SEC Filing - Twin Disc, Inc.

1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 - - - - - - - - - - - - - - - - - - - - - - - For the Fiscal Year Ended June 30, 2000 Commission File Number 1-7635 TWIN DISC, INCORPORATED - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (Exact Name of Registrant as Specified in its Charter) Wisconsin 39-0667110 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 1328 Racine Street, Racine, Wisconsin 53403 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including area code (262) 638-4000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered: Common stock, no par value New York Stock Exchange - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Securities registered pursuant to Section 12(g) of the Act: Common stock, no par value - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (Title of Class) 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 the 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 [X]. At September 1, 2000, the aggregate market value of the common stock held by non-affiliates of the registrant was $36,294,186. Determination of stock ownership by affiliates was made solely for the purpose of responding to this requirement and registrant is not bound by this determination for any other purpose. At September 1, 2000, the registrant had 2,809,890 shares of its common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: The incorporated portions of such documents being specifically identified in the applicable Items of this Report. Portions of the Annual Report to Shareholders for the year ended June 30, 2000 are incorporated by reference into Parts I, II and IV. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held October 20, 2000 are incorporated by reference into Parts I, III and IV.

2 PART I Item 1. Business Twin Disc designs, manufactures and sells heavy duty off-highway power transmission equipment. Products offered include: hydraulic torque converters; power-shift transmissions; marine transmissions and surface drives; universal joints; gas turbine starting drives; power take-offs and reduction gears; industrial clutches; fluid couplings and control systems. The Company sells its product to customers primarily in the construction equipment, industrial equipment, government, marine, energy and natural resources and agricultural markets. The Company's worldwide sales to both domestic and foreign customers are transacted through a direct sales force and a distributor network. There have been no significant changes in products or markets since the beginning of the fiscal year. The products described above have accounted for more than 90% of revenues in each of the last three fiscal years. Most of the Company's products are machined from cast iron, forgings, cast aluminum and bar steel which generally are available from multiple sources and which are believed to be in adequate supply. The Company has pursued a policy of applying for patents in both the United States and certain foreign countries on inventions made in the course of its development work for which commercial applications are considered probable. The Company regards its patents collectively as important but does not consider its business dependent upon any one of such patents. The business is not considered to be seasonal except to the extent that employee vacations are taken mainly in the months of July and August curtailing production during that period. The Company's products receive direct widespread competition, including from divisions of other larger independent manufacturers. The Company also competes for business with parts manufacturing divisions of some of its major customers. Ten customers accounted for approximately 45% of the Company's consolidated net sales during the year ended June 30, 2000. Two customers, Caterpillar Inc. and Sewart Supply, Inc., accounted for approximately 6% and 10%, respectively, of consolidated net sales in 2000. Unfilled open orders for the next six months of $52,991,000 at June 30, 2000 compares to $39,892,000 at June 30, 1999. Since orders are subject to cancellation and rescheduling by the customer, the six-month order backlog is considered more representative of operating conditions than total backlog. However, as procurement and manufacturing "lead times" change, the backlog will increase or decrease; and thus it does not necessarily provide a valid indicator of the shipping rate. Cancellations are generally the result of rescheduling activity and do not represent a material change in backlog. Management recognizes that there are attendant risks that foreign governments may place restrictions on dividend payments and other movements of money, but these risks are considered minimal due to the political relations the United States maintains with the countries in which the Company operates or the relatively low investment within individual countries. The Company's business is not subject to renegotiation of profits or termination of contracts at the election of the Government. Engineering and development costs include research and development expenses for new product development and major improvements to existing products, and other charges for ongoing efforts to refine existing products. Research and development costs charged to operations totaled $1,852,000, $2,505,000 and $3,104,000 in 2000, 1999, and 1998, respectively. Total engineering and development costs were $6,322,000, $7,829,000 and $8,833,000 in 2000, 1999 and 1998, respectively.

