $.4 million; 2004, $.5
million and 2005, $.5 million.
Interest paid was $1.6 million in 2000, $1.1 million in 1999 and $1.0
million in 1998.
The fair value of debt approximates the amounts recorded.
NOTE E - LEASES
The Company has commitments under operating leases primarily for office and
manufacturing space, transportation equipment and computer equipment. Rental
expense was $1.3 million in 2000 and $1.0 million in each of 1999 and 1998.
Future minimum rental commitments having non-cancelable terms exceeding one year
are $1.2 million in 2001, $1.2 million in 2002, $.8 million in 2003, $.8 million
in 2004, $.8 million in 2005 and an aggregate $12.3 million thereafter.
NOTE F - INCOME TAXES
The provision for income taxes is based upon income before tax for
financial reporting purposes. Deferred tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
tax bases of assets and liabilities and their carrying value for financial
statement purposes. In estimating future tax consequences, the company considers
anticipated future events, except changes in tax laws or rates, which are
recognized when enacted.
Income before income tax consists of the following:
2000 1999 1998
------- ------- -------
United States......................................... $ 6,617 $ 5,965 $18,028
Foreign............................................... 10,518 8,764 10,436
------- ------- -------
Total....................................... $17,135 $14,729 $28,464
======= ======= =======
The components of income tax expense are as follows:
2000 1999 1998
------ ------ -------
Current:
Federal............................................... $2,753 $1,117 $ 7,164
Foreign............................................... 3,662 2,096 2,523
State and local....................................... 507 990 1,421
------ ------ -------
6,922 4,203 11,108
------ ------ -------
Deferred:
Federal............................................... (660) (243) (1,443)
Foreign............................................... (178) 568 (207)
------ ------ -------
(838) 325 (1,650)
------ ------ -------
$6,084 $4,528 $ 9,458
====== ====== =======
40
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
The differences between the provision for income taxes at the U.S.
statutory rate and the tax shown in the consolidated statements of income are
summarized as follows:
2000 1999 1998
------ ------ ------
Tax at statutory rate of 35%............................. $5,996 $5,155 $9,962
State and local taxes, net of federal benefit............ 507 696 907
Non-deductible expenses.................................. 604 926 574
Non-U.S. tax rate variances net of foreign tax credits... (890) (1,523) (1,113)
Other, net............................................... (133) (726) (872)
------ ------ ------
$6,084 $4,528 $9,458
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets (liabilities) at December 31 are
as follows:
2000 1999
------ ------
Deferred tax assets:
Accrued compensation and benefits......................... $ 885 $ 822
Depreciation and other basis differences.................. 1,076 689
Inventory obsolescence.................................... 550 204
Allowance for doubtful accounts........................... 310 253
Other reserves............................................ 691 979
Other..................................................... 312 173
------ ------
Gross deferred tax assets................................. $3,824 $3,120
Deferred tax liabilities:
Depreciation and other basis differences.................. (307) (340)
Inventory................................................. -- (295)
Other..................................................... (180) 14
------ ------
Gross deferred tax liabilities............................ (487) (621)
------ ------
Net deferred tax assets................................... $3,337 $2,499
====== ======
The Company has not provided for income taxes on approximately $46 million
of undistributed earnings of foreign subsidiaries and joint ventures. The
Company intends to reinvest these earnings indefinitely in operations outside
the United States. If distributed, such earnings would be subject to withholding
taxes but substantially free of United States income taxes.
Income taxes paid, net of refunds, were $6.2 million in 2000, $4.8 million
in 1999, and $10.1 million in 1998.
NOTE G - STOCK OPTIONS
The 1999 Stock Option Plan (Plan) provides for granting of 300,000 options
to key employees to buy common shares of the Company at not less than fair
market value of the shares on the date of grant. At December 31, 2000 there were
300,000 shares reserved for the Plan. Under the Plan, options vest 50% one year
following the date of the grant, 75% after two years, 100% after three years and
expire from five to ten years from the date of grant.
