-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jrpbv1pAYpN3cTAp35rPQsAdp41xWK4A2mCIBPfbDgPqrrm7a663K6J50wena8iz Xv+A24SwljQTSfZ8zy2nrw== 0000059593-00-000004.txt : 20000324 0000059593-00-000004.hdr.sgml : 20000324 ACCESSION NUMBER: 0000059593-00-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINDBERG CORP /DE/ CENTRAL INDEX KEY: 0000059593 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PRIMARY METAL PRODUCTS [3390] IRS NUMBER: 361391480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08287 FILM NUMBER: 576710 BUSINESS ADDRESS: STREET 1: 6133 N RIVER RD STE 700 CITY: ROSEMONT STATE: IL ZIP: 60018 BUSINESS PHONE: 8478232021 MAIL ADDRESS: STREET 1: 6133 N RIVER ROAD SUITE 700 STREET 2: 6133 N RIVER ROAD SUITE 700 CITY: ROSEMONT STATE: IL ZIP: 60018 10-K 1 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File Number 0-8287 LINDBERG CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-1391480 (State of Incorporation) (IRS Identification No.) 6133 North River Road, Suite 700 Rosemont, Illinois 60018 (847) 823-2021 (Address and telephone number of registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Common Stock Purchase Rights (currently traded with Common Stock) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the closing sale price on the Nasdaq Stock Market on March 10, 2000) was $19,473,922. The number of shares of the registrant's common stock outstanding as of March 10, 2000 was 5,661,061. Documents Incorporated by Reference Those sections or portions of the registrant's 1999 Annual Report to Stockholders (the "Annual Report") and of the registrant's definitive proxy statement for use in connection with its annual meeting of stockholders to be held on April 28, 2000 (the "Proxy Statement"), described in the table of contents and attached hereto, are incorporated by reference into Parts I, II and III of this report. 2 Table of Contents
Item Number and Caption Page PART I Item 1 Business.......................... Annual Report, pp. 16-17 (Notes 2 and 3); herein, pp. 4-8 Item 2 Properties........................ 9-10 Item 3 Legal Proceedings................. Annual Report, p. 21 (Note 10); herein, pp. 8 and 10 Item 4 Submission of Matters to a Vote of Security Holders............ 10 PART II Item 5 Market for the Company's Common Equity and Related Stockholder Matters............ Annual Report, p. 25 "Stock Market Information" and p. 18 (Note 5); herein, p. 11 Item 6 Selected Financial Data........... Annual Report, p. 23 "Six-Year Financial Review"; herein, p. 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...... Annual Report, pp. 10-11 "Management's Discussion and Analysis"; herein, p. 11 Item 7A Quantitative and Qualitative Disclosures About Market Risk.. Annual Report, p. 11 "Market Risk"; herein, p. 11 Item 8 Financial Statements and Supplementary Data............. Annual Report, pp. 12-22 "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements"; herein, p. 11 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 11 2 3 Item Number and Caption Page PART III Item 10 Directors and Executive Officers of the Company (a) Identification of directors.. Proxy Statement, pp. 1-3, "The Election of Directors"; herein, p. 12 (b) Identification of executive officers..................... 12 Item 11 Executive Compensation............ Proxy Statement, pp. 3-6, "Executive Compensation"; herein, p. 12 Item 12 Security Ownership of Certain Beneficial Owners and Management..................... Proxy Statement, pp. 8-9, "Stock Ownership"; herein, p. 12 Item 13 Certain Relationships and Related Transactions................... Proxy Statement, p. 2, "The Election of Directors", and p. 5, "Executive Compensation - Compensation Committee Interlocks and Insider Participation"; herein, p. 12 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 13-15 Signatures................................ 16 Exhibit Index............................. 17-19
3 4 PART I STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This report or documents incorporated herein by reference contain ''forward- looking statements'' within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not statements of historical fact, including statements regarding future revenues, expenses and profits. These forward-looking statements are subject to known and unknown risks, uncertainties or other factors which may cause the actual results of the company to be materially different from the historical results or from any results expressed or implied by the forward-looking statements. Such risks and factors include, but are not limited to, those discussed in Exhibit 99.1 attached to this report and under ''Management's Discussion and Analysis of Results of Operations and Financial Condition'' incorporated by reference below. All cautionary statements made in this report and documents incorporated herein should be read as being applicable to all related forward- looking statements wherever they appear. ITEM 1. BUSINESS General development of business Lindberg is the largest commercial heat treating company in North America, with operations in major industrial centers throughout the United States and in Mexico. The company serves more than 10,000 customers in diverse industries, including commercial aerospace, automobile/light truck, heavy truck/construction equipment, oil-field machinery, defense, consumer products, tool and die, agricultural equipment and a variety of other industries. The company was founded in 1922 and, through both internal growth and acquisitions, today operates in 15 states and in Mexico. On February 17, 1999, the company acquired all of the outstanding shares of Metal-Lab of Wisconsin, Inc. ("Metal-Lab"), located in Sturtevant, Wisconsin. Metal-Lab primarily serves the tool and die industry. Since November 1994, the company has acquired nine companies in the United States, and continues to seek other acquisitions. In 1998, the company started its first heat treating operation in Mexico, outside Monterrey. The company intends the plant to be a base of operations that could expand over time to meet other market needs, particularly in the growing metal-working markets of northern Mexico. On January 18, 1999, the company sold the assets of the remaining operation of its discontinued Precision Products segment, Arrow-Acme Company, thereby completing the divestiture of that segment. As a result, the company currently operates solely as a heat treating company, and reports only one business segment. Industry Heat treating in the United States is performed in-house in captive heat treating departments of manufacturers or externally by a commercial heat treating company such as Lindberg. Management believes that the commercial heat treating industry captures about $2 billion in business annually, which represents about 10-15% of the total amount of heat treating performed in the U.S. -- the balance is performed in captive heat treating departments. In-house heat treating facilities are typically part of a larger facility, such as a steel mill or an automobile components factory, where large volumes justify a captive operation. Commercial heat treaters 4 5 are independent companies that specialize in heat treating or other metal treatments and serve a large number of customers across a variety of industries. Due to the time and costs associated with transporting materials and customers' need for quick turnaround times for heat treated products, commercial heat treating has developed as a regional industry, with customers typically located within 100 to 200 miles of the heat treating supplier. Consequently, the commercial heat treating industry is highly fragmented. Commercial heat treaters are concentrated in major industrial centers of the country. Management estimates that the top five commercial heat treating companies in terms of revenues in the U.S. represent approximately 15-20% of the commercial heat treating industry. The fragmented nature of the commercial heat treating industry has presented opportunity for consolidation. Several factors have motivated smaller commercial heat treating owners to sell to larger commercial heat treaters, including increasingly burdensome regulatory and certification requirements, capital expenditures necessary to remain competitive, increasing demand for technical expertise, and succession planning considerations. In addition, a number of industry participants have acquired other heat treaters in order to expand their geographical presence and provide expanded or enhanced service capabilities. Management expects outsourcing to be a continuing opportunity in the heat treating industry. Many smaller companies involved in the manufacture of metal components outsource their heat treating requirements to commercial heat treaters in order to avoid the significant cost of heat treating equipment. In recent years, larger manufacturers have also outsourced heat treating requirements due to the increased demand for technical expertise required in heat treating and the relatively small portion of the total cost of the finished product represented by heat treating. Processes Lindberg offers a wide range of heat treating processes for steel, aluminum, cast iron, titanium alloys and other metals. Processes are performed on customer-provided products at various steps in the manufacturing cycle. The company does not maintain a raw material inventory or own work-in-process. The range of processing offered by the company requires different types and sizes of primary and secondary heat treating equipment. Heat treating improves the mechanical properties, performance, durability and wear resistance of metals and is an important step in many manufacturing processes involving metals. Heat treating can soften metal to improve formability, make a part harder to improve strength, put a hard surface on a relatively soft component to increase strength or abrasion resistance, put a corrosion-resistant surface on an item that would otherwise corrode or temper a brittle product. Heat treated parts are essential to the operation of automobiles, aircraft, spacecraft, consumer products, and heavy equipment of every kind. Typical products that the company heat treats are aircraft components, automotive parts, machine tools and dies, oil-field drill rig parts, bearings, gears, axles, fasteners, camshafts, crankshafts and cutting tools. Heat treating is a process in which metal is heated and cooled under tight controls. Heat treating processes require three basic steps: (i) heating to a specified temperature, (ii) holding at that temperature for the appropriate amount of time, and (iii) cooling according to a prescribed method. Temperatures may range as high as 2400oF, and time at temperature may vary from a few seconds to as many as 60 hours or more. Some materials are cooled slowly in the furnace or in the air, but others must be cooled quickly, or ''quenched.'' Primary quenching media include water, oils, gases and polymer solutions. Each quenching medium has specific characteristics that make it well-suited for certain applications. 5 6 Of the company's wide range of heat treating processes, the following are the most common: Hardening, Tempering and Annealing are performed using a variety of equipment, including electric and gas furnaces, neutral salt baths, press quenching and vacuum furnaces. The purpose of these processes is to create the ideal metallurgical properties in the treated material. Solution Treating and Aging is performed on aluminum, titanium and stainless steel pieces to create desired properties of ductility and hardness throughout the piece. Surface Treating utilizes a specialized furnace to heat steels to an appropriate temperature. Once the selected temperature is achieved, a carbon or nitrogen rich gas is introduced to the furnace and elements within the gas diffuse into the surface of the steel. The surface of the material is transformed into a tougher, more wear resistant structure, while the core of the material retains its ductility. Types of surface treatment include carburizing, nitriding, carbo nitriding and ferritic nitrocarburizing. Brazing is a process which uses heat treating to bond two different pieces. The company utilizes electric furnaces, vacuum furnaces and induction in its brazing process. Lindberg has established itself as a leading commercial heat treater based on its level of quality and service, technical expertise and network of facilities, industry certifications and national reputation. The company delivers its services on a timely basis, while its technical expertise provides the capability to develop customized solutions that meet specific customer needs. The company's plants are recognized with third-party quality endorsements, such as ISO 9000, QS 9000, NADCAP, and AS 9000 and have approved vendor status from many customers. These certifications and approvals enable the company to heat treat products manufactured for some of the largest domestic manufacturers. Operations Because the industry is fragmented and localized, the company's operations are decentralized so each plant can react quickly and effectively to local market conditions. The company's divisions have considerable autonomy in most operational areas, including sales, pricing, hiring and participation in strategic planning for their respective local markets. In addition, the company's facilities tend to be clustered in certain geographic areas, which permits individual facilities to utilize additional capacity or other heat treating processes at alternate sites if necessary. Each plant is equipped with furnaces of various types and sizes, and support equipment. Many pieces of primary equipment are capable of running several different processes. Auxiliary items include fixtures, atmosphere generators, material handling equipment, cleaning equipment and metallurgical testing equipment. Key suppliers provide electricity and natural gas. Other important purchased materials include quench oils, process gases, fixtures, maintenance supplies, laboratory and testing supplies and auxiliary equipment. The company has not experienced any material restrictions by its suppliers of sources of energy or any other significant raw materials necessary in the process of heat treating. The company services certain customers which are seasonal in nature. However, in large part because of compensating variations and the large majority of non-seasonal customers, the company does not view its business as seasonal. 