3 Item 1. Business (continued) Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not anticipated to have a material effect on capital expenditures, earnings or the competitive position of the Company. The number of persons employed by the Company at June 30, 2000 was 999. A summary of financial data by segment for the years ended June 30, 2000, 1999 and 1998 appears in Note I to the consolidated financial statements on pages 31 through 33 of the 2000 Annual Report to Shareholders, which financial statements are incorporated by reference in this Form 10-K Annual Report in Part II. Item 2.Properties The Company owns two manufacturing, assembly and office facilities in Racine, Wisconsin, U.S.A. and one in Nivelles, Belgium. The aggregate floor space of these three plants approximates 677,000 square feet. One of the Racine facilities includes office space which is the location of the Company's corporate headquarters. The Company leases additional manufacturing, assembly and office facilities in Decima, Italy. The Company also has operations in the following locations, all of which are used for sales offices, warehousing and light assembly or product service. The following properties are leased: Jacksonville, Florida, U.S.A. Brisbane, Queensland, Australia Miami, Florida, U.S.A. Perth, Western Australia, Australia Loves Park, Illinois, U.S.A. Auckland, New Zealand Coburg, Oregon, U.S.A. Singapore Kent, Washington, U.S.A. Shanghai, China Portland, Oregon, U.S.A. Viareggio, Italy Edmonton, Alberta, CanadaChambery, France Vancouver, British Columbia, Canada The properties are generally suitable for operations and are utilized in the manner for which they were designed. Manufacturing facilities are currently operating at less than 68% capacity and are adequate to meet foreseeable needs of the Company.

4 Item 3. Legal Proceedings Twin Disc is a defendant in several product liability or related claims considered either adequately covered by appropriate liability insurance or involving amounts not deemed material to the business or financial condition of the Company. The Company has joined with a group of potentially responsible parties in signing a consent decree with the Illinois Environmental Protection Agency ("IEPA") to conduct a remedial investigation and feasibility study at the Interstate Pollution Control facility in Rockford, Illinois. The consent decree was signed on October 17, 1991, and filed with the federal court in the Northern District of Illinois. The Company's total potential liability on the site cannot be estimated with particularity until a final remedy is selected by the IEPA and an allocation scheme is adopted by the parties. The IEPA is expected to issue its decision by early fall, 2000. Based upon current assumptions, however, the Company anticipates potential liability of approximately $100,000. The Company has also joined with a group of potentially responsible parties in signing a consent decree with the Illinois Environmental Protection Agency to conduct a remedial investigation and feasibility study at the MIG\DeWane Landfill in Rockford, Illinois. The consent decree was signed on March 29, 1991, and filed with the federal court in the Northern District of Illinois. The IEPA issued its record of decision for the site in April 2000, selecting a remedy with an estimated cost of $18 million. The Company's total potential liability on the site cannot be estimated with particularity until an allocation scheme is adopted by the parties. Based upon current assumptions, however, the Company anticipates potential liability of approximately $600,000. Item 4. Submission of Matters to a Vote of Security Holders None. Executive Officers of the Registrant (Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on October 20, 2000.) Principal Occupation Name Last Five Years Age - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Michael E. Batten Chairman, Chief Executive Officer 60 Michael H. Joyce President-Chief Operating Officer 59 James O. Parrish Vice President-Finance and Treasurer 60 Lance J. Melik Vice President-Transmission and 57 Industrial products since June 1999 and Vice President-Corporate Development since September 1995 Paul A. Pelligrino Vice President-Engineering since April 1996; 61 formerly Chief Engineer of Corporate Engineering