In 2000, 155,000 options were granted at exercise prices of $15.125 and
$16.638 per share for a weighted average price of $15.32 per share. All options
were outstanding as of December 31, 2000 and no options were exercisable as of
December 31, 2000.
41
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
As permitted under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), the Company applies the
intrinsic value based method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, to account for stock options
granted to employees to purchase common shares. Under this method, compensation
expense is measured as the excess, if any, of the market price at the date of
grant over the exercise price of the options. Therefore, no compensation expense
has been recorded.
SFAS 123 requires pro forma disclosure of the effect on net income and
earnings per share when applying the fair value method of valuing stock-based
compensation. If the fair value method to measure compensation cost for the
Company's stock compensation plan had been used, the Company's net income would
have been reduced by $.5 million in 2000 ($.09 per share). For purposes of this
pro forma disclosure, the estimated fair value of the options is amortized
ratably over the vesting period.
Disclosures under the fair value method are estimated using the
Black-Scholes option-pricing model with the following assumptions:
Risk-free interest rate..................................... 5.88%
Dividend yield.............................................. 3.97%
Expected life............................................... 5 years
Expected volatility......................................... 25.6%
NOTE H - COMPUTATION OF EARNINGS PER SHARE
2000 1999 1998
------- ------- -------
Numerator
Net income................................................ $11,051 $10,201 $19,006
======= ======= =======
Denominator
Determination of shares
Weighted average common shares outstanding............. 5,790 5,975 6,125
Dilutive effect -- employee stock options.............. -- -- --
------- ------- -------
Diluted weighted average common shares outstanding..... 5,790 5,975 6,125
======= ======= =======
Earnings per common share
Basic..................................................... $ 1.91 $ 1.71 $ 3.10
Diluted................................................... $ 1.91 $ 1.71 $ 3.10
NOTE I - ASSET IMPAIRMENT
In December 1998, the Company decided to close or sell an aluminum casting
operation located in Birmingham, Alabama. As a result, the Company recorded an
impairment charge of $1.1 million to reduce the carrying value of certain assets
related to this manufacturing facility. In 1999, after an independent appraisal
of the fair value of this facility, the Company recorded an additional $1.0
million impairment charge. These impairment charges are reflected in the
consolidated statements of income for the years ended December 31, 1999 and 1998
as cost of sales. In February 2000, the Company sold certain long-lived assets
as well as operating assets located at this facility to a third party.
42
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NOTE J - BUSINESS SEGMENTS
The Company designs, manufactures and sells hardware employed in the
construction and maintenance of telecommunications, energy and other utility
networks. Principal products include cable anchoring and control hardware,
splice enclosures and devices which are sold primarily to customers in North and
South America, Europe and Asia.
The Company's segments are based on the way management makes operating
decisions and assesses performance. The Company's operating segments are
domestic and foreign operations. The accounting policies of the operating
segments are the same as those described in Note A. Revenues and assets in any
individual foreign country are not material. Revenues and assets outside the
United States are primarily from Brazil, Canada, Australia, Britain and
Scotland. No individual foreign country accounted for 10% or more of the
Company's revenues or assets for the years presented.