6 7 Customers The company serves over 10,000 customers that range from owner-operated job shops to large, national manufacturing companies. At the plant level, each of the company's heat treating facilities serve an average of 400 customers. The company's largest direct customer accounted for less than 3% of the company's net sales in 1999. The ten largest customers accounted for approximately 13% of net sales in 1999. The company's customers are primary suppliers to companies operating in a variety of manufacturing industries, including commercial aerospace, automobile/light truck, heavy truck/construction equipment, oil-field machinery, defense, consumer products, building components, tool and die, agricultural equipment and a variety of other industries. The company also provides heat treating services directly to end users in such industries. Management estimates that customers serving the commercial aerospace industry currently account for approximately 24% of the company's net sales and that customers serving the automobile/light truck industry account for approximately 15% of net sales. Because the company provides heat treating services at different stages of the manufacturing process to a wide range of manufacturers and their suppliers in a variety of industries, the company cannot measure precisely its penetration of specific industries. Most of the company's plants are located in major industrial areas of the Midwest, California, Texas or the Northeast, usually serving customers in that region. Because customers generally want to minimize the expense and risks associated with transporting their products over long distances to and from commercial heat treating plants, they tend to prefer heat treaters located in close proximity to their own facilities. Customers often deliver and pick up their parts, or the plant provides some delivery with its own trucking. This market configuration has led to some degree of specialization for most of the company's plants, with each plant focusing on the particular needs of the customers in its area. The company operates with a limited backlog due to the localized nature of its businesses and the customers' necessity for a quick turnaround. The company's plants typically process orders within one to five days; therefore, backlog in facilities is generally estimated to be less than one week. The company also offers dedicated heat treating services to certain larger customers under long-term contracts through its Strategic Partnership 2000 ("SP 2000") program. This program was developed to (i) provide services to manufacturers that perform their own heat treating in-house, (ii) retain existing customers whose high heat treating volume may justify moving the process in-house and (iii) capture additional volume from customers that may be using multiple heat treaters. Competition Due to the regional and highly fragmented nature of the commercial heat treating industry, each plant has competition of varying degrees of intensity. Competition consists of local heat treating owner-operators and certain facilities of larger heat treating companies. Each plant competes in its market on the basis of service and on-time delivery, quality and price. Local management at each of the company's facilities is largely responsible for its own pricing and cost control, and thus has the flexibility to respond to local market conditions. National competition in the commercial heat treating industry is limited. There are competitors in particular localities that are larger than the company's facility located in those markets. Such competitors may also be divisions of larger companies and, therefore, have access 7 8 to additonal resources. Competition also exists from in-house heat treating facilities of manufacturers, although the company also considers such manufacturers as potential customers. Management believes that the company's national presence, size and reputation for quality and service position it to supply many of the nation's largest corporations. Associates Currently, the company employs approximately 1,050 associates, as compared to 1,220 associates at December 31, 1998. Of these associates, 132 are covered by collective bargaining agreements. One agreement is currently under renewal negotiations and four are subject to such in 2001. The company believes that its employee relations are good. Environmental Regulation The company employs some environmentally hazardous materials. The company has made expenditures to comply with laws and regulations relating to the protection of the environment, including studies, investigations and remediation of ground contamination, and expects to make such expenditures in the future in its efforts to comply with existing and future requirements. While such expenditures to date have not materially affected the company's capital expenditures, competitive position, financial condition or results of operations, there can be no assurance that more stringent regulation or enforcement in the future will not have such effects. The company has notified state authorities of a possible need for remediation at three sites it currently operates. At all such sites, costs which may be incurred are difficult to accurately predict until the level of contamination is determined, and would be subject to increase if more contamination is discovered during investigation or remediation or if state authorities require more remediation than anticipated. Such costs may be less if the contamination proves to be less than currently expected and to the extent costs are covered by insurance or are allocable to others. The company has also been notified by various state and federal governmental authorities that they believe the company may be a ''potentially responsible party'' or otherwise have responsibility with respect to clean-up obligations at one waste disposal site which was never owned or operated by the company. The company is participating in a settlement with the relevant authorities or other parties believed by the company to be responsible for clean-up obligations and further believes its responsibility to be of a minor nature. Management believes that the ultimate outcome will not have a material effect on the company's financial condition or results of operations. At December 31, 1999, the company had reserves of $1.7 million to cover future environmental related costs. Such reserves give no effect to possible recoveries from insurers or other potentially responsible parties nor do they reflect any discount for the several years over which investigation or remediation amounts may be paid out. Patents, Trademarks and Licenses The company is a minority (17%) stockholder in a consortium of industrial partners called Thixomat, Inc. Thixomat, Inc. was formed in 1989 to promote and commercialize the ThixomoldingTM technology, a specialized molding process. 8 9 ITEM 2. PROPERTIES The principal plants of the company, the approximate square footage and whether the plants are leased or owned are as follows:
Location Square Feet Leased or Owned Melrose Park, IL.............. 200,000 Owned Houston, TX................... 200,000 Owned Racine, WI.................... 193,500 Owned Solon, OH..................... 96,300 Owned Lansing, MI................... 83,800 Owned Paramount, CA................. 80,000 Leased Gardena, CA................... 60,000 Leased Dallas, TX.................... 60,000 Owned Rancho Dominguez, CA.......... 55,000 Leased New Berlin, WI................ 50,000 Owned St. Louis, MO................. 50,000 Owned Worcester, MA................. 45,000 Owned Huntington Park, CA........... 40,000 Owned Minneapolis, MN............... 40,000 Leased Sturtevant, WI................ 40,000 Owned Westminster, CA............... 38,400 Owned Berlin, CT.................... 36,700 Owned Santa Fe Springs, CA.......... 36,000 Leased Waterbury, CT................. 32,600 Leased Los Angeles, CA............... 31,000 Owned Tulsa, OK..................... 30,300 Owned Wichita, KS................... 30,000 Leased Rochester, NY................. 17,000 Leased Monterrey, Mexico............. 2,900 Leased
The following SP 2000 operations are located in customer facilities at the locations indicated (in each case with no substantial occupancy charge):
Location Square Feet Walnut, CA.................... 20,000 Reading, PA................... 15,000 Lexington, TN................. 10,000 Bedford Heights, OH........... 9,600 Clintonville, WI.............. 5,000 Downers Grove, IL............. 4,500
The company's corporate office consists of an 8,900-square-foot leased space located in Rosemont, Illinois. Four of the company's leases will expire within the next three years, three of which are renewable at the option of the company. 9 10 The company's facilities are suitable for their respective uses and are, in general, adequate for the company's current needs. Those providing products in markets where economic activity is strong at any particular time operate at relatively high levels of plant utilization. The company believes that it has sufficient capacity at its current facilities to absorb additional workloads at reasonably anticipated levels. ITEM 3. LEGAL PROCEEDINGS The company was the subject of an investigation by the government and a qui- tam (whistle-blower) lawsuit regarding alleged violations of the Federal False Claims Act and wrongful termination. The company learned of the lawsuit in May 1998. The activities that were the subject of the investigation and lawsuit related to only one plant, and in the fourth quarter 1998, the company established reserves for the potential settlement of this claim. In the first quarter of 1999, the company reached a settlement in principle with the government and the plaintiff on terms consistent with the reserves previously established. The company completed the settlement in the second quarter of 1999. The company is a party to various other lawsuits and claims arising in the ordinary course of business. See also page 8, section entitled "Environmental Regulation." After review and consultation with legal counsel, the company believes that any liability resulting from these matters would not materially affect its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1999. 10 11 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference to page 25 of the Annual Report, section entitled "Stock Market Information" and to page 18 of the Annual Report - Note 5 to the Consolidated Financial Statements. As of March 10, 2000, the company had 422 stockholders of record. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference to page 23 of the Annual Report, section entitled "Six-Year Financial Review." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference to pages 10-11 of the Annual Report, section entitled "Management's Discussion and Analysis." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated by reference to page 11 of the Annual Report, section entitled "Market Risk." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference to pages 12-22 of the Annual Report, sections entitled "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 11 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (a) Identification of Directors - Incorporated by reference to pages 1-3 of the Proxy Statement, section entitled "The Election of Directors."
(b) Identification of Executive Officers Name Age Position Leo G. Thompson 59 President (since October 1987) and Chief Executive Officer (since January 1991). Stephen S. Penley 50 Chief Financial Officer (since January 1989); Executive Vice President (since February 2000); formerly Senior Vice President (July 1993 to February 2000); Secretary (since October 1990). Michael W. Nelson 52 Senior Group Vice President and Manager of East and Central Operations (since March 1998); formerly Senior Vice President and President of Heat Treat Operations (July 1993 to March 1998). Paul J. McCarren 53 Group Vice President and Manager of West Coast Operations (since March 1998); prior thereto, various operating positions (from 1972 to March 1998).