5 Item 4. Executive Officers of the Registrant (continued) Principal Occupation Name Last Five Years Age - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Henri Claude Fabry Vice President-Marine and Distribution 54 since June 1999; formerly Director of Marketing and Sales, Twin Disc International S.A. since February 1997; formerly Managing Director of Marine Power Europe since 1985 Arthur A. Zintek Vice President-Human Resources 53 since January 1998; formerly Vice President Human Resources, Mitsubishi Motor Manufacturing of North America since April 1997; formerly Director of Human Resources, Harley Davidson, Inc. since September 1992 Fred H. Timm Corporate Controller and Secretary 54 Officers are elected annually by the Board of Directors at the Board meeting held preceding each Annual Meeting of the Shareholders. Each officer holds office until his successor is duly elected, or until he resigns or is removed from office. PART II Item 5.Market for the Registrant's Common Stock and Related Stockholder Matters The dividends per share and stock price range information set forth under the caption "Sales and Earnings by Quarter" on page 1 of the Annual Report for the year ended June 30, 2000 are incorporated into this Report by reference. As of June 30, 2000 there were 1,480 shareholder accounts. The Company's stock is traded on the New York Stock Exchange. The market price of the Company's common stock as of the close of business on September 1, 2000 was $16.81 per share. Pursuant to a shareholder rights plan (the "Rights Plan"), on April 17, 1998, the Board of Directors declared a dividend distribution, payable to shareholders of record at the close of business on June 30, 1998, of one Preferred Stock Purchase Right ("Rights") for each outstanding share of Common Stock. The Rights will expire 10 years after issuance, and will be exercisable only if a person or group becomes the beneficial owner of 15% or more of the Common Stock (or 25% in the case of any person or group which currently owns 15% or more of the shares or who shall become the Beneficial Owner of 15% or more of the shares as a result of any transfer by reason of the death of or by gift from any other person who is an Affiliate or an Associate of such existing holder or by succeeding such a person as trustee of a trust existing on the record date) (an "Acquiring Person"), or 10 business days following the commencement of a tender or exchange offer that would result in the offeror beneficially owning 25% or more of the Common Stock. A person who is not an Acquiring Person will not be deemed to have become an Acquiring Person solely as a result of a reduction in the number of shares of Common Stock outstanding due to a repurchase of Common Stock by the Company until such person becomes beneficial owner of any additional shares of Common Stock. Each Right will entitle shareholders who received the Rights to buy one newly issued unit of one one-hundredth of a share of Series A Junior Preferred Stock at an exercise price of $160, subject to certain antidilution adjustments. The Company will generally be entitled to redeem the Rights at $.05 per Right at any time prior to 10 business days after a public announcement of the

6 Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters (Continued) existence of an Acquiring Person. In addition, if (i) a person or group accumulates more than 25% of the Common Stock (except pursuant to an offer for all outstanding shares of Common Stock which the independent directors of the Company determine to be fair to and otherwise in the best interests of the Company and its shareholders and except solely due to a reduction in the number of shares of Common Stock outstanding due to the repurchase of Common Stock by the Company), (ii) a merger takes place with an Acquiring Person where the Company is the surviving corporation and its Common Stock is not changed or exchanged, (iii) an Acquiring Person engages in certain self-dealing transactions, or (iv) during such time as there is an Acquiring Person, an event occurs which results in such Acquiring Person's ownership interest being increased by more than 1% (e.g., a reverse stock split), each Right (other than Rights held by the Acquiring Person and certain related parties which become void) will represent the right to purchase, at the exercise price, Common Stock (or in certain circumstances, a combination of securities and/or assets) having a value of twice the exercise price. In addition, if following the public announcement of the existence of an Acquiring Person the Company is acquired in a merger or other business combination transaction, except a merger or other business combination transaction that takes place after the consummation of an offer for all outstanding shares of Common Stock that the independent directors of the Company have determined to be fair, or a sale or transfer of 50% or more of the Company's assets or earning power is made, each Right (unless previously voided) will represent the right to purchase, at the exercise price, common stock of the acquiring entity having a value of twice the exercise price at the time. The Rights may have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on a substantial number of Rights being acquired. However, the Rights are not intended to prevent a take-over, but rather are designed to enhance the ability of the Board of Directors to negotiate with an acquirer on behalf of all of the shareholders. In addition, the Rights should not interfere with a proxy contest. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Rights may be redeemed by the Company at $.05 per Right prior to 10 business days after the public announcement of the existence of an Acquiring Person. The news release announcing the declaration of the Rights dividend, dated April 17, 1998, filed as Item 14(a)(3), Exhibit 4(b) of Part IV of the Annual Report on Form 10-K for the year ended June 30, 1998 is hereby incorporated by reference. Item 6.Selected Financial Data The information set forth under the caption "Ten-Year Financial Summary" on pages 42 and 43 of the Annual Report to Shareholders for the year ended June 30, 2000 is incorporated into this report by reference. Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations a) Quantitative and Qualitative Disclosure About Market Risk. The Company is exposed to market risks from changes in interest rates, commodities and foreign exchange. To reduce such risks, the Company selectively uses financial instruments and other pro-active management techniques. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which prohibit the use of financial instruments for trading or speculative purposes. Discussions of the Company's accounting policies and further disclosure relating to financial instruments is included in Note A of Notes to Consolidated Financial Statements on pages 27 and 28 of the 2000 Annual Report to Shareholders,