2000 1999 1998
-------- -------- --------
Net sales
Domestic......................................... $125,764 $123,228 $138,981
Foreign.......................................... 81,568 72,017 77,263
-------- -------- --------
Total net sales.................................... $207,332 $195,245 $216,244
======== ======== ========
Intersegment sales
Domestic......................................... $ 4,996 $ 3,490 $ 7,849
Foreign.......................................... 732 427 401
-------- -------- --------
Total intersegment sales........................... $ 5,728 $ 3,917 $ 8,250
======== ======== ========
Operating income
Domestic......................................... $ 4,801 $ 1,707 $ 13,693
Foreign.......................................... 12,569 11,036 11,300
-------- -------- --------
17,370 12,743 24,993
Equity in net income of joint ventures............. 335 928 771
Interest income
Domestic......................................... 58 124 55
Foreign.......................................... 624 589 674
-------- -------- --------
682 713 729
Interest expense
Domestic......................................... (1,206) (642) (751)
Foreign.......................................... (402) (425) (237)
-------- -------- --------
(1,608) (1,067) (988)
Other income -- net................................ 356 1,412 2,959
-------- -------- --------
Income before income taxes......................... $ 17,135 $ 14,729 $ 28,464
======== ======== ========
Identifiable assets
Domestic......................................... $ 97,905 $ 95,051 $ 88,592
Foreign.......................................... 62,558 55,378 59,920
-------- -------- --------
160,463 150,429 148,512
Corporate........................................ 10,148 9,235 9,205
-------- -------- --------
Total assets....................................... $170,611 $159,664 $157,717
======== ======== ========
43
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
2000 1999 1998
-------- -------- --------
Long-lived assets
Domestic......................................... $ 37,394 $ 33,842 $ 31,973
Foreign.......................................... 21,349 20,157 19,622
-------- -------- --------
$ 58,743 $ 53,999 $ 51,595
======== ======== ========
Expenditure for long-lived assets
Domestic......................................... $ 9,571 $ 8,463 $ 9,497
Foreign.......................................... 4,817 4,673 5,483
-------- -------- --------
$ 14,388 $ 13,136 $ 14,980
======== ======== ========
Depreciation and amortization
Domestic......................................... $ 8,423 $ 7,284 $ 6,554
Foreign.......................................... 2,109 2,502 2,200
-------- -------- --------
$ 10,532 $ 9,786 $ 8,754
======== ======== ========
Transfers between geographic areas are generally above cost and consistent
with rules and regulations of governing tax authorities. Corporate assets are
equity investments in joint ventures.
NOTE K - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
THREE MONTHS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
2000
Net sales.......................................... $49,820 $54,988 $53,353 $49,171
Gross profit....................................... 14,871 16,938 16,102 15,621
Income before income taxes......................... 3,684 5,103 4,414 3,934
Net income......................................... 2,831 3,097 2,679 2,444
Net income per share, basic and diluted............ $ 0.49 $ 0.53 $ 0.46 $ 0.43
1999
Net sales.......................................... $46,684 $49,471 $52,609 $46,481
Gross profit....................................... 13,813 15,059 16,347 13,109
Income before income taxes......................... 3,318 3,157 5,626 2,628
Net income......................................... 2,794 2,154 3,640 1,613
Net income per share, basic and diluted............ $ 0.46 $ 0.35 $ 0.62 $ 0.28
44
47
INTERIM FINANCIAL STATEMENTS AND NOTES AT MARCH 31, 2001
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
Thousands of dollars, except per share data (UNAUDITED) (NOTE A)
ASSETS
Cash and cash equivalents................................... $ 7,931 $ 9,470
Accounts receivables, less allowance of $913 ($910 in
2000)..................................................... 33,682 30,839
Inventories................................................. 45,410 43,648
Deferred income taxes....................................... 2,395 2,501
Prepaids and other.......................................... 930 1,325
-------- --------
TOTAL CURRENT ASSETS................................... 90,348 87,783
Property and equipment -- net............................... 58,070 58,743
Investments in foreign joint ventures....................... 10,148 10,148
Deferred income taxes....................................... 1,323 1,323
Goodwill, patents and other intangibles -- net.............. 8,150 8,077
Other....................................................... 4,524 4,537
-------- --------
TOTAL ASSETS........................................... $172,563 $170,611
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to banks...................................... $ 3,482 $ 1,704
Trade accounts payable...................................... 10,794 10,289
Accrued compensation and amounts withheld from employees.... 3,233 3,292
Accrued expenses and other liabilities...................... 3,721 4,762
Accrued profit-sharing and pension contributions............ 4,458 2,811
Dividends payable........................................... 863 865
Income taxes payable........................................ 507 1,976
Current portion of long-term debt........................... 380 545
-------- --------
TOTAL CURRENT LIABILITIES.............................. 27,438 26,244
Long-term debt, less current portion........................ 23,028 20,160
Deferred income taxes....................................... 457 307
Minority interest........................................... 44 44
SHAREHOLDERS' EQUITY
Common stock -- $2 par value, 15,000,000 shares authorized,
5,747,682 and 5,768,086 issued and outstanding net of
407,966 and 387,562 treasury shares at par................ 11,495 11,536
Retained earnings........................................... 128,007 127,994
Accumulated foreign currency translation adjustment......... (17,906) (15,674)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................. 121,596 123,856
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $172,563 $170,611
======== ========
See notes to consolidated financial statements.
