1
TWIN DISC, INCORPORATED
ACCELERATOR 401(k) SAVINGS PLAN
Racine, Wisconsin
AUDITED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
TABLE OF CONTENTS
Page
----
Independent Auditors' Report 1
Statements of Net Assets Available for Benefits 2
Statements of Changes in Net Assets Available for Benefits 3
Notes to Financial Statements 4-8
Schedule of Assets Held for Investment 9
2
INDEPENDENT AUDITORS' REPORT
----------------------------
Benefits Committee
Twin Disc, Incorporated -
Accelerator 401(k) Savings Plan
Racine, Wisconsin
We have audited the accompanying statements of net assets available for
benefits of the Twin Disc Accelerator-401(k) Savings Plan as of December 31,
2004 and 2003, and the related statements of changes in net assets available
for benefits for the years then ended. These financial statements are the
responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (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 net assets available for benefits of the
Plan as of December 31, 2004 and 2003 and the changes in its net assets
available for benefits for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The supplemental Schedule of
Assets Held for Investment Purposes-December 31, 2004, is presented for the
purpose of additional analysis and is not a required part of the basic
financial statements but is supplementary information required by the
Department of Labor's rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. This supplemental
schedule is the responsibility of the Plan's manangement. The supplemental
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
May 13, 2005
Milwaukee, Wisconsin
3
TWIN DISC, INCORPORATED
THE ACCELERATOR 401(K) SAVINGS PLAN
Racine, Wisconsin
Statements of Net Assets Available for Benefits
Years Ended December 31, 2004 and 2003
2004 2003
---- ----
Assets:
Investment options at fair value $ 50,969,146 $ 44,841,177
Receivables:
Employer match contribution 6,058 17,637
Participant contributions 21,537 58,569
----------------------------
Total receivables 27,595 76,206
----------------------------
Net assets available for plan benefits $ 50,996,741 $ 44,917,383
----------------------------
----------------------------
The accompanying notes to financial statments are an integral part of these
statements.
4
TWIN DISC, INCORPORATED
THE ACCELERATOR 401(K) SAVINGS PLAN
Racine, Wisconsin
Statements of Changes in Net Assets Available for Benefits
Years Ended December 31, 2004 and 2003
2004 2003
---- ----
Additions:
Additions to net assets attributed to:
Investmetn income:
Net Appreciation in fair value of investments $ 3,415,195 $ 7,180,049
Interest 71,242 76,853
Dividends 1,721,104 707,277
------------------------
Net investment gain 5,207,541 7,964,179
Contributions:
Employer 630,546 832,703
Particpant 2,195,513 2,176,136
Rollovers 194,865 3,659
------------------------
Total contributions 3,020,924 3,012,498
------------------------
Total additions 8,228,465 10,976,677
Deductions:
Deductions from net assets attributed to:
Administrative fees 2,400 ---
Benefits paid to participants 2,146,707 5,205,648
------------------------
Total deductions 2,149,107 5,205,648
------------------------
Change in net assets available for plan benefits 6,079,358 5,771,029
Net assests available for plan benefits,
beginning of year 44,917,383 39,146,354
------------------------
Net assets available for plan benefits, end of year 50,996,741 44,917,383
------------------------
------------------------
The accompanying notes to financial statments are an integral part of these
statements.
5
TWIN DISC, INCORPORATED - ACCELERATOR 401(k) SAVINGS PLAN
Racine, Wisconsin
Notes to Financial Statements
December 31, 2004 and 2003
1. Basis of Presentation and Significant Accounting Policies
-------------------------------------------------------------
General
-------
The following brief description of the Twin Disc, Incorporated -
Accelerator 401(k) Savings Plan (the "Plan") is provided for general
information purposes only. Participants should refer to the plan agreement
for a more complete description of the Plan's provisions. The Plan,
established April 1, 1986, is a defined contribution plan covering
substantially all Twin Disc, Incorporated (the "Company") domestic employees
and is subject to the provisions of the Employee Retirement Income Security
Act of 1974 ("ERISA").
Eligibility
-----------
An employee of the Company is eligible for plan participation after
completing two months of employment.
Contributions
-------------
Participants may elect to contribute on a pre-tax basis up to 100% of
annual gross income with contributions limited under provisions of the Internal
Revenue Code.
For participants who are employed by Twin Disc, Inc., the Company
contributes an amount equal to a percentage of each participant's 401(k)
contributions, up to 6% of compensation. The contribution percentage for the
years ended December 31, 2004 and 2003 was 50%. For participants who are
employed by the Twin Disc South East subsidiary, the Company contributes a
matching contribution equal to 25% of each participant's 401(k) contributions,
up to 6% of compensation, and a profit sharing contribution equal to 2.5% of
each participant's compensation. The Internal Revenue Code has set a maximum
of $13,000 and $12,000 for tax-deferred contributions that may be excluded for
any individual participant in 2004 and 2003, respectively. The Internal
Revenue Code also allows additional catch-up contributions for participants age
fifty and over. The maximum additional contribution allowed was $3,000 and
$2,000 in 2004 and 2003, respectively. No federal income tax is paid on the
tax-deferred contributions and growth thereon until the participant withdraws
them from the Plan.