Executive Officers of the company are elected annually by the Board of Directors of the company in April. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to pages 3-6 of the Proxy Statement, section entitled "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to pages 8-9 of the Proxy Statement, section entitled "Stock Ownership." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to page 2 of the Proxy Statement, section entitled "The Election of Directors", and to page 5, section entitled "Executive Compensation - Compensation Committee Interlocks and Insider Participation." 12 13 PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements Page or Reference Consolidated Statements of Earnings for the years ended December 31, 1999, 1998 and 1997.................................. Annual Report, p. 12 Consolidated Balance Sheets as of December 31, 1999 and 1998......................... Annual Report, p. 13 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.................................. Annual Report, p. 14 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997....................... Annual Report, p. 15 Notes to Consolidated Financial Statements Annual Report, pp. 16-22 Report of Independent Public Accountants.. Annual Report, p. 22 (a)(2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts and Reserves..................... 14 Report of Independent Public Accountants on Schedules.............................. 15
Schedules other than that listed above are omitted for the reason that they are not required or are not applicable, or because the required information is shown in the financial statements or notes thereto. (b) Reports on Form 8-K There were no Current Reports on Form 8-K filed by the company during the fourth quarter of 1999. (c) Exhibits Required by Item 601 of Regulation S-K Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index which is attached hereto at pages 17-19 and which is incorporated herein by reference. 13 14 LINDBERG CORPORATION AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Allowance for Doubtful Accounts 1999 1998 1997 -------- -------- -------- Balance at beginning of year..... $888,000 $363,000 $325,000 Provision charged to expense during the year............... 146,000 746,000 121,000 Reserves assumed in acquisitions. 37,000 137,000 65,000 Write-offs during the year, net of recoveries............. (417,000) (358,000) (148,000) -------- -------- -------- Balance at end of year........... $654,000 $888,000 $363,000 ======== ======== ========
14 15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To the Stockholders of Lindberg Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Lindberg Corporation's annual report to stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated January 21, 2000. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois January 21, 2000 15 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 23, 2000. LINDBERG CORPORATION By /s/ Stephen S. Penley ---------------------- Stephen S. Penley Executive Vice President and Chief Financial Officer; Principal Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the company in the capacities indicated on March 23, 2000. /s/ Leo G. Thompson - -------------------- Leo G. Thompson President and Chief Executive Officer and Director /s/ Stephen S. Penley - ---------------------- Stephen S. Penley Executive Vice President and Chief Financial Officer; Principal Financial and Accounting Officer /s/ George H. Bodeen - --------------------- George H. Bodeen Director /s/ Dr. Raymond F. Decker - -------------------------- Dr. Raymond F. Decker Director /s/ Raymond A. Jean - -------------------- Raymond A. Jean Director /s/ W. Robert Reum - ------------------- W. Robert Reum Director /s/ J. Thomas Schanck - ---------------------- J. Thomas Schanck Director 16 17 LINDBERG CORPORATION Annual Report on Form 10-K for the Year Ended December 31, 1999 EXHIBIT INDEX
Exhibit No.* Description 2.1 Purchase Agreement dated October 1, 1997 among Aerospace Aluminum Heat Treating Company, Alta Canada Corporation, California Manufacturing Enterprises, Inc. and Lindberg Corporation (incorporated by reference to Exhibit 2.1 of the company's Current Report on Form 8-K dated October 15, 1997). 2.2 Purchase Agreement dated January 16, 1998 among the stockholders of Industrial Steel Treating Co. and Lindberg Corporation (incorporated by reference to Exhibit 2 of the company's Current Report on Form 8-K dated January 30, 1998). 2.3 Purchase Agreement dated April 16, 1998 among the stockholders of Houston Heat Treating Company and Lindberg Corporation (incorporated by reference to Exhibit 2.1 of the company's Current Report on Form 8-K dated April 23, 1998). 3.1 Composite Certificate of Incorporation, as amended through April 24, 1998 (incorporated by reference to Exhibit 3.1 of the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998). 3.2 By-laws, as amended through October 22, 1999 (incorporated by reference to Exhibit 3 of the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 4.0 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.0 of the company's Registration Statement on Form S-2, Registration No.333-57313). 4.1 Amended and Restated Credit Agreement dated as of April 28, 1994 between the company, various financial institutions and Continental Bank N.A. (now Bank of America National Trust and Savings Association), as agent (incorporated by reference to Exhibit 4.2 of the company's Current Report on Form 8-K dated April 29, 1994). 4.2 First Amendment to Amended and Restated Credit Agreement dated as of November 2, 1995 (incorporated by reference to Exhibit 4.2 of the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.3 Second Amendment to Amended and Restated Credit Agreement dated as of January 31, 1996 (incorporated by reference to Exhibit 4.3 of the company's Annual Report on Form 10-K for the year ended December 31, 1995). - ------------------- * Filed with this report unless otherwise indicated. 17 18 Exhibit No.* Description 4.4 Third Amendment to Amended and Restated Credit Agreement dated as of September 29, 1997 (incorporated by reference to Exhibit 4.1 to the company's Current Report on Form 8-K dated October 15, 1997). 4.5 Fourth Amendment to Amended and Restated Credit Agreement dated as of February 10, 1998 (incorporated by reference to Exhibit 4.5 to the company's Annual Report on Form 10-K for the year ended December 31, 1997). 4.6 Fifth Amendment to Amended and Restated Credit Agreement dated as of February 5, 1999 (incorporated by reference to Exhibit 4.6 to the company's Annual Report on Form 10-K for the year ended December 31, 1998). 4.7 Note Agreement dated as of October 15, 1995 (incorporated by reference to Exhibit 4.3 to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 4.8 Rights Agreement dated November 21, 1996, between the company and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 99.1 of the company's Report on Form 8-A dated December 6, 1996). 10.1 Description of Bonus Program (incorporated by reference to page 6 of the company's Definitive Proxy Statement on Schedule 14A filed with the Commission in connection with the company's 1996 annual meeting of stockholders). 10.2 Consulting Agreement between the company and George H. Bodeen dated October 25, 1990 (incorporated by reference to Exhibit 10.5 of the company's Annual Report on Form 10-K for the year ended December 31, 1990).** 10.3 Amended and Restated 1991 Stock Option Plan for Key Employees (incorporated by reference to Appendix A of the company's Definitive Proxy Statement on Schedule 14A filed with the Commission in connection with the company's 1995 annual meeting of stockholders).** 10.4 Amended and Restated 1991 Stock Option Plan for Directors (incorporated by reference to Appendix A of the company's Definitive Proxy Statement on Schedule 14A filed with the Commission in connection with the company's 1997 annual meeting of stockholders).** 10.5 Amended and Restated Supplemental Pension Plan dated July 22, 1999 (incorporated by reference to Exhibit 10.1 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).** - ------------------- * Filed with this report unless otherwise indicated. ** Identifies management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c). 18 19 Exhibit No.* Description 10.6 Employment Agreement dated July 22, 1999, between the company and Leo G. Thompson (incorporated by reference to Exhibit 10.2 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).** 10.7 Employment Agreement dated July 22, 1999, between the company and Stephen S. Penley (incorporated by reference to Exhibit 10.2 to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).** 11 Computation of Per Share Earnings. 13 Information on Annual Report to Stockholders incorporated herein by reference. 21 Subsidiaries of the Company. 23 Consent of Independent Public Accountants. 27 Financial Data Schedule. 99.1 Statement Concerning Forward-Looking Statements. - ------------------- * Filed with this report unless otherwise indicated. ** Identifies management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c).
19 EX-11 2 1 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- EARNINGS - -------- Earnings From Continuing Operations $7,597,003 $9,537,904 $6,961,090 Loss From Discontinued Operations -- -- (6,698,240) ---------- ---------- ---------- Net Earnings $7,597,003 $9,537,904 $ 262,850 ========== ========== ========== SHARES - ------ Weighted Average Number of Common Shares Outstanding (See Note) 5,900,928 5,274,881 4,806,834 Additional Shares Assuming Conversion of Stock Options 72,313 205,250 125,994 --------- --------- --------- Weighted Average Common Shares Outstanding and Equivalents 5,973,241 5,480,131 4,932,828 ========= ========= ========= Basic Earnings Per Share: Continuing Operations $ 1.29 $ 1.81 $ 1.45 Discontinued Operations -- -- (1.40) ------- ------- ------- Net Earnings $ 1.29 $ 1.81 $ .05 ======= ======= ======= Diluted Earnings Per Share: Continuing Operations $ 1.27 $ 1.74 $ 1.41 Discontinued Operations -- -- (1.36) ------- ------- ------- Net Earnings $ 1.27 $ 1.74 $ .05 ======= ======= ======= Note: All activity during the year has been adjusted for the number of days in the year that the shares were outstanding.
EX-13 3 Management's Discussion and Analysis OF FINANCIAL CONDITION In 1999, the company's borrowings increased $8.6 million from $34.8 million at December 31, 1998 to $43.4 million at December 31, 1999. The ratio of debt to total capitalization was 42% at the close of 1999 as compared to 38% at year-end 1998. In 1999, a significant use of funds related to the company's acquisition of Metal-Lab of Wisconsin ("Metal-Lab"). The company completed this acquisition in February 1999, at a final purchase price of $11.4 million, using bank borrowings. Capital expenditures were another significant use of funds in 1999. The company spent $10.3 million on capital projects during 1999 as compared to $10.1 million in 1998. The figures for both years exclude amounts related to the purchase price of acquisitions and amounts related to discontinued operations. The company made capital investments in 1999 primarily to accommodate new business opportunities and, to a lesser degree, upgrade facilities and equipment. In January 1999, the company sold the operating assets of Arrow-Acme Company, the last remaining of three operations comprising the discontinued Precision Products business segment. This segment has been reported as discontinued operations since the fourth quarter of 1997. The company received $2.1 million in cash and $600,000 in the form of a note receivable at the time of the sale and also retained and collected $300,000 of accounts receivable. In December 1999, the company repurchased 264,000 shares of its common stock for $2.2 million, using bank borrowings. This purchase was an isolated transaction, and the company does not contemplate the acquisition of additional shares of its common stock in the near future. In 1999, the company made cash outlays related to environmental matters. These outlays largely included costs for consulting/engineering and remediation at certain company owned sites. The company believes it will make such expenditures in the future, but that such spending will continue to have a limited effect on its financial condition and liquidity. During 1999, the company paid cash dividends of $.32 per share, for a total payout of $1.9 million to stockholders. The total amount paid represented an increase of 10% from the $1.7 million paid to stockholders in 1998. In February 1999, the company amended its bank revolving credit facility to increase the total borrowing capacity from $45 million to $70 million, extend the maturity date of the agreement to December 31, 2001 and to adjust certain loan covenants. The company believes that its borrowing capacity and funds generated through operations will be sufficient to meet currently foreseeable capital investment and working capital needs both for 2000 and for the longer term. OF RESULTS OF OPERATIONS: 1999 VERSUS 1998 Net sales in 1999 were $120.5 million, down $4.6 million, or 4%, from $125.1 million in 1998. The lower level of net sales resulted primarily from softness in the commercial aerospace, oil-field machinery and farm equipment markets. These markets, which represented approximately 27% of total net sales for 1999, began weakening in the latter half of 1998 and continued on a downward trend for much of 1999. The softness in these two markets was offset to some degree by strength in the