45
48
STATEMENTS OF CONSOLIDATED INCOME
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
Thousands of dollars, except per share data (UNAUDITED)
Net sales................................................... $50,073 $49,820
Cost of products sold....................................... 35,054 34,949
------- -------
GROSS PROFIT........................................... 15,019 14,871
Costs and expenses
Selling................................................... 5,580 4,746
General and administrative................................ 5,573 5,092
Research and engineering.................................. 1,697 1,626
------- -------
12,850 11,464
------- -------
OPERATING INCOME....................................... 2,169 3,407
Other income (expense)
Equity in net income of foreign joint ventures............ -- 201
Interest income........................................... 134 186
Interest expense.......................................... (418) (303)
Other income -- net....................................... 196 193
------- -------
(88) 277
------- -------
INCOME BEFORE INCOME TAXES............................. 2,081 3,684
Income taxes................................................ 960 853
------- -------
NET INCOME............................................. $ 1,121 $ 2,831
======= =======
Net income per share -- basic and diluted................... $ 0.19 $ 0.49
======= =======
Cash dividends declared per share........................... $ 0.15 $ 0.15
======= =======
Average number of shares outstanding (in thousands)......... 5,751 5,823
======= =======
See notes to consolidated financial statements.
46
49
STATEMENTS OF CONSOLIDATED CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
------- -------
Thousands of dollars (UNAUDITED)
OPERATING ACTIVITIES
Net income.................................................. $ 1,121 $ 2,831
Adjustment to reconcile net income to net cash provided by
(used in) operations
Depreciation and amortization............................. 2,519 2,354
Equity in earnings of joint ventures -- net of dividends
received............................................... -- 201
Changes in operating assets and liabilities
Receivables............................................ (2,843) (3,126)
Inventories............................................ (1,762) 560
Trade payables and accruals............................ 1,052 1,852
Income taxes........................................... (1,469) 74
Other -- net........................................... 186 (1,006)
------- -------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES.......................................... (1,196) 3,740
INVESTING ACTIVITIES
Capital expenditures........................................ (2,285) (4,858)
Business acquisitions....................................... (791) (309)
Proceeds from the sale of property and equipment............ 7 1,900
------- -------
NET CASH USED IN INVESTING ACTIVITIES................ (3,069) (3,267)
FINANCING ACTIVITIES
Increase (decrease) in notes payable to banks............... 1,778 (1,296)
Proceeds from the issuance of long-term debt................ 7,533 6,645
Payments of long-term debt.................................. (4,830) (5,758)
Dividends paid.............................................. (865) (874)
Purchase of treasury stock.................................. (286) (472)
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES.......................................... 3,330 (1,755)
Effects of exchange rate changes on cash and cash
equivalents............................................... (541) (379)
------- -------
Decrease in cash and cash equivalents....................... (1,476) (1,661)
Cash and cash equivalents at beginning of year.............. 9,407 6,907
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 7,931 $ 5,246
======= =======
See notes to consolidated financial statements.