7 Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) which financial statements are incorporated into this report by reference. Interest rate risk - The Company currently has lines of credit bearing interest predominantly at the LIBOR interest rate plus 1.25%. Due to the relative stability of interest rates, the Company does not utilize any financial instruments to manage interest rate risk exposure. Commodity price risk - The Company is exposed to the fluctuation in market prices for such commodities as steel and aluminum. Due to the relative stability of these commodities, the Company does not utilize commodity price hedges to manage commodity price risk exposure. Currency risk - The Company has exposure to foreign currency exchange fluctuations. The Company does not hedge the translation exposure represented by the net assets of its foreign subsidiaries. Foreign currency translation adjustments are recorded as a component of shareholders' equity. Forward foreign exchange contracts are used to hedge the currency fluctuations on transactions denominated in foreign currencies. Gains and losses from foreign currency transactions are included in earnings. At June 30, 2000 and 1999, the Company had outstanding forward exchange contracts to purchase 189,972,000 and 76,040,000 Belgian francs at a cost of $4,500,000 and $2,000,000, respectively. The contracts have a weighted average maturity of 40 days and 33 days, respectively. The information set forth under the caption "Management's Discussion and Analysis" on pages 19 through 22 of the Annual Report to Shareholders for the year ended June 30, 2000 is incorporated into this report by reference. Item 8.Financial Statements and Supplementary Data The following Consolidated Financial Statements of Twin Disc, Incorporated and Subsidiaries set forth on pages 23 through 41 of the Annual Report to Shareholders for the year ended June 30, 2000 are incorporated into this report by reference: Consolidated Balance Sheets, June 30, 2000 and 1999 Consolidated Statements of Operations for the years ended June 30, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended June 30, 2000, 1999 and 1998 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the years ended June 30, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Report of Independent Accountants The supplementary data regarding quarterly results of operations set forth under the caption "Sales and Earnings by Quarter" on page 1 of the Annual Report to Shareholders for the year ended June 30, 2000 is incorporated into this report by reference.

8 Item 9.Change in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant For information with respect to the executive officers of the Registrant, see "Executive Officers of the Registrant" at the end of Part I of this report. For information with respect to the Directors of the Registrant, see "Election of Directors" on pages 5 through 6 of the Proxy Statement for the Annual Meeting of Shareholders to be held October 20, 2000, which is incorporated into this report by reference. For information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, see "Section 16(a) Beneficial Ownership Reporting Compliance" on page 13 of the Proxy Statement for the Annual Meeting of Shareholders to be held October 20, 2000, which is incorporated into this report by reference. Item 11. Executive Compensation The information set forth under the captions "Compensation of Executive Officers", "Stock Options","Retirement Income Plan" and "Supplemental Retirement Benefit Plan" on pages 8 through 10 of the Proxy Statement for the Annual Meeting of Shareholders to be held on October 20, 2000 is incorporated into this report by reference. Discussion in the Proxy Statement under the captions "Board Executive Selection and Salary Committee Report on Executive Compensation" and "Corporate Performance Graph" is not incorporated by reference and shall not be deemed "filed" as part of this report. Item 12. Security Ownership of Certain Beneficial Owners and Management Security ownership of certain beneficial owners and management is set forth on pages 3 and 4 of the Proxy Statement for the Annual Meeting of Shareholders to be held on October 20, 2000 under the caption "Principal Shareholders, Directors and Executive Officers" and incorporated into this report by reference. There are no arrangements known to the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant. Item 13. Certain Relationships and Related Transactions None. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) The following Consolidated Financial Statements of Twin Disc, Incorporated and Subsidiaries set forth on pages 23 through 41 of the Annual Report to Shareholders for the year ended June 30, 2000 are incorporated by reference into this report in Part II: Consolidated Balance Sheets, June 30, 2000 and 1999