The Plan enables participants to allocate their contributions and account
balances among various investment options offered by the Plan. Assets of the
Plan are segregated and invested based upon the total allocation of the
participants' accounts. Participants may direct such allocations in any whole
percentage increment and allocations can be changed at any time.
Vesting
-------
Participants are immediately 100% vested in their individual account
balances.
Withdrawals
-----------
After-tax contributions may be withdrawn at any time upon receipt of
written notice by the Trustee. Pre-tax contributions may only be withdrawn,
prior to employment termination, in the event of severe financial hardship or
once annually upon attainment of age 59 1/2. A final distribution is paid to
the participant upon termination of employment with the Company. Final
distributions in excess of $5,000 may be deferred as elected by the participant
until age 70 1/2.
6
TWIN DISC, INCORPORATED - ACCELERATOR 401(k) SAVINGS PLAN
Racine, Wisconsin
Notes to Financial Statements
December 31, 2004 and 2003
(Continued)
1. Basis of Presentation and Significant Accounting Policies (Continued)
-------------------------------------------------------------------------
Participant Accounts
--------------------
On March 1, 2004, the Company authorized the transfer of trusteeship of
the Plan from UMB Bank, N.A., to T. Rowe Price Trust Company, and the
recordkeeping services for the Plan from Strong Retirement Plan Services
("Strong") to T. Rowe Price Retirement Plan Services Inc. ("T. Rowe Price").
T. Rowe Price maintains individual accounts for each participant for their
respective investment in each of twelve available investment funds. For all
investment programs which are mutual funds or collective trust funds,
participant balances are maintained on a share or unit method, as appropriate.
Participant investments in the Twin Disc, Inc. Stock Fund, a unitized fund in
2003, were accounted for on a unit value method. The participant investments
were accounted for on a share method beginning March 1, 2004. Shares and share
values, and units and unit values for the fund as of December 31, 2004 and 2003
were as follows:
Shares/Units Share/Unit Value
December 31, December 31,
---------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Twin Disc, Inc. Stock 51,236 --- $25.55 ---
Twin Disc, Inc. Stock Fund --- 81,285 --- $12.05
Participant Loans
-----------------
Participants may be granted a loan against their individual account
balance limited to the lesser of $50,000 or 50% of the account balance. Loans
are granted in a uniform and nondiscriminatory manner based on the loan policy
as set forth by the Benefits Committee. The loan proceeds are made pro-rata
from the investment elections of the participant. Each participant's
individual account and the interest and principal paid on the loan shall be
credited only to such participant's account balance. Any such loan shall be
repaid over a period not exceeding five years unless the loan is used to
purchase a principal residence, in which case the loan shall be repaid over a
period not exceeding fifteen years.
Basis of Accounting
-------------------
The financial statements of the Plan are prepared under the accrual method
of accounting.
Administrative Expenses
-----------------------
Certain administrative expenses of the Plan are paid by the Company at its
discretion. The remaining administrative expenses are paid by the Plan.
Benefit Payments
----------------
Benefits are recorded when paid.
7
TWIN DISC, INCORPORATED - ACCELERATOR 401(k) SAVINGS PLAN
Racine, Wisconsin
Notes to Financial Statements
December 31, 2004 and 2003
(Continued)
1. Basis of Presentation and Significant Accounting Policies (Continued)
-------------------------------------------------------------------------
Investment Valuation
--------------------
Investments of the Plan are stated at fair value. The values of
investments in mutual funds and common stocks are determined by the last
reported market price on the last business day of the year. Investments in
collective trust funds, other than the T. Rowe Price Stable Value Common Trust
Fund (see below), are valued at redemption prices established by the trustee of
the funds based on the quoted market prices of the underlying investments.
Participant loans are valued at cost which approximates fair value. The Plan
presents in the statement of changes in net assets, the net appreciation
(depreciation) in the fair value of its investments, which consists of the
realized gains or losses and the unrealized appreciation (depreciation) on
those investments. Purchases and sales of investments are recorded on a
trade-date basis. Dividends are recorded on the ex-dividend date. Interest is
recognized when earned.
The fair value of the T. Rowe Price Stable Value Common Trust Fund is
determined by T. Rowe Price Retirement Plan Services, Inc. The fair value of
the Strong Stable Value Fund was determined by Strong Investments, Inc. The
collective trust fund invests in short-term and long-term conventional and
synthetic investment contracts issued by insurance companies and other
institutions that meet the high credit quality standards established by Strong
and T. Rowe Price. The investment contracts are recorded at contract value
(which represents contributions received, plus interest, less plan
withdrawals), which approximates fair value at December 31, 2004.