47
50
PREFORMED LINE PRODUCTS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2001
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions pursuant to Rule
3-12 and Article 10 of Regulation S-X. Accordingly, these consolidated financial
statements do not include all of the information and notes required by
accounting principles generally accepted in the United States for complete
financial statements. However, in the opinion of management, these consolidated
financial statements contain all estimates and adjustments required to fairly
present the financial position, results of operations and changes in cash flows
for the interim period. Operating results for the three month period ended March
31, 2001 are not necessarily indicative of the results to be expected for the
year ending December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date, but does not include all of the information
and notes required by accounting principles generally accepted in the United
Sates for complete financial statements. For further information, refer to the
consolidated financial statements and notes included herein.
NOTE B - SUPPLEMENTAL INFORMATION
INVENTORIES
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(DOLLARS IN THOUSANDS)
Finished goods.............................................. $20,082 $17,882
Work-in-process............................................. 2,000 1,592
Raw Material................................................ 23,328 24,174
------- -------
$45,410 $43,648
======= =======
The valuation of inventory under last-in, first-out (LIFO) method is made
at the end of the year based on inventory levels and costs at that time.
Therefore, interim LIFO calculations are based on estimates of expected year-end
inventory levels and costs and are subject to final year-end adjustments.
COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN THOUSANDS)
Net Income.................................................. $ 1,121 $ 2,831
Other comprehensive income:
Foreign currency adjustment -- net........................ (2,232) (1,628)
------- -------
Comprehensive (loss) income................................. $(1,111) $ 1,203
======= =======
48
51
PREFORMED LINE PRODUCTS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE C - COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED
MARCH 31,
--------------------
2001 2000
-------- --------
(DOLLARS AND SHARES
IN THOUSANDS, EXCEPT
PER SHARE DATA)
Numerator
Net income................................................ $1,121 $2,831
====== ======
Denominator
Determination of shares
Weighted average common shares outstanding............. 5,751 5,823
Dilutive effect -- employee stock options.............. -- --
------ ------
Diluted weighted average common shares outstanding..... 5,751 5,823
====== ======
Earnings per common share
Basic..................................................... $ 0.19 $ 0.49
Diluted................................................... $ 0.19 $ 0.49
NOTE D - NEW ACCOUNTING PRONOUNCEMENTS
The financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. On January 1, 2001, the Company adopted this Statement along
with its amendments SFAS No. 137 and SFAS No. 138. The impact from the adoption
of these Statements was not material to the Company's financial position or
results of operations for the three month period ended March 31, 2001.
49
52
PREFORMED LINE PRODUCTS COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE E - BUSINESS SEGMENTS
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
--------- ---------
(DOLLARS IN THOUSANDS)
Net sales
Domestic.................................................. $ 29,770 $ 31,668
Foreign................................................... 20,303 18,152
-------- --------
Total net sales............................................. $ 50,073 $ 49,820
======== ========
Intersegment sales
Domestic.................................................. $ 1,381 $ 1,163
Foreign................................................... 108 200
-------- --------
Total intersegment sales.................................... $ 1,489 $ 1,363
======== ========
Operating income
Domestic.................................................. $ 41 $ 968
Foreign................................................... 2,128 2,439
-------- --------
2,169 3,407
Equity in net income of joint ventures...................... -- 201
Interest income
Domestic.................................................. 3 10
Foreign................................................... 131 176
-------- --------
134 186
Interest expense
Domestic.................................................. (321) (204)