9 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (Continued) Consolidated Statements of Operations for the years ended June 30, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended June 30, 2000, 1999 and 1998 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the years ended June 30, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Report of Independent Accountants The supplementary data regarding quarterly results of operations under the caption "Sales and Earnings by Quarter" on page 1 of the Annual Report to Shareholders for the year ended June 30, 2000 is incorporated by reference into this Form in Part II. Individual financial statements of the 50% or less owned entities accounted for by the equity method are not required because the 50% or less owned entities do not constitute significant subsidiaries. (a)(2) Consolidated Financial Statement Schedule (numbered in accordance with Regulation S-X) for the 3 years ended June 30, 2000: Page - - Report of Independent Accountants 13 Schedule II-Valuation and Qualifying Accounts 14 Schedules, other than those listed, are omitted for the reason that they are inapplicable, are not required, or the information required is shown in the financial statements or the related notes. The Report of the Independent Accountants of the Registrant with respect to the above-listed consolidated financial statement schedule appears on page 13 of this Form. (a)(3) List of Exhibits: (numbered in accordance with Item 601 of Regulation S-K) 2 Not applicable 3a) Articles of Incorporation, as restated October 21, 1988 (Incorporated by reference to Exhibit 3(a) of the Company's Form 10-K for the year ended June 30, 1989). b) Corporate Bylaws, amended through June 22, 1998 (Incorporated by reference to Exhibit 3(b) of the Company's Form 10-K for the year ended June 30, 1998). 4 Instruments defining the rights of security holders, including indentures a) Form of Rights Agreement dated as of April 17, 1998 by and between the Company and the Firstar Trust Company, as Rights Agent, with Form of Rights Certificate (Incorporated by reference to Exhibits 1 and 2 of the Company's Form 8-A dated May 4, 1998).

10 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (Continued) b) Announcement of Shareholder Rights Plan per news release dated April 17, 1998 (Incorporated by reference to Exhibit 99, of the Company's Form 10-Q dated May 4, 1998 ). 9 Not applicable 10 Material Contracts a) * The 1988 Incentive Stock Option Plan (Incorporated by reference to Exhibit B of the Proxy Statement for the Annual Meeting of Shareholders held on October 21, 1988). b) * The 1988 Non-Qualified Stock Option Plan for Officers, Key Employees and Directors (Incorporated by reference to Exhibit C of the Proxy Statement for the Annual Meeting of Shareholders held on October 21,1988). c) * Amendment to 1988 Incentive Stock Option Plan of Twin Disc, Incorporated (Incorporated by reference to Exhibit A of the Proxy Statement for the Annual Meeting of Shareholders held on October 15, 1993). d) * Amendment to 1988 Non-Qualified Incentive Stock Option Plan for Officers, Key Employees and Directors of Twin Disc, Incorporated (Incorporated by reference to Exhibit B of the Proxy Statement for the Annual Meeting of Shareholders held on October 15, 1993). e) * Form of Severance Agreement for Senior Officers and form of Severance Agreement for Other Officers (Incorporated by reference to Exhibit 10(c) and (d), respectively, of the Company's Form 10-K for the year ended June 30, 1989). f) *Supplemental Retirement Plan (Incorporated by reference to Exhibit 10(f) of the Company's Form 10-K for the year ended June 30, 1998). g) * Director Tenure and Retirement Policy (Incorporated by reference to Exhibit 10(f) of the Company's Form 10-K for the year ended June 30, 1993). h) * Form of Twin Disc, Incorporated Corporate Short Term Incentive Plan (Incorporated by reference to Exhibit 10(g) of the Company's Form 10-K for the year ended June 30, 1993). i) * The 1998 Incentive Compensation Plan (Incorporated by reference to Exhibit A of the Proxy Statement for the Annual Meeting of Shareholders held on October 16, 1998). j) * The 1998 Stock Option Plan for Non-Employee Directors (Incorporated by reference to Exhibit B of the Proxy Statement for the Annual Meeting of Shareholders held on October 16, 1998). * Denotes management contract or compensatory plan or arrangement.

11 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (Continued) 11 Not applicable 12 Not applicable 13 Annual Report of the Registrant for the year ended June 30, 2000 is separately filed as Exhibit 13 to this Report (except for those portions of such Annual Report separately incorporated by reference into this Report, such Annual Report is furnished for the information of the Securities and Exchange Commission and shall not be deemed "filed" as part of this Form). 18 Not applicable 21 Subsidiaries of the Registrant 22 Not applicable 23 Consent of Independent Accountants 24 Power of Attorney 27 Financial Data Schedule for the year ended June 30, 2000 is separately filed as Exhibit 27 to this report. (This schedule is furnished for the information of the Securities and Exchange Commission and shall not be deemed "filed" for purposes of Section 11 of the Securities Act or Section 18 of the Exchange Act.) 28 Not applicable Copies of exhibits filed as a part of this Annual Report on Form 10-K may be obtained by shareholders of record upon written request directed to the Secretary, Twin Disc, Incorporated, 1328 Racine Street, Racine, Wisconsin 53403.