automobile/light truck market, which accounted for about 15% of the company's total net sales in 1999. The acquisition of Industrial Steel Treating Company/Fabriform Metal Brazing (collectively "Industrial"), Houston Heat Treating ("HHT"), Merrell Enterprises, known as Mann Aircraft Forming ("Mann") and Quality Heat-Treating ("Quality") in 1998 and Metal-Lab in 1999 accounted for $23 million of sales in 1999 as compared to $20 million in 1998. In 1999 the company's Strategic Partnership 2000 ("SP 2000") program provided net sales of $8.7 million, slightly above the 1998 figure of $8.4 million. Net sales excluding the aforementioned acquisitions and the SP 2000 program decreased by 8% in 1999 as compared to 1998. Gross profit in 1999 was $33.9 million, down $4.7 million, or 12%, from $38.6 million in 1998. The gross margin in 1999 was 28.1%, compared to 30.8% in the prior year. The decrease in gross margin was primarily related to the loss of incremental earnings on the lower net sales at a rate in excess of the prior year's gross margin and to a shift in sales mix toward somewhat lower margin business. Selling and administrative expenses in 1999 were $19.1 million, compared to $20.5 million in 1998. The decrease in the level of expenses in 1999 resulted primarily from cost reduction efforts, a lower level of employee incentive expense in 1999 and expense in 1998 related to the write-off of two large accounts receivable. Selling and administrative expenses as a percentage of net sales decreased to 15.8% in 1999 from 16.4% in 1998. Net interest expense in 1999 was $2.2 million, compared to $2.5 million in 1998. The decrease primarily resulted from a lower effective interest rate on the company's revolving credit borrowings. The average interest rate on revolving credit borrowings in 1999 was 6.0% as compared to 6.6% in 1998. The net interest amount also benefited from higher interest income earned during the year on notes receivable related to the sales of discontinued operations in 1998 and 1999. During 1999, the company recorded investment earnings of $118,000 related to its 17% minority interest in Thixomat, Inc. In 1998, the company recorded investment earnings of $444,000. The company remains uncertain as to whether and to what extent Thixomat will pay dividends in the future. Reflecting the above items, net earnings in 1999 were $7.6 million, down $1.9 million, or 20%, from $9.5 million in 1998. Net earnings per diluted share in 1999 were $1.27, down $.47, or 27%, from $1.74 in 1998. 10 Lindberg Corporation OF RESULTS OF OPERATIONS: 1998 VERSUS 1997 Net sales in 1998 were $125.1 million, up $36.3 million, or 41%, from $88.8 million in 1997. The higher level of net sales resulted primarily from the acquisition of six heat treating operations from July 1997 through November 1998, expansion of the company's SP 2000 program during 1998 and modest growth at existing heat treating plants. In addition, during 1998 the company's underlying sales activity was influenced by the commercial aerospace, automobile/light truck and oil-field machinery markets, which represented approximately 50% of total net sales in that year. In particular, the commercial aerospace and oil-field machinery markets, which began strong in 1998, had softened significantly by the fourth quarter of the year. The acquisition of Ticorm and Alumatherm Heat Treating Company in 1997 and Industrial, HHT, Mann and Quality in 1998 accounted for 91% of the increase in net sales for 1998 as compared to 1997. Also, in 1998 the company's SP 2000 program provided net sales of $8.4 million in comparison to $6.2 million in 1997. Finally, net sales excluding the aforementioned acquisitions and the SP 2000 program increased by 2% in 1998 from the 1997 level. Gross profit in 1998 was $38.6 million, up $13.5 million, or 54%, from $25.1 million in 1997. The gross margin in 1998 was 30.8%, compared to 28.3% in the prior year. The increase in gross margin resulted primarily from the addition of acquisitions discussed above as most of the acquired businesses had gross margins higher than the company's margin at the time of the acquisition. Selling and administrative expenses in 1998 were $20.5 million, compared to $13.2 million in 1997. The increase in the level of expenses in 1998 over the prior year resulted primarily from additional expenses of approximately $4.0 million related to the acquired facilities discussed earlier. The remaining increase in 1998 related mainly to additional salaries and incentives paid during the year and to the write-off of two large trade accounts receivable. Selling and administrative expenses as a percentage of net sales increased to 16.4% in 1998 from 14.9% in 1997 due to the aforementioned expense increases. During 1998, the company carried no investments under the equity method of accounting, and no equity earnings were recorded. In 1997, the company recorded such earnings from its 50% interest in its Alumatherm joint venture. In the first nine months of 1997 prior to the acquisition of its partner's interest, the company recorded equity earnings of $1.4 million. Net interest expense in 1998 was $2.5 million, compared to $1.7 million in 1997. The increase primarily resulted from higher average borrowing levels during the year. The effect of acquisitions in the latter half of 1997 and in 1998, offset to a degree by the proceeds from a common stock offering and sales of discontinued operations in 1998, led to these higher borrowing levels. The average interest rate on revolving credit borrowings in 1998 was 6.6%. This was the same rate as experienced during 1997. In the fourth quarter of 1998, the company recorded investment earnings of $444,000 related to a dividend from its 17% minority interest in Thixomat, Inc. This was the first such dividend declared by Thixomat. Reflecting the above items, net earnings from continuing operations in 1998 were $9.5 million, up $2.6 million, or 37%, from $7.0 million in 1997. Net earnings per diluted share from continuing operations in 1998 were $1.74, up $.33, or 23%, from $1.41 in 1997. In the fourth quarter of 1997, the company established a plan to divest its Precision Products business segment. Accordingly, this segment was accounted for as discontinued operations at that time. During 1998, discontinued operations had no effect on the company's results of operations as all activity was charged to a reserve established in 1997. For 1997, an after-tax loss of $754,000 from operations and a $5.9 million after-tax charge related to the anticipated loss on the eventual sale of the segment's operations were recorded. Net earnings for 1998 were $9.5 million, or $1.74 per diluted share, as compared to $263,000, or $.05 per diluted share, in 1997. INFLATION Although the company cannot accurately determine the exact effect of inflation on its past or future operations, it does not believe inflation has had a material effect during the past three years on sales or the financial results of its operations. EFFECTS OF YEAR 2000 The company maintains information technology systems at each operating facility and at its corporate office and utilizes embedded technology such as microprocessor-based process controllers in its heat treating operations. Certain of these technologies are provided by third party vendors, which are responsible for upgrades and maintenance. Company personnel maintain the others. Subsequent to January 1, 2000, the company experienced no significant disruption of its operations related to such information technology systems and embedded technology. In addition, related to the Year 2000 issue, the company experienced no disruption to its operations related to suppliers nor did it experience disruption of its normal business activities with customers. MARKET RISK The company is subject to certain fluctuations in interest rates related to market sensitive instruments. In particular, outstanding bank debt under the company's revolving credit facility is carried at variable interest rates related primarily to the Eurodollar interest rate and to the U.S. prime rate. In order to reduce its interest costs, the company maintains most of its outstanding bank debt at the Eurodollar rate plus a rate spread. As the level of bank debt increases relative to its total outstanding debt, the company investigates interest rate alternatives such as fixed rate notes or term loans. The company does not use derivative financial instruments to manage its interest rate exposure. Based on the year-end 1999 debt level, the company's interest costs in 2000 would increase by $370,000 assuming a 1% increase in its average effective interest rate. This would reduce net earnings by about $222,000. Lindberg Corporation 11 Consolidated Statements of Earnings
For the Years Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------- NET SALES $120,482,625 $125,069,317 $ 88,783,577 Cost of Sales (86,618,120) (86,494,542) (63,691,330) - ----------------------------------------------------------------------------- Gross Profit 33,864,505 38,574,775 25,092,247 Selling and Administrative Expenses (19,067,393) (20,477,693) (13,211,421) Equity in Earnings of Partnership -- -- 1,436,328 - ----------------------------------------------------------------------------- Operating Earnings 14,797,112 18,097,082 13,317,154 Interest Expense (Net) (2,229,348) (2,510,061) (1,681,103) Investment Earnings 118,480 444,300 -- - ----------------------------------------------------------------------------- Earnings From Continuing Operations Before Income Taxes 12,686,244 16,031,321 11,636,051 Provision for Income Taxes (5,089,241) (6,493,417) (4,674,961) - ----------------------------------------------------------------------------- Earnings From Continuing Operations 7,597,003 9,537,904 6,961,090 - ----------------------------------------------------------------------------- Discontinued Operations, Net of Income Taxes: Loss From Operations -- -- (754,240) Estimated Loss on Sale -- -- (5,944,000) - ----------------------------------------------------------------------------- Loss From Discontinued Operations -- -- (6,698,240) - ----------------------------------------------------------------------------- NET EARNINGS $ 7,597,003 $ 9,537,904 $ 262,850 - ----------------------------------------------------------------------------- BASIC EARNINGS PER SHARE: Continuing Operations $ 1.29 $ 1.81 $ 1.45 Discontinued Operations -- -- (1.40) - ----------------------------------------------------------------------------- NET EARNINGS $ 1.29 $ 1.81 $ .05 - ----------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 5,900,928 5,274,881 4,806,834 - ----------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE: Continuing Operations $ 1.27 $ 1.74 $ 1.41 Discontinued Operations -- -- (1.36) - ----------------------------------------------------------------------------- NET EARNINGS $ 1.27 $ 1.74 $ .05 - ----------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING AND EQUIVALENTS 5,973,241 5,480,131 4,932,828 - -----------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 12 Lindberg Corporation Consolidated Balance Sheets
December 31, 1999 1998 - ----------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash $ 272,649 $ 157,391 Receivables (Less Allowance for Doubtful Accounts of $654,000 in 1999 and $888,000 in 1998) 17,492,480 19,281,571 Current Maturities on Notes Receivable 1,044,824 -- Prepaid and Refundable Income Taxes 2,868,985 1,067,030 Prepaid Expenses 595,060 643,766 Net Assets of Discontinued Operations -- 2,142,719 Other Current Assets 493,744 601,331 - ----------------------------------------------------------------------------- Total Current Assets 22,767,742 23,893,808 PROPERTY AND EQUIPMENT: Land 3,213,246 3,033,246 Buildings and Improvements 27,327,699 25,341,037 Machinery and Equipment 98,649,046 94,013,844 Construction in Progress 4,865,328 3,530,398 - ----------------------------------------------------------------------------- Total Property and Equipment 134,055,319 125,918,525 Less-Accumulated Depreciation (62,693,233) (59,181,581) - ----------------------------------------------------------------------------- Net Property and Equipment 71,362,086 66,736,944 Goodwill (Less Accumulated Amortization) 32,717,675 19,922,274 Long-Term Notes Receivable 2,761,413 3,250,000 Other Non-Current Assets 2,402,162 1,686,776 - ----------------------------------------------------------------------------- TOTAL ASSETS $132,011,078 $115,489,802 - ----------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current Maturities on Long-Term Debt $ 46,695 $ 77,271 Notes Payable 2,000,000 2,000,000 Accounts Payable 2,760,142 4,187,398 Accrued Expenses: Salaries and Wages 1,920,852 3,109,328 Taxes, other than Income 938,099 866,744 Employee Insurance and Benefits 1,853,426 1,335,370 Utilities 941,477 936,013 Other 1,394,392 2,759,315 - ----------------------------------------------------------------------------- Total Current Liabilities 11,855,083 15,271,439 NON-CURRENT LIABILITIES: Deferred Income Taxes 14,058,612 7,055,718 Long-Term Debt (Less Current Maturities) 41,337,949 32,683,630 Accrued Pension 3,264,415 2,220,253 Other Non-Current Liabilities 1,754,467 2,465,598 - ----------------------------------------------------------------------------- Total Non-Current Liabilities 60,415,443 44,425,199 STOCKHOLDERS' EQUITY: Preferred Stock, par value $0.01: Authorized 1,000,000 shares. No shares issued. -- -- Common Stock, par value $0.01: Authorized 25,000,000 shares. Issued 6,673,397 shares. 