Foreign................................................... (97) (99)
-------- --------
(418) (303)
Other income -- net......................................... 196 193
-------- --------
Income before income taxes.................................. $ 2,081 $ 3,684
======== ========
Identifiable assets
Domestic.................................................. $ 98,238 $ 96,214
Foreign................................................... 64,241 56,396
-------- --------
162,479 152,610
Corporate................................................. 10,148 9,435
-------- --------
Total assets................................................ $172,627 $162,045
======== ========
50
53
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following consolidated financial statements of the Company are included
in Item 13:
PAGE FINANCIAL STATEMENTS
---- --------------------
28 Report of Ernst & Young LLP, Independent Auditors
29 Consolidated Balance Sheets at December 31, 1999 and 2000
30 Statements of Consolidated Income for the years ended
December 31, 1998, 1999 and 2000
31 Statements of Consolidated Shareholders' Equity for the
years ended December 31, 1998, 1999 and 2000
32 Statements of Consolidated Cash Flows for the years ended
December 31, 1998, 1999 and 2000
44 Interim Unaudited Consolidated Balance Sheets at March 31,
2001
45 Interim Unaudited Statements of Consolidated Income for the
three month period ended March 31, 2001
46 Interim Unaudited Statements of Consolidated Cash Flows for
the three month period ended March 31, 2001
(b) Exhibit Index
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3.1* Amended and Restated Articles of Incorporation of Preformed
Line Products Company
3.2* Amended and Restated Code of Regulations of Preformed Line
Products Company
4* Description of Specimen Stock Certificate
10.1* Agreement between Ruhlman Motor Sports and Preformed Line
Products Company dated February 28, 2001 regarding
sponsorship of racing car
10.2* Agreement between Ruhlman Motor Sports and Preformed Line
Products Company dated February 1, 2000 regarding
sponsorship of racing car
10.3* Agreement between Ruhlman Motor Sports and Preformed Line
Products Company dated February 4, 1999 regarding
sponsorship of racing car
10.4* Employment Agreement between Kenneth W. Brownell, Jr. and
Preformed Line Products Company dated December 3, 1998
10.5* Preformed Line Products Company 1999 Employee Stock Option
Plan
10.6* Preformed Line Products Company Officers Bonus Plan
10.7* Preformed Line Products Company Executive Life Insurance
Plan -- Summary
10.8* Preformed Line Products Company Supplemental Profit Sharing
Plan
10.9* Revolving Credit Agreement between National City Bank and
Preformed Line Products Company, dated December 30, 1994, as
amended
10.10 Contract dated February 1, 2001 with GE Polymerland
21* Subsidiaries of Preformed Line Products Company
---------------
*Filed with Form 10 filed on April 30, 2001
51
54
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Amendment No. 1 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
PREFORMED LINE PRODUCTS COMPANY
/s/ ROBERT G. RUHLMAN
--------------------------------------
Robert G. Ruhlman
President and Chief Executive Officer
June 25, 2001
52
55
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3.1* Amended and Restated Articles of Incorporation of Preformed
Line Products Company
3.2* Amended and Restated Code of Regulations of Preformed Line
Products Company
4* Description of Specimen Stock Certificate
10.1* Agreement between Ruhlman Motor Sports and Preformed Line
Products Company dated February 28, 2001 regarding
sponsorship of racing car
10.2* Agreement between Ruhlman Motor Sports and Preformed Line
Products Company dated February 1, 2000 regarding
sponsorship of racing car
10.3* Agreement between Ruhlman Motor Sports and Preformed Line
Products Company dated February 4, 1999 regarding
sponsorship of racing car
10.4* Employment Agreement between Kenneth W. Brownell, Jr. and
Preformed Line Products Company dated December 3, 1998
10.5* Preformed Line Products Company 1999 Employee Stock Option
Plan
10.6* Preformed Line Products Company Officers Bonus Plan
10.7* Preformed Line Products Company Executive Life Insurance
Plan -- Summary
10.8* Preformed Line Products Company Supplemental Profit Sharing
Plan
10.9* Revolving Credit Agreement between National City Bank and
Preformed Line Products Company, dated December 30, 1994, as
amended
10.10 Contract dated February 1, 2001 with GE Polymerland
21* Subsidiaries of Preformed Line Products Company
---------------
*Filed with Form 10 filed on April 30, 2001
53