12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TWIN DISC, INCORPORATED By FRED H. TIMM - - - - - - - - - - - - - - - - - Fred H. Timm, Corporate Controller and Secretary (Chief Accounting Officer) September 22, 2000 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 registrant and in the capacities and on the dates indicated. ( By MICHAEL E. BATTEN - - - - - - - - - - - - - - - - - - - ( Michael E. Batten, Chairman, ( Chief Executive Officer and Director ( ( ( September 22, 2000 ( By MICHAEL H. JOYCE - - - - - - - - - - - - - - - - - - - ( Michael H. Joyce, President, ( Chief Operating Officer and Director ( ( ( ( By JAMES O. PARRISH - - - - - - - - - - - - - - - - - - - ( James O. Parrish, Vice President- ( Finance, Treasurer and Director ( (Chief Financial Officer) ( Paul J. Powers, Director ( Richard T. Savage, Director September 22, 2000 ( David L. Swift, Director ( John A. Mellowes, Director ( George E. Wardeberg, Director ( David R. Zimmer, Director ( David B. Rayburn, Director ( ( ( By JAMES O. PARRISH - - - - - - - - - - - - - - - - - - - ( James O. Parrish, Attorney in Fact

13 REPORT OF INDEPENDENT ACCOUNTANTS (See Item 14) Consolidated Financial Statement Schedule of Twin Disc, Incorporated and Subsidiaries To the Board of Directors Twin Disc, Incorporated Racine, Wisconsin Our audits of the consolidated financial statements referred to in our report dated July 21, 2000 appearing on page 41 of the 2000 Annual Report to Shareholders of Twin Disc, Incorporated and Subsidiaries (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial schedule listed in the index on pages 8 and 9 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Milwaukee, Wisconsin July 21, 2000

14 TWIN DISC, INCORPORATED AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS for the years ended June 30, 2000, 1999 and 1998 (In thousands) Balance at Additions Charged Balance at Beginning of To Costs and end of Description Period Expenses Deductions Period - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2000: Allowance for losses on accounts receivable $ 534 $ 371 $ 201 $ 704 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Reserve for inventory obsolescence 1,161 1,212 1,002 1,371 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1999: Allowance for losses on accounts receivable $ 647 $ 170 $ 283 $ 534 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Reserve for inventory obsolescence 1,125 779 743 1,161 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1998: Allowance for losses on accounts receivable $ 538 $ 355 $ 246 $ 647 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Reserve for inventory obsolescence 1,013 893 781 1,125 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Accounts receivable written-off and inventory disposed of during the year and other adjustments.

15 EXHIBIT INDEX Exhibit Description Page - - - - - - - - - - - - - 3a) Articles of Incorporation, as restated October 21, 1988 (Incorporated by reference to Exhibit 3(a) of the Company's Form 10-K for the year ended June 30, 1989). - b) Corporate Bylaws, as amended through June 22, 1998 (Incorporated by reference to Exhibit 3(b) of the Company's Form 10-K for the year ended June 30, 1998). - 4a) Form of Rights Agreement dated as of April 17, 1998 by and between the Company and the Firstar Trust Company, as Rights Agent, with Form of Rights Certificate (Incorporated by reference to Exhibits 1 and 2 of the Company's Form 8-A dated May 4, 1998). - b) Announcement of Shareholder Rights Plan per news release dated April 17, 1998 (Incorporated by reference to Exhibit 6(a), of the Company's Form 10-Q dated May 4, 1998). - Material Contracts 10a) The 1988 Incentive Stock Option Plan (Incorporated by reference to Exhibit B of the Proxy Statement for the Annual Meeting of Shareholders held on October 21, 1988). - b) The 1988 Non-Qualified Stock Option Plan for Officers, Key Employees and Directors (Incorporated by reference to Exhibit C of the Proxy Statement for the Annual Meeting of Shareholders held on October 21,1988). - c) Amendment to 1988 Incentive Stock Option Plan of Twin Disc, Incorporated (Incorporated by reference to Exhibit A of the Proxy Statement for the Annual Meeting of Shareholders held on October 15, 1993). - d) Amendment to 1988 Non-Qualified Incentive Stock Option Plan for Officers, Key Employees and Directors of Twin Disc, Incorporated (Incorporated by reference to Exhibit B of the Proxy Statement for the Annual Meeting of Shareholders held on October 15, 1993). - e) Form of Severance Agreement for Senior Officers and form of Severance Agreement for Other Officers (Incorporated by reference to Exhibit 10(c) and (d), respectively, of the Company's Form 10-K for the year ended June 30, 1989). - f) Supplemental Retirement Plan (Incorporated by reference to Exhibit 10(f) of the Company's Form 10-K for the year ended June 30, 1998). - g) Director Tenure and Retirement Policy (Incorporated by reference to Exhibit 10(f) of the Company's Form 10-K for the year ended June 30, 1993). - h) Form of Twin Disc, Incorporated Corporate Short Term Incentive Plan (Incorporated by reference to Exhibit 10(g) of the Company's Form 10-K for the year ended June 30, 1993). -