66,734 66,734 Additional Paid-In Capital 31,326,150 31,326,023 Retained Earnings 34,906,679 29,200,569 Treasury Shares (1,012,336 in 1999 and 790,661 in 1998), at Cost (6,440,164) (4,529,767) Cumulative Foreign Translation Adjustment (25,855) (93,781) Underfunded Pension Liability Adjustment (92,992) (176,614) - ----------------------------------------------------------------------------- Total Stockholders' Equity 59,740,552 55,793,164 - ----------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $132,011,078 $115,489,802 - -----------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets. Lindberg Corporation 13 Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH CASH FLOWS FROM OPERATING ACTIVITIES: Net Earnings $ 7,597,003 $ 9,537,904 $ 262,850 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation 7,252,771 6,094,212 4,084,315 Equity Earnings, Net of Cash Distributions -- -- (235,128) Goodwill Amortization 1,077,436 603,522 119,347 Increase in Deferred Taxes 1,487,100 906,717 101,497 Non-Cash Portion of Discontinued Operations Reserve, Net of Tax Benefit -- -- 5,944,000 Investment Earnings 444,300 (444,300) -- Change in Assets and Liabilities: Receivables 1,922,653 195,155 (2,337,872) Prepaid and Refundable Income Taxes (1,059,838) 208,893 310,846 Prepaid Expenses and Other Current Assets (8,687) (289,659) (220,486) Accounts Payable (1,427,256) 482,191 18,311 Accrued Expenses (2,128,095) 1,548,360 356,720 Other (306,708) 522,069 1,605,242 - ----------------------------------------------------------------------------- Total Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities 7,253,676 9,827,160 9,746,792 - ----------------------------------------------------------------------------- Net Cash Provided by Operating Activities 14,850,679 19,365,064 10,009,642 - ----------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (10,262,640) (10,051,114) (7,336,401) Acquisitions, Net of Cash Acquired (11,411,312) (32,724,040) (16,555,267) Sale of Discontinued Operations 2,358,601 10,403,974 1,102,600 - ----------------------------------------------------------------------------- Net Cash Used in Investing Activities (19,315,351) (32,371,180) (22,789,068) - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Borrowings Under Revolving Credit Agreement 10,400,000 8,800,000 7,100,000 Payments on Senior Notes (2,000,000) (2,000,000) -- Issuance of Notes Payable 303,400 -- 8,220,000 Repayment of Notes Payable (2,387) (8,220,000) (901,437) Other Debt (77,270) 15,061 145,840 Issuance of Common Stock -- 16,000,000 -- Repurchase of Common Stock (2,152,920) -- -- Dividends Paid (1,890,893) (1,714,824) (1,537,935) - ----------------------------------------------------------------------------- Net Cash Provided by Financing Activities 4,579,930 12,880,237 13,026,468 - ----------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH 115,258 (125,879) 247,042 Cash at Beginning of Year 157,391 283,270 36,228 - ----------------------------------------------------------------------------- Cash at End of Year $ 272,649 $ 157,391 $ 283,270 - ----------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest Paid $ 2,834,028 $ 3,083,627 $ 1,679,402 Income Taxes Paid 4,737,131 5,470,439 3,875,117 - -----------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 14 Lindberg Corporation Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------------------------------------------------------- Cumulative Underfunded Additional Foreign Pension Common Paid-In Retained Treasury Translation Liability Stock Capital Earnings Shares Adjustment Adjustment Total - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 14,183,493 $ 1,493,406 $ 22,652,574 $ (5,054,651) $ -- $ (227,920) $ 33,046,902 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Earnings 262,850 262,850 Pension Adjustment 73,385 73,385 ------------ Comprehensive Income 336,235 Dividends Paid (1,537,935) (1,537,935) Exercise of Stock Options 32,786 213,430 246,216 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 14,183,493 1,526,192 21,377,489 (4,841,221) -- (154,535) 32,091,418 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Earnings 9,537,904 9,537,904 Foreign Translation Adjustment (93,781) (93,781) Pension Adjustment (22,079) (22,079) ------------ Comprehensive Income 9,422,044 Change in Common Stock Par Value (14,126,759) 14,126,759 -- Issuance of Common Stock 10,000 15,634,257 15,644,257 Dividends Paid (1,714,824) (1,714,824) Exercise of Stock Options 38,815 311,454 350,269 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 66,734 31,326,023 29,200,569 (4,529,767) (93,781) (176,614) 55,793,164 - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Earnings 7,597,003 7,597,003 Foreign Translation Adjustment 67,926 67,926 Pension Adjustment 83,622 83,622 ------------ Comprehensive Income 7,748,551 Repurchase of Common Stock (2,152,920) (2,152,920) Dividends Paid (1,890,893) (1,890,893) Exercise of Stock Options 127 242,523 242,650 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $ 66,734 $ 31,326,150 $ 34,906,679 $ (6,440,164) $ (25,855) $ (92,992) $ 59,740,552 - --------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Lindberg Corporation 15 Notes to Consolidated Financial Statements For the Years Ended December 31, 1999, 1998 and 1997 NOTE 1. ACCOUNTING POLICIES A. NATURE OF OPERATIONS The company provides commercial heat treating throughout the U.S. and Mexico to metal-working industries. B. PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the accounts of Lindberg Corporation and its subsidiaries. Significant intercompany balances and transactions have been eliminated. The company's 50% share in the Alumatherm Heat Treating Company ("Alumatherm") partnership was carried on the equity basis of accounting from the partnership formation on July 1, 1994, until the acquisition of the partner's interest in that entity on October 1, 1997 (see Note 2). The company's investment in Thixomat, Inc. ("Thixomat") is accounted for on the cost basis. Income from that investment is recognized when dividends are declared (see Note 9). C. REVENUE RECOGNITION The company recognizes revenues from sales upon shipment to its customers. D. PROPERTY AND DEPRECIATION Property and equipment are stated at cost. Depreciation is provided on the straight-line method for financial statement purposes and on accelerated methods for income tax purposes. Maintenance costs are charged to expense as incurred. Expenditures which improve efficiency or capacity or extend the useful life of assets are capitalized. Interest cost incurred during the period of construction of plant and equipment is capitalized as part of the cost of such plant and equipment. E. GOODWILL AND AMORTIZATION Goodwill, which represents the excess of the purchase price paid over the fair market value of the net identifiable assets acquired, is amortized using the straight-line method over 30 years. The company reviews the valuation and amortization periods of goodwill whenever events or changes in circumstances warrant such a review. Accumulated goodwill amortization was $1.8 million and $731,000 at December 31, 1999 and 1998, respectively. F. USE OF ESTIMATES The preparation of these financial statements, in conformity with generally accepted accounting principles, required the use of certain estimates by management determining the company's assets, liabilities, revenues and expenses. Actual results could differ from those estimates. G. FOREIGN EXCHANGE Assets and liabilities of the company's Mexican operation are translated using the exchange rate in effect at the balance sheet date and revenues and expenses are translated monthly at the average rate for the period. Exchange gains or losses on translation of the company's net equity investment in this subsidiary are deferred as a separate component of stockholders' equity. Foreign exchange gains and losses on transactions during the year are reflected in income. H. INCOME TAXES The company's provision for income taxes represents income taxes paid or payable for the current year adjusted for the change in deferred taxes during the year. Deferred income taxes reflect the net tax effects of temporary differences between the financial statement bases and the tax bases of assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. I. INTERNAL USE SOFTWARE Effective January 1, 1999 the company adopted SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1), which provides guidance for determining whether computer software is for internal use and how to account for the related costs. SOP 98-1 did not have a material effect on the Consolidated Financial Statements. J. SEGMENT REPORTING Effective January 1, 1998, the company adopted SFAS 131, "Disclosure about Segments of an Enterprise and Related Information" (SFAS 131). The company does not operate in more than one segment of business and no customer directly accounted for more than 10% of the company's sales. Assets and revenues related to the company's operation in Mexico accounted for less than 1% of the company's total. K. COMPREHENSIVE INCOME Effective January 1, 1998, the company adopted SFAS 130, "Reporting Comprehensive Income" (SFAS 130). In accordance with the provisions of SFAS 130, presentation of the company's comprehensive income is included within the company's Consolidated Statements of Stockholders' Equity. L. EARNINGS PER SHARE Effective January 1, 1997, the company adopted SFAS 128, "Earnings per Share" (SFAS 128). The provisions of SFAS 128 require computations of basic and diluted earnings per share. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options were converted into common stock. Basic earnings per share excludes dilution effects. Earnings per share for all years have been computed in accordance with SFAS 128. M. RECLASSIFICATIONS Certain prior period amounts have been reclassified to be consistent with the 1999 presentation. NOTE 2. ACQUISITIONS 1999 On February 17, 1999, the company acquired all of the outstanding shares of Metal-Lab of Wisconsin, Inc. ("Metal-Lab"), located in Sturtevant, Wisconsin, for $11.1 million of cash and $300,000 of a note payable. Metal-Lab primarily serves the tool and die industry. 1998 On January 16, 1998, the company acquired all of the outstanding shares of both Industrial Steel Treating Co. and Fabriform Metal Brazing, Inc. (collectively "Industrial"), related heat treating companies in the Los Angeles area which primarily serve the aerospace industry, for $10.6 million. The purchase was effective as of January 1, 1998. On April 16, 1998, the company acquired all of the outstanding shares of Houston Heat Treating Company ("HHT") for $10.7 million. HHT primarily serves the oil-field machinery industry. On September 30, 1998, the company acquired all of the outstanding shares of Merrell Enterprises, Inc. (d/b/a Mann Aircraft Forming) of Gardena, California, a metal stretching and forming business, for $2.9 million. On November 12, 1998, the company acquired all of the outstanding shares of Quality Heat-Treat, Inc. ("Quality") and the assets of certain related companies of Quality for $8.5 million. Quality, located in Dallas, primarily serves the heavy truck/construction equipment and oil-field machinery industries. 16 Lindberg Corporation 1997 On July 31, 1997, the company acquired all of the outstanding shares of Ticorm, Inc. for $1.9 million of cash and $1.9 million of notes payable. On October 1, 1997, the company acquired the remaining 50% share of Alumatherm from its partner for $6.5 million of cash and $6.3 million of notes payable. Both of these acquired businesses are heat treating companies which primarily serve the aerospace industry in the Los Angeles area. Prior to the purchase of Alumatherm, the company reported Alumatherm under the equity method of accounting as an unconsolidated partnership. Accordingly, the Consolidated Statement of Earnings for the year ended December 31, 1997 includes its equity in Alumatherm's earnings during the period in which it held its partnership interest. Cash payments made as part of each purchase were funded with additional borrowings under the company's revolving credit agreement. All of the acquisitions were accounted for using the purchase method; accordingly, the results of operations have been included in the consolidated totals of the company since the dates of their respective acquisitions. The cost of the acquisitions has been allocated to the assets and liabilities based on their estimated fair market value. With the exception of HHT, Industrial and Alumatherm, the acquired companies did not materially impact the consolidated financial position or results of operations for the periods presented. The allocation of the total cost of HHT, Industrial and Alumatherm is as follows: (in thousands)
HHT Industrial Alumatherm - ---------------------------------------------------------------------------- Property and Equipment $ 9,261 $ 5,740 $ 3,525 Accounts Receivable 974 1,947 1,858 Other Assets 40 638 376 Goodwill 3,638 5,852 9,967 Accounts Payable (11) (157) (273) Other Liabilities (3,202) (3,406) (850) - ---------------------------------------------------------------------------- $ 10,700 $ 10,614 $ 14,603(1) (1) Includes the purchase price and elimination of the related equity investment account.
The following table presents pro forma information for the combined entities of Lindberg Corporation, HHT and Industrial for the twelve months ended December 31, 1999 and 1998 assuming the acquisitions had taken place at the beginning of the periods presented (in thousands, except per share data).