2. Investments
---------------
The following presents investments that represent 5% or more of the Plan's
net assets:
Mutual Funds:
Pimco Total Return Fund $4,278,146 $ -
T. Rowe Price Equity Income Fund 3,027,455 -
T. Rowe Price Growth Stock Fund 11,260,625 -
T. Rowe Price Mid Cap Value Fund 8,422,721 -
T. Rowe Price Small Cap Value Fund 2,775,540 -
Davis NY Venture - 2,659,062
Strong Institutional Growth - 11,313,394
Strong Opportunity - 7,009,488
Strong Advisor Bond Institutional - 4,478,708
T. Rowe Price Stable Value Common Trust Fund 11,779,338 ---
Strong Stable Value Fund - 10,410,405
8
TWIN DISC, INCORPORATED - ACCELERATOR 401(k) SAVINGS PLAN
Racine, Wisconsin
Notes to Financial Statements
December 31, 2004 and 2003
(Continued)
During 2004 and 2003, the Plan's investments (including gains and losses
on investments bought and sold as well as held during the year) appreciated
(depreciated) in value by $3,415,196 and $7,180,049, respectively, as follows:
December 31,
------------
2004 2003
---- ----
Mutual funds $ 2,267,469 $ 6,457,009
Common stock 1,043,508 472,762
Collective trust fund 104,218 250,278
---------------------------
$ 3,415,195 $ 7,180,049
---------------------------
---------------------------
3. Income Tax Status
---------------------
The Plan obtained its latest determination letter on March 19, 2002, in
which the Internal Revenue Service stated the Plan as then designed, was in
compliance with the applicable requirements of the Internal Revenue Code. The
Plan administrator and the Plan's tax counsel believe that the Plan is
currently designed and being operated in compliance with the applicable
requirements of the Internal Revenue Code. Therefore, no provision for income
taxes has been included in the Plan's financial statements.
4. Termination of Plan
-----------------------
Although the Company has not expressed any intent to terminate the Plan,
it may do so at any time.
5. Party-in-Interest Transactions
----------------------------------
Transactions involving employer securities, funds administered by T. Rowe
Price Trust Company, the current trustee of the Plan, funds administered by T.
Rowe Price Retirement Plan Services, Inc., the recordkeeper of the Plan, and
participant loans are considered party-in-interest transactions. These
transactions are not, however, considered prohibited transactions under
29 CFR 408(b) of the ERISA regulations.
6. Amounts Allocated to Withdrawn Participants
-----------------------------------------------
Plan assets of $9,086,930 and $8,608,508 have been allocated to the
accounts of persons who are no longer active participants of the Plan as of
December 31, 2004 and 2003, respectively, but who have not yet received
distributions as of that date.
7. Use of Estimates
--------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the dates of the financial statements and the
reported amounts of additions and deductions during the reporting periods.
Actual amounts could differ from those estimates.
9
8. Risks and Uncertainties
---------------------------
The Plan's investments are exposed to various risks, such as interest
rate, market and credit risks. Due to the level of risk associated with certain
investments and the level of uncertainty related to changes in the values of
investments, it is at least reasonably possible that changes in risks in the
near term would materially affect participants' account balances and the
amounts reported in the Statements of Net Assets Available for Benefits and the
Statements of Changes in Net Assets Available for Benefits.
TWIN DISC, INCORPORATED
THE ACCELERATOR 401(K) SAVINGS PLAN
Racine, Wisconsin
Employer Identification #39-0667110
Plan 005
Schedule of Assets Held for Investment Purposes - Schedule H, Line 4i
Description of asset Shares/Units Value
-------------------- ------------ -----
Dodge & Cox Balanced Fund 31,551 2,503,585
Goldman Sachs Growth Opportunities A Fund 18,082 392,388
Pimco Total Return Fund 400,951 4,278,146
* T. Rowe Price Equity Income Fund 113,857 3,027,455
* T. Rowe Price Growth Stock Fund 422,221 11,260,625
* T. Rowe Price Mid Cap Value Fund 366,365 8,422,721
* T. Rowe Price Small Cap Value Fund 77,790 2,775,540
* T. Rowe Price Stable Value Common Trust Fund 11,779,338 11,779,338
Templeton Foreign Fund 89,651 1,102,712
* Twin Disc, Inc. - Common Stock 51,236 1,309,074
Vanguard 500 Index Fund 12,919 1,442,251
William Blair Small Cap Growth Fund 51,004 1,312,321
* Participants Loans, interest rates ranging
between 5.0% and 10.5%, maturities ranging
from 2005 to 2019 1,362,990
------------
$ 50,969,146
------------
------------
* The party involved is known to be a party-in-interest to the Plan.
See Independent Auditors' Report.