16 EXHIBIT INDEX (Continued) Exhibit Description Page - - - - - - - - - - - - - 10i) The 1998 Incentive Compensation Plan (Incorporated by reference to Exhibit A of the Proxy Statement for the Annual Meeting of Shareholders held on October 16, 1998). - j) The 1998 Stock Option Plan for Non-Employee Directors (Incorporated by reference to Exhibit B of the Proxy Statement for the Annual Meeting of Shareholders held on October 16, 1998). - 13 Annual Report of the Registrant for the year ended June 30, 2000 17 21 Subsidiaries of the Registrant 45 23 Consent of Independent Accountants 46 24 Power of Attorney 47 27 Financial Data Schedule for the year ended June 30, 2000 48

17 EXHIBIT 13 - - - - - FINANCIAL HIGHLIGHTS 2000 1999 1998 Net Sales $177,987 $168,142 $202,643 Net Earnings (Loss) 3,773 (1,018) 9,363 Basic Earnings (Loss) Per Share 1.34 (.36) 3.30 Diluted Earnings (Loss) Per Share 1.34 (.36) 3.24 Dividends Per Share .70 .805 .76 Average Shares Outstanding For The Year 2,820,534 2,834,909 2,833,663 Diluted Shares Outstanding For The Year 2,820,730 2,843,877 2,886,209 Sales and Earnings by Quarter 2000 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year Net Sales $35,277 $44,342 $49,467 $48,901 $177,987 Gross Profit 6,856 9,952 11,590 12,960 41,358 Net Earnings (897) 693 1,726 2,251 3,773 Basic Earnings Per Share (.32) .25 .61 .80 1.34 Diluted Earnings Per Share (.32) .25 .61 .80 1.34 Dividends Per Share .175 .175 .175 .175 .70 Stock Price Range: High 20 3/8 16 5/8 18 5/16 17 9/16 20 3/8 Low 16 1/2 11 11 7/8 15 7/16 11 Sales and Earnings by Quarter 1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year Net Sales $40,625 $40,108 $41,139 $46,270 $168,142 Gross Profit 9,220 9,275 7,316 10,270 36,081 Net Earnings (Loss) 588 (291) (1,782) 467 (1,018) Basic Earnings (Loss) Per Share .21 (.10) (.63) .16 (.36) Diluted Earnings (Loss) Per Share .21 (.10) (.63) .16 (.36) Dividends Per Share .21 .21 .21 .175 .805 Stock Price Range: High 37 3/4 24 1/4 22 3/16 20 3/16 37 3/4 Low 23 3/8 20 1/4 19 18 9/16 18 9/16 Based on average shares outstanding for the period. In thousands of dollars except per share and stock price range statistics.