Unaudited 1999 1998 - ---------------------------------------------------------------------------- Net Sales $120,483 $127,051 Earnings from Continuing Operations 7,597 9,793 Net Earnings 7,597 9,793 Per Diluted Share: Earnings from Continuing Operations 1.27 1.79 Net Earnings 1.27 1.79
Pro forma adjustments to the Consolidated Statements of Earnings include additional depreciation and interest charges, goodwill amortization, the reduction of certain other expenses and income tax effects. The pro forma information is provided for illustrative purposes only and is not necessarily reflective of the future results of the company or results of operations that would have actually occurred had the transactions been in effect for the periods presented. NOTE 3. DISCONTINUED OPERATIONS On December 22, 1997, the Board of Directors approved a plan to sell the company's Precision Products business segment ("Precision Products"). Precision Products consisted of two aluminum die casting facilities (Impact Industries, Inc. and Arrow-Acme Company) and one aluminum semi-permanent mold foundry (Harris Metals). On April 22, 1998, the company sold certain assets of Impact Industries, Inc; on June 11, 1998, the company sold the assets of Harris Metals; and on January 18, 1999, it sold the assets of Arrow-Acme Company. The company received cash and a note in each transaction. Precision Products is reported as discontinued operations and the Consolidated Financial Statements have been reclassified to segregate the net assets and operating results of the business. The estimated loss recorded during 1997 for the sale of Precision Products was $6.7 million, which included a reduction in asset values of $5.8 million and a provision for anticipated closing costs and operating losses until disposal of $900,000. The loss was reported net of an income tax benefit of $800,000 for an after-tax loss of $5.9 million. The loss on the sale of Precision Products was based on estimates of the proceeds expected to be realized on the sale of the operations. The amounts the company ultimately realized did not differ significantly from the amounts assumed in arriving at the loss on disposal of the discontinued operations. Summary operating results of the discontinued operations for 1999, 1998 and 1997 are as follows: (in thousands)
1999 1998 1997 - ---------------------------------------------------------------------------- Net Sales $ 268 $ 16,669 $ 34,567 Costs and Expenses 189 17,016 35,835 - ---------------------------------------------------------------------------- Earnings (Loss) Before Taxes 79 (347) (1,268) (Provision) Benefit for Income Taxes (32) 141 514 - ---------------------------------------------------------------------------- Net Income (Loss) $ 47 $ (206) $ (754)
Lindberg Corporation 17 Notes to Consolidated Financial Statements NOTE 4. INCOME TAXES The major components of the provision for income taxes for 1999, 1998 and 1997 are as follows: (in thousands)
1999 1998 1997 - ---------------------------------------------------------------------------- Federal $ 3,644 $ 4,816 $ 3,448 State 638 1,235 800 Foreign -- -- 107 - ---------------------------------------------------------------------------- Currently Payable 4,282 6,051 4,355 Federal 691 371 269 State 116 71 51 - ---------------------------------------------------------------------------- Deferred 807 442 320 - ---------------------------------------------------------------------------- $ 5,089 $ 6,493 $ 4,675
The differences between the provision for income taxes at the statutory rate and that shown in the Consolidated Statements of Earnings are summarized as follows: (in thousands)
1999 1998 1997 - ---------------------------------------------------------------------------- Consolidated Pretax Earnings at Statutory Rate $ 4,340 $ 5,542 $ 3,973 State Income Taxes, Net of Federal Tax Benefit 469 846 614 Other 280 105 88 - ---------------------------------------------------------------------------- $ 5,089 $ 6,493 $ 4,675
Significant components of the company's deferred tax liabilities and assets at December 31, 1999 and 1998 are as follows: (in thousands)
1999 1998 - ---------------------------------------------------------------------------- Deferred Tax Liabilities: Book/Tax Basis Differences $(12,887) $ (7,451) Other Liabilities (2,652) (809) - ---------------------------------------------------------------------------- Total Deferred Tax Liabilities (15,539) (8,260) - ---------------------------------------------------------------------------- Deferred Tax Assets: Reserves Not Deducted for Tax 1,500 869 Employee Benefit Provisions in Excess of Cash Payments 1,887 1,308 Other Assets 138 14 - ---------------------------------------------------------------------------- Total Deferred Tax Assets 3,525 2,191 - ---------------------------------------------------------------------------- Net Deferred Tax Liability (12,014) (6,069) - ---------------------------------------------------------------------------- Included in Consolidated Balance Sheets in: Prepaid and Refundable Income Taxes 2,045 987 Deferred Income Taxes (14,059) (7,056) - ---------------------------------------------------------------------------- $(12,014) $ (6,069)
NOTE 5. DEBT Long-term debt consists of the following: (in thousands)
1999 1998 - ---------------------------------------------------------------------------- Revolving Credit $ 37,000 $ 26,600 Senior Notes 6,000 8,000 Notes Payable 301 56 Capital Leases 84 105 - ---------------------------------------------------------------------------- 43,385 34,761 Less-Current Maturities (2,047) (2,077) - ---------------------------------------------------------------------------- $ 41,338 $ 32,684
As of December 31, 1999, the company had in place an amended unsecured revolving credit agreement with two banks providing a line of credit of $70 million. The agreement requires no prepayments and comes due on December 31, 2001. The company may choose from two interest rate alternatives - (i) the bank's reference rate (prime rate) and (ii) a Eurodollar loan rate plus an applicable margin based on the company's ratio of funded debt to earnings before interest, taxes, depreciation and amortization. The effective interest rate for the agreement was 6.0% and 6.6% during 1999 and 1998, respectively; the year-end rates were 7.1% and 6.3% for 1999 and 1998, respectively. The company also has outstanding senior notes which bear interest at 7.16% annually and mature in November 2002. The revolving credit and senior note agreements contain various covenants which, among others, require the company to meet certain financial ratios and include restrictions on dividend payments and the incurrence of additional indebtedness. At December 31, 1999, the company had approximately $23.7 million available for dividend payments. The company also has a second bank agreement which provides for the issuance of letters of credit, up to a maximum of $5,000,000. At December 31, 1999, a letter of credit totaling $4,250,000 was issued in accordance with an insurance agreement. Annual maturities of long-term debt, excluding the revolving credit agreement, for the five years following December 31, 1999 are $2,047,000, $2,050,000, $2,054,000, $32,000 and $29,000, respectively. 18 Lindberg Corporation NOTE 6. LEASES The company has a number of lease agreements related to the rental of production and administrative facilities and equipment. These are of varying terms and extend as far as the year 2010. The company capitalizes all leases which qualify as capital leases. The following is a schedule of estimated future minimum rental payments required under leases that have initial or remaining noncancelable terms in excess of one year as of December 31, 1999: (in thousands)
Operating Capital Leases Leases - ---------------------------------------------------------------------------- 2000 $ 1,986 $ 31 2001 1,711 31 2002 1,500 31 2003 1,176 4 2004 1,090 -- Thereafter 1,611 -- - ---------------------------------------------------------------------------- Total Minimum Payment Required $ 9,074 97 Less Imputed Interest (13) -------- Present Value of Minimum Lease Payments $ 84
The total rent expense for 1999, 1998 and 1997 was $2,668,000, $2,466,000 and $1,765,000, respectively. NOTE 7. EMPLOYEE BENEFITS The company has various defined benefit pension plans covering certain of its employees. Effective January 1, 1998, the company adopted SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132). The provisions of SFAS 132 change the required disclosures for net pension expense, the reconciliations of the projected benefit obligation and the fair value of plan assets, and the funded status of pension plans. The pension expense related to these plans included amortization of past service cost over 30 years. The standards utilized by the company to fund the pension plans satisfy the minimum funding requirements under the provisions of ERISA. Net pension expense for 1999, 1998 and 1997 included the following components: (in thousands)
1999 1998 1997 - ---------------------------------------------------------------------------- Service Cost $ 761 $ 675 $ 727 Interest Cost 1,420 1,245 1,226 Expected Return on Plan Assets (1,667) (1,596) (1,494) Amortization of: Unrecognized Net (Gain) Loss 45 (3) (13) Unrecognized Prior Service Cost 97 45 48 Unrecognized Net (Asset) Obligation (134) (147) (103) - ---------------------------------------------------------------------------- $ 522 $ 219 $ 391
The following tables provide a reconciliation of the changes in the projected benefit obligation and fair value of plan assets during the twelve months ending December 31, 1999 and 1998 and a statement of the funded status as of December 31, 1999 and 1998: (in thousands)
1999 1998 - ---------------------------------------------------------------------------- Accumulated Benefit Obligation, December 31 $ 16,085 $ 15,137 - ---------------------------------------------------------------------------- Reconciliation of Projected Benefit Obligation: Projected Benefit Obligation, January 1 $ 19,327 $ 17,756 Service Cost 761 675 Interest Cost 1,420 1,245 Plan Amendments 1,480 -- Actuarial (Gain) Loss (388) 738 Benefits Paid (1,170) (1,087) Divestiture (528) -- - ---------------------------------------------------------------------------- Projected Benefit Obligation, December 31 $ 20,902 $ 19,327 Reconciliation of Fair Value of Plan Assets: Plan Assets at Fair Value, January 1 $ 21,746 $ 21,179 Actual Return on Plan Assets 2,250 1,413 Company Contributions 218 241 Benefits Paid (1,170) (1,087) Divestiture (579) -- - ---------------------------------------------------------------------------- Plan Assets at Fair Value, December 31 $ 22,465 $ 21,746 Funded Status: Funded Status of the Plan, December 31 $ 1,563 $ 2,419 Unrecognized Net (Gain) Loss (4,108) (3,078) Unrecognized Prior Service Cost 1,636 341 Unrecognized Net (Asset) Obligation (572) (700) - ---------------------------------------------------------------------------- Net Amount Recognized $ (1,481) $ (1,018)
The following table provides the amounts recognized in the Consolidated Balance Sheets as of December 31, 1999 and 1998: (in thousands) Accrued Benefit Liability $ (2,865) $ (1,532) Intangible Asset 1,229 220 Accumulated Comprehensive Income Adjustment 155 294 - ---------------------------------------------------------------------------- Net Amount Recognized $ (1,481) $ (1,018)
Weighted Average Assumptions: Discount Rate Used in Determining the Projected Benefit Obligation 7.5% 7.0% Expected Long-Term Rate of Return on Plan Assets 9.0% 9.0% Rate of Increase in Future Compensation Levels 5.0% 5.0% Lindberg Corporation 19 Notes to Consolidated Financial Statements The accumulated benefit obligation (ABO) and fair value of plan assets for pension plans with ABOs in excess of plan assets were $2.7 million and $451,000, respectively, as of December 31, 1999, and $1.6 million and $429,000, respectively, as of December 31, 1998. The company also maintains two defined contribution plans. The company matches 50% of contributions up to 4% of compensation for both plans. Additionally, the company also contributes one percent of each employee's compensation for all those who are not participants in a defined benefit plan, have six months of service, and who are still participants in a 401(k) savings plan at the end of the year. The company made distributions for contributions and related expenses of $770,000, $739,000 and $598,000 to these defined contribution plans in 1999, 1998 and 1997, respectively. The company provides no postretirement benefits other than the benefit plans listed above. NOTE 8. STOCK OPTIONS The company maintains a stock option plan for key employees covering a maximum of 675,000 shares. The plan provides for the issuance, from time to time, of options to purchase shares of the company's common stock at prices not less than 100% of the fair market value of the stock at the time an option is granted. Under the terms of this plan, options to purchase an aggregate of 562,000 shares have been granted. At December 31, 1999, 113,000 were available for future grant. The following table summarizes activity under this plan during 1999, 1998 and 1997.
Average Option Shares Price per Share - ---------------------------------------------------------------------------- Outstanding, December 31, 1996 318,225 $ 6.70 Options Granted 73,900 9.00 Options Exercised (56,125) 6.26 Options Cancelled (26,300) 7.52 - ---------------------------------------------------------------------------- Outstanding, December 31, 1997 309,700 7.26 Options Granted 182,300 12.81 Options Exercised (42,355) 6.29 Options Cancelled (6,575) 9.19 - ---------------------------------------------------------------------------- Outstanding, December 31, 1998 443,070 9.61 Options Exercised (33,325) 5.53 Options Cancelled (6,150) 10.83 - ---------------------------------------------------------------------------- Outstanding, December 31, 1999 403,595 $ 9.93
The company accounts for employee stock options under APB Opinion 25, as permitted under generally accepted accounting principles. Accordingly, no compensation cost has been recognized in the accompanying financial statements related to these options. Had compensation cost for these plans been determined consistent with SFAS 123, "Accounting for Stock Based Compensation," the company's net earnings and net earnings per share would have been the following: (in thousands, except per share data)
1999 1998 1997 - ---------------------------------------------------------------------------- Earnings from Continuing Operations: As Reported $ 7,597 $ 9,538 $ 6,961 Pro forma 7,340 9,309 6,863 Net Earnings: As Reported 7,597 9,538 263 Pro forma 7,340 9,309 165 - ---------------------------------------------------------------------------- Diluted Earnings Per Share from Continuing Operations: As Reported $ 1.27 $ 1.74 $ 1.41 Pro forma 1.23 1.70 1.39 Diluted Net Earnings Per Share: As Reported 1.27 1.74 .05 Pro forma 1.23 1.70 .03
The pro forma effects reflected above may not be indicative of pro forma results which may be expected in future years. There were no stock option grants to employees in 1999. The fair values of the option grants in 1998 and 1997 were estimated at the date of grant using the Black-Scholes option pricing model. The following table provides the weighted-average assumptions and the fair values of the grants.
1998 1997 - ---------------------------------------------------------------------------- Risk-Free Interest Rate 4.9% 5.7% Dividend Yield 3.5% 2.1% Volatility 65.2% 40.1% Fair Value of Options $5.83 - $6.01 $ 3.29
The options vest ratably over 4 years and are assumed to have an average life of 5 years. The company also administers a stock option plan for members of the Board of Directors who are not employees of the company covering a maximum of 150,000 shares. Under the terms of this plan, options to purchase an aggregate of 91,500 shares have been granted, of which 70,500 were outstanding at year-end. The average exercise price for the outstanding options is $8.99 per share. At December 31, 1999, 58,500 shares were available for future grant. 20 Lindberg Corporation NOTE 9. RELATED PARTY The company holds a 17% equity interest in Thixomat, a company formed to promote and commercialize ThixomoldingTM technology. The Chairman of Thixomat serves on the Board of Directors of Lindberg. In addition, the President of Lindberg serves on Thixomat's Board of Directors. At December 31, 1999, the company held a $434,000 equity investment, accounted for at cost, in Thixomat. NOTE 10. COMMITMENTS AND CONTINGENCIES The company is a party to various lawsuits and claims arising in the ordinary course of business. Management, after review and consultation with legal counsel, considers that any liability resulting from these matters would not materially affect the financial condition or results of operations of the company. The company was the subject of an investigation by the government and a quitam (whistle-blower) lawsuit regarding alleged violations of the Federal False Claims Act and wrongful termination. The company learned of the lawsuit in May 1998. The activities that were the subject of the investigation and lawsuit related to only one plant and, in the fourth quarter 1998, the company established reserves for the potential settlement of this claim. In the first quarter of 1999, the company reached a settlement in principle with the government and the plaintiff on terms consistent with the reserves previously established. The company completed the settlement in the second quarter of 1999. The company employs some environmentally hazardous materials. The company has made expenditures to comply with laws and regulations relating to the protection of the environment, including studies, investigations and remediation of ground contamination, and expects to make such expenditures in the future in its efforts to comply with existing and future requirements. While such expenditures to date have not materially affected the company's capital expenditures, competitive position, financial condition, or results of operations, there can be no assurance that more stringent regulation or enforcement in the future will not have such effects. The company has notified state authorities of a possible need for remediation at three sites it currently operates. At all such sites, costs which may be incurred are difficult to accurately predict until the level of contamination is determined, and would be subject to increase if more contamination is discovered during investigation or remediation or if state authorities require more remediation than anticipated. Such costs may be less if the contamination proves to be less than currently expected and to the extent costs are covered by insurance or are allocable to others. The company has also been notified by state and federal governmental authorities that it may be a "potentially responsible party" or otherwise have responsibility with respect to clean-up obligations at one waste disposal site which was never owned or operated by the company. The company is participating in a settlement with the relevant authorities and other parties believed by the company to be responsible for clean-up obligations and further believes its financial responsibility to be of a minor nature. At December 31, 1999, the company had reserves of approximately $1.7 million to cover future environmental related anticipated costs. Such reserves give no effect to possible recoveries from insurers or other potentially responsible parties nor do they reflect any discount for the several years over which investigation or remediation amounts may be paid out. NOTE 11. CAPITAL STOCK CHANGE AND STOCKHOLDER RIGHTS PLAN In 1998, the company's stockholders approved an amendment to the company's certificate of incorporation. This amendment changed the par value of the common stock from $2.50 to $0.01 per share and increased the number of authorized shares from 12 million to 25 million. The amendment also authorized a new class of preferred stock with par value of $0.01 per share and authorized one million such shares. The company has in place a Stockholder Rights Plan designed to deter unfair takeover tactics and to prevent an acquirer from gaining control of the company without offering a fair price to all stockholders. Under the plan, the company declared a dividend distribution of one common share purchase right on each outstanding share of common stock. The rights become exercisable after a person or group acquires beneficial ownership of 20% or more of the common stock of the company or publicly announces a tender offer or exchange offer for 20% or more of the common stock. Initially, each right will entitle its holder to buy one share of common stock of the company at an exercise price of $40 per share. If a person or group acquires beneficial ownership of 20% or more of the outstanding common stock of the company: 1) each right will entitle its holder to purchase shares of common stock of the company at one-half their market price, or, in certain circumstances, at their par value (currently $0.01 per share) and 2) if the company or its assets are acquired in certain merger or other transactions, holders of rights may acquire common stock of the acquiring company having a market value of twice the exercise price of the right. Rights held by the 20% holder will become void and will not be exercisable to purchase shares at the reduced purchase price. The rights, which do not have voting rights, will expire on November 21, 2006 and may be redeemed by the company's board of directors at a price of $0.01 per right prior to their expiration or the accumulation of 20% or more of the company's common stock. Lindberg Corporation 21 Notes to Consolidated Financial Statements NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1999 and 1998 are shown below: (in thousands, except per share data)
1999 March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------ Net Sales $32,141 $31,584 $29,010 $27,748 Gross Profit 9,776 9,427 7,853 6,809 Net Earnings 2,498 2,419 1,663 1,017 Basic Net Earnings Per Share .42 .41 .28 .17 Diluted Net Earnings Per Share .42 .40 .28 .17 - ------------------------------------------------------------------------------ 1998 March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------ Net Sales $30,872 $33,034 $31,365 $29,798 Gross Profit 9,600 10,358 9,685 8,932 Net Earnings 2,440 2,683 2,355 2,060 Basic Net Earnings Per Share .50 .55 .43 .35 Diluted Net Earnings Per Share .48 .52 .41 .34 - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ Report of Independent Public Accountants TO THE STOCKHOLDERS OF LINDBERG CORPORATION We have audited the accompanying consolidated balance sheets of Lindberg Corporation (a Delaware Corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity and cash flows for the years ended December 31, 1999, 1998 and 1997. 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 generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lindberg Corporation and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for the years ended December 31, 1999, 1998 and 1997, in conformity with generally accepted accounting principles in the United States. ARTHUR ANDERSEN LLP Chicago, Illinois January 21, 2000 22 Lindberg Corporation Six-Year Financial Review
For the Years Ended December 31, 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ OPERATIONS (in thousands) Net Sales $ 120,483 $ 125,069 $ 88,784 $ 72,776 $ 67,967 $ 59,380 Gross Profit 33,865 38,575 25,092 20,257 19,265 15,028 Selling and Administrative Expenses (19,068) (20,478) (13,211) (11,507) (11,530) (10,217) Equity in Earnings of Partnership -- -- 1,436 893 301 54 - ------------------------------------------------------------------------------------------------------------------------ Operating Earnings 14,797 18,097 13,317 9,643 8,036 4,865 Interest Expense (Net) (2,229) (2,510) (1,681) (1,512) (1,638) (789) Other Income 118 444 -- -- 615 -- - ------------------------------------------------------------------------------------------------------------------------ Earnings Before Income Taxes 12,686 16,031 11,636 8,131 7,013 4,076 Provision for Income Taxes (5,089) (6,493) (4,675) (3,293) (2,840) (1,633) - ------------------------------------------------------------------------------------------------------------------------ Earnings From Continuing Operations 7,597 9,538 6,961 4,838 4,173 2,443 Earnings (Loss) From Discontinued Operations -- -- (6,698)(1) 178 1,462 1,931 - ------------------------------------------------------------------------------------------------------------------------ Net Earnings $ 7,597 $ 9,538 $ 263 $ 5,016 $ 5,635 $ 4,374 - ------------------------------------------------------------------------------------------------------------------------ Diluted Earnings Per Share: Continuing Operations $ 1.27 $ 1.74 $ 1.41 $ .99 $ .88 $ .51 Discontinued Operations -- -- (1.36) .04 .30 .41 - ------------------------------------------------------------------------------------------------------------------------ Net Earnings $ 1.27 $ 1.74 $ .05 $ 1.03 $ 1.18 $ .92 - ------------------------------------------------------------------------------------------------------------------------ FINANCIAL POSITION (in thousands) Working Capital $ 10,913 $ 8,622 $ 16,147 $ 30,100 $ 29,237 $ 23,726 Property and Equipment (Net) 71,362 66,737 39,097 30,879 27,332 26,224 Total Assets 132,011 115,490 89,563 74,888 68,639 65,878 Long-Term Debt 41,338 32,684 25,863 20,700 18,900 16,500 Total Debt 43,385 34,761 36,166 21,601 18,900 17,900 Stockholders' Equity 59,741 55,793 32,091 33,047 29,182 24,669 - ------------------------------------------------------------------------------------------------------------------------ OTHER FINANCIAL INFORMATION Cash Dividends Declared and Paid (in thousands) $ 1,891 $ 1,715 $ 1,538 $ 1,379 $ 1,181 $ 989 Cash Dividends Per Share .32 .32 .32 .29 .25 .21 Return on Average Stockholders' Equity 13% 22% 1% 16% 21% 19% Book Value Per Share of Stockholders' Equity $ 10.55 $ 9.48 $ 6.65 $ 6.91 $ 6.17 $ 5.23 Debt/Capitalization Ratio 42% 38% 53% 40% 39% 42% Shares Outstanding at Year-End 5,661,061 5,882,736 4,828,381 4,779,141 4,727,391 4,717,016 Capital Expenditures (in thousands) $ 10,263 $ 10,051 $ 7,336 $ 5,365 $ 4,029 $ 4,396 Depreciation (in thousands) 7,253 6,094 4,084 3,690 3,459 3,258 Goodwill Amortization (in thousands) 1,077 604 119 5 -- -- Number of Employees at Year-End 1,045 1,220 975 667 642 633 - ------------------------------------------------------------------------------------------------------------------------ (1) 1997 includes a net charge of $5,944,000 related to the discontinuance of the company's Precision Products segment.
SAFE HARBOR STATEMENT Statements contained in this annual report that are not based on historical facts are forward-looking statements subject to uncertainties and risks including, but not limited to, product and service demand and acceptance; economic conditions; the impact of competition and pricing; capacity and supply constraints or difficulties; results of financing and acquisition efforts; regulatory and other legal issues; and other risks detailed in the company's Securities and Exchange Commission filings. Lindberg Corporation 23 Corporate Information DIRECTORS George H. Bodeen 2 Chairman of the Board Dr. Raymond F. Decker 1, 2 Chairman, Thixomat, Inc. Raymond A. Jean 1 Corporate Vice President Amsted Industries W. Robert Reum 1 Former Chairman, President and Chief Executive Officer The Interlake Corporation J. Thomas Schanck 2 Former Vice Chairman Illinois Tool Works Inc. Leo G. Thompson President and Chief Executive Officer Committees of the Board: 1 Audit 2 Executive Compensation OFFICERS George H. Bodeen Chairman of the Board Leo G. Thompson President and Chief Executive Officer Stephen S. Penley Executive Vice President, Chief Financial Officer and Secretary Michael W. Nelson Senior Group Vice President Paul J. McCarren Group Vice President Terrence D. Brown Vice President Geoffrey S. Calhoun Vice President Jerome R. Sullivan Vice President Roger J. Fabian Vice President Brian J. McInerney Treasurer and Assistant Secretary U.S. LOCATIONS Gardena, California Huntington Park, California Los Angeles, California Paramount, California Rancho Dominguez, California Santa Fe Springs, California Westminster, California Berlin, Connecticut Waterbury, Connecticut Melrose Park, Illinois Wichita, Kansas Worcester, Massachusetts Lansing, Michigan Minneapolis, Minnesota St. Louis, Missouri Rochester, New York Solon, Ohio Tulsa, Oklahoma Dallas, Texas Houston, Texas New Berlin, Wisconsin Racine, Wisconsin Sturtevant, Wisconsin FOREIGN LOCATION Monterrey, Mexico SP 2000 OPERATIONS Walnut, California Waterbury, Connecticut Downers Grove, Illinois Bedford Heights, Ohio Reading, Pennsylvania Lexington, Tennessee Clintonville, Wisconsin New Berlin, Wisconsin 24 Lindberg Corporation Stockholder Information STOCK TRANSFER AGENT AND REGISTRAR Harris Trust & Savings Bank Chicago, Illinois INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP Chicago, Illinois GENERAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois CORPORATE OFFICES Lindberg Corporation 6133 North River Road, Suite 700 Rosemont, Illinois, 60018 847 823-2021 INTERNET ADDRESS www.lindberght.com ANNUAL MEETING The annual stockholders' meeting will be held on Friday, April 28, 2000, at 9 a.m., in the auditorium at Riverway, 6133 North River Road, Rosemont, Illinois. A formal notice of the meeting will be mailed to stockholders on or about April 1, 2000. FORM 10-K A copy of the company's Annual Report to the Securities and Exchange Commission (Form 10-K), for the year ended December 31, 1999, is available to any stockholder upon written request to the Secretary of the Company, 6133 North River Road, Suite 700, Rosemont, Illinois, 60018. STOCK MARKET INFORMATION The company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol LIND. The tables below show the range of high and low sale prices of the common stock as reported by the Nasdaq National Market and dividend payments during the past two years.
Sale Price Dividend 1999 High Low Per Share - ------------------------------------------------------------------------------- Quarter 1st $13.250 $ 8.625 $.08 2nd 12.438 9.313 .08 3rd 13.375 8.406 .08 4th 9.750 7.625 .08 - ------------------------------------------------------------------------------- $.32 Sale Price Dividend 1998 High Low Per Share - ------------------------------------------------------------------------------- Quarter 1st $18.125 $12.750 $.08 2nd 25.000 16.750 .08 3rd 20.250 12.375 .08 4th 14.250 8.375 .08 - ------------------------------------------------------------------------------- $.32
EX-21 4 1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY Name Where Incorporated - ---- ------------------ Alumatherm Heat Treating Company, L.L.C. Delaware Fabriform Metal Brazing, Inc. California Houston Heat Treating Company Texas Impind, Inc. Delaware Industrial Steel Treating Co. California Merrell Enterprises, Inc. California Metal-Lab of Wisconsin, Inc. Wisconsin Quality Heat-Treat, Inc. Texas Ticorm, Inc. California Lindberg de Mexico Mexico
EX-23 5 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated January 21, 2000 included in Registration Statement File Nos. 33-47323 and 33-60361. Arthur Andersen LLP Chicago, Illinois March 23, 2000 EX-27 6
5 0000059593 LINDBERG CORPORATION 1 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 272,649 0 17,492,480 654,000 0 22,767,742 134,055,319 62,693,233 132,011,078 11,855,083 0 0 0 66,734 31,326,150 132,011,078 120,482,625 120,482,625 86,618,120 86,618,120 19,067,393 0 2,229,348 12,686,244 5,089,241 7,597,003 0 0 0 7,597,003 1.29 1.27
EX-99 7 1 EXHIBIT 99.1 STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS The company's Annual Report on Form 10-K, news releases and other public documents, as well as oral statements that may be made by or on behalf of the company, contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not statements of historical fact, including statements regarding future revenues, expenses and profits. These forward-looking statements are subject to known and unknown risks, uncertainties or other factors which may cause the actual results of the company to be materially different from the historical results or from any results expressed or implied by the forward-looking statements. Such risks and factors include, but are not limited to, those discussed below and under "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the company's Annual Report on Form 10-K. All cautionary statements made in this report should be read as being applicable to all related forward-looking statements wherever they appear. Economy; Industry Concentration The company provides services to customers operating across a wide range of manufacturing industries, and its financial results have historically followed general economic conditions in the United States. The company has benefited from the strong U.S. economy in recent years. However, a prolonged retrenchment in the general U.S. economy could have a material adverse effect on the company's operating results and, ultimately, financial condition. In addition, due to the high fixed cost structure of the heat treating business, a reduction in the company's sales volume can have a disproportionately adverse effect on its profitability. The company estimates that customers serving the commercial aerospace and automobile/light truck industries currently account for approximately 24% and 15%, respectively, of the company's net sales. A significant decline in either commercial aircraft or automobile production could have a material adverse effect on the company's business and financial condition, if the company were unable to replace such business with orders from other industries. The company's concentration in certain industries may change depending on the company's acquisitions and the condition of the industries served by the company. Risks Associated with Acquisition Strategy The company's growth strategy includes acquisitions of heat treating businesses that complement its current operations. Although the company believes that there are many suitable acquisition candidates, it may not be able to capitalize on certain opportunities due to potential sellers' valuations and competition from other prospective buyers. The company's acquisition activities may involve certain other risks, including potential disruption to the company's ongoing business, integration difficulties, difficulty implementing uniform standards, controls, procedures and policies, potential impairment of relationships with employees and customers, and potential liabilities of an acquired company. Future acquisitions may be financed by internally generated funds, bank borrowings, or public offerings or private placements of equity or debt securities, to the extent such financing opportunities are available to the company. Any acquisitions funded by equity of the company may be dilutive. Approved Vendor Status Many of the company's customers are contractors or subcontractors to major manufacturers that impose stringent quality standards and that require their contractors and subcontractors to use only 2 approved vendors. The company is an approved vendor for these major manufacturers and, as an approved vendor, it is subject to periodic audit and renewal of certifications. Should the company lose its status as an approved vendor for one or more major manufacturers, the company may suffer a loss in revenues and may incur additional costs in connection with seeking recertification. Environmental Regulations The company is subject to federal, state and local environmental laws and regulations concerning emissions into the air, discharges into waterways and the generation, handling and disposal of waste materials. The company's past expenditures relating to environmental compliance have not had a material adverse effect on the company. However, there can be no assurance that changes in these laws and regulations or in their enforcement, or the discovery of new environmental issues requiring corrective measures in the future, will not adversely affect the company's capital expenditures, earnings and competitive position. Product and Other Liabilities The company's business may expose it to potential product liability claims in the event that a failure of a product containing parts treated by the company results in personal injury or death. In addition, if any product with parts treated by the company proves to be defective, the company may be required to participate in a recall involving such product. Although the company maintains various types of insurance coverage, there can be no assurance that such coverage will be adequate for liabilities that may be incurred or that it will continue to be available on terms acceptable to the company. The company believes that it is in material compliance with applicable laws and regulations relating to occupational hazards and safety. However, the company's operations entail risk of injury to production workers. There can be no assurance that the company will not incur material costs and liabilities in connection with personal injuries suffered by its associates. Risks Associated with Government Programs The company estimates that approximately 10% to 15% of the company's net sales are generated from government contractors and subcontractors whose products are used by the defense industry. As a service provider to contractors and subcontractors of the U.S. government, the company is directly and indirectly subject to various federal rules, regulations and orders applicable to government contracts. Although the company believes that it is in material compliance with all such laws, any future violation could result in civil liability, cancellation or suspension of existing contracts or ineligibility for future contracts funded in whole or in part with federal funds. Future changes in these rules, regulations and orders may make compliance substantially more costly. In addition, a significant reduction in defense budgets in the future may adversely affect the company's volume and margins. Competition Competition in the heat treating industry is intense. Companies generally compete on a local level for customers in a defined geographic area on the basis of timely delivery, quality and price. In certain markets, the company competes against companies that may have larger facilities and greater resources in those markets. 2 3 Dependence upon Key Personnel The company's continued success will depend to a large extent upon the abilities and continued efforts of its senior management and upon the company's ability to attract and retain highly qualified personnel, including personnel associated with businesses acquired by the company. The loss of key members of the company's management team could adversely affect the company's results of operations and future growth prospects. Volatility of Stock Price; Limited Public Float The market price of the common stock is affected by a number of factors, including limited trading volume, variations in the company's operating results, evolving business prospects and competitors, as well as general conditions in the economy and the financial markets. Also, the equity markets generally have experienced significant price and volume fluctuations in recent years. This volatility can impact significantly the stock price of many companies for reasons unrelated to their performance. Although a public market exists for the common stock, trading activity has been limited. Due to the relatively small number of shares currently outstanding, the trading of a relatively small number of shares could subject the stock price to volatility and significantly affect the market price of the common stock. Limitations on Change in Control Certain provisions in the company's Certificate of Incorporation and By-laws may have the effect of delaying, deferring or preventing a change in control of the company, even if such a change would potentially be beneficial to many stockholders. These provisions include a staggered board and super- majority stockholder vote or approval by a super-majority of the Board of Directors for a change in the number of directors. In addition, the Board of Directors has the authority, without further action by the stockholders, to issue up to one million shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, and to issue authorized but unissued shares of common stock up to a maximum of 25 million shares. The issuance of preferred stock or additional shares of common stock could have the effect of delaying, deferring or preventing a change in control of the company, even if such change in control would potentially be beneficial to the company's stockholders. The company's stockholder rights plan may also have the effect of discouraging a change in control of the company, as could the elimination of stockholder action by written consent without a meeting, as the company's charter provides. A two- thirds vote of the holders of the company's voting securities is required for certain mergers and other major corporate transactions with holders of 10% or more of the company's voting securities without approval of the company's Board of Directors prior to such 10% ownership. Further, the company has not opted out of the provision under Delaware law that imposes certain restrictions on any business combination between the company and an ``interested stockholder'' as defined in the Delaware statute. 3 -----END PRIVACY-ENHANCED MESSAGE-----