18 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net Sales, New Orders and Backlog - - - - - - - - - - - - - - - - - - Revenues increased in fiscal 2000 as our distribution operations and domestic manufacturing rebounded from the previous year's downturn. Order rates were weak throughout fiscal 1999 and the backlog of orders scheduled for shipment during the next six months (six-month backlog) dropped 26 percent to $40 million by year-end. Improvement in demand began early in fiscal 2000 and resulted in the six-month backlog rising to $55 million in March 2000 before easing to end the year at $53 million - a 32 percent increase from the previous year. Net sales of $168 million in fiscal 1999 were down 17 percent from fiscal 1998 but rose to $178 million, an increase of six percent, in fiscal 2000. The 1999 sales decline resulted from weak demand in many markets, customer inventory reductions adversely affecting replacement part sales, and the absence of the truck transmission contract completed in fiscal 1998. Most significantly, lower demand from the commercial marine market led to a 34 percent drop in domestic manufacturing sales. Other important factors in the sales decline were low oil prices; prices for commodities such as lumber and food, which were adversely affected by the Asian economic crisis; and reduced capital spending in the agricultural and construction equipment markets. Sales of lower-horsepower marine transmissions for pleasure craft also were down, causing a modest decline in sales from our Belgian plant. On the positive side, the acquisition of an Italian manufacturing company and purchase of a domestic product line, completed early in the second half of the fiscal year, provided a sales boost and slight incremental earnings in the last five months of fiscal 1999. Both acquisitions provided products that strengthen our global market position in industrial products. Technodrive S.p.A adds to the lower-horsepower end of our marine transmission line and provides several complementary industrial products. We also broadened our industrial product offerings with the mechanical power take-off product line acquired from Rockford Powertrain, Inc. While order rates improved early in fiscal year 2000, year-to-year improvements in shipments began in the second fiscal quarter. The most significant components of the improvement were registered within our domestic manufacturing operation. Shipments of power take-offs, attributable to the product line purchased in the prior year; higher-horsepower marine transmissions used in commercial boats; power-shift transmissions for construction applications; and aftermarket parts sales all contributed to the increase. Shipments from our Belgian plant of lower-horsepower marine transmissions also increased slightly as demand for their use in pleasure craft applications remained steady, and shipments from the recently acquired Italian manufacturing subsidiary contributed for the full year. Sales at our wholly owned distribution companies varied by global region, but generally rebounded in fiscal 2000 after the modest decline in 1999. Domestic declines in 1999 were related to low oil and commodity prices, which recovered and provided some improvement during the recently completed year. Although sales from our wholly owned European distributors were affected by changes we made in market representation, demand from the markets served trended upward in both years, and shipments were up materially in fiscal 2000. Sales in the Pacific Rim generally mirrored the economies in which they operate and were down in fiscal 1999 but began to improve in the year just completed.

19 The U.S. dollar strengthened against most currencies in each of the last two fiscal years, particularly Asian currencies in fiscal 1999 and the Euro in fiscal 2000. As a result, pricing pressure increased, but the effects were partially offset by sales to U.S. customers from our Belgian operation. Although the general effect has been a reduction of reported dollar sales, the impact has not been significant. Price increases, implemented selectively in each year, generated revenues about equal to the rate of inflation. At the end of fiscal 1999, the backlog of orders scheduled for shipment during the next six months was $40 million. As the new fiscal year began, order rates improved in both commercial marine and certain industrial markets. There were further improvements as the year progressed and the six-month backlog rose to $53 million at year-end, an increase of 32 percent for the year. Although somewhat higher at the end of the third fiscal quarter, backlog declined due to normal seasonal influences in the fourth quarter. Margins, Costs and Expenses Manufacturing method and process improvements, cellular layout of machine tools, and cost control have all played critical roles in efforts to improve margins. But, as fixed costs are a large component of manufacturing expense, production volume is an important element in gross margin fluctuations. In fiscal 1999, the gross margin was more than three percentage points below that of fiscal 1998, primarily because of the reduced domestic sales volume, lower productivity, and unusual separation costs in the second and third quarters. During the 1999 second fiscal quarter, there was a domestic salaried staff reduction, and in the following period, a similar program was implemented overseas along with a voluntary separation program for domestic hourly associates. In Belgium, the workweek was shortened utilizing a government-supported layoff program. In addition to the one-time expenses, an adverse productivity impact, primarily in the third quarter, was associated with these actions. The gross margin increased by almost two percentage points in fiscal 2000 with all manufacturing operations showing improvement. Domestically, higher production volume, a favorable product mix, and strict control of general manufacturing costs were the most significant factors, while productivity improvements, expansion of the workweek, and the favorable impact of sales denominated in the relatively strong dollar boosted margins overseas. Marketing, engineering, and administrative (ME&A) expense declined four percent in fiscal 1999, but increased sharply as a percent of the reduced sales volume. Included in the expenses for the year were severance costs associated with the second- and third-quarter reductions in domestic and Belgian salaried staff. The total pre-tax impact of approximately $350,000 was recovered within one year.

20 In fiscal 2000, ME&A expense dropped a further four percent as a result of previous-year staff reductions, continued attention to cost control, and closure of our South African distribution operation. In March 1999, we sold a portion of the investment in our Japanese affiliate, Niigata Converter Company (NICO), which resulted in a pre-tax gain of $1.4 million (discussed further in Footnote D to the consolidated financial statements), and reduced our ownership interest in NICO from 25.0 percent to 19.5 percent. Our share of NICO losses for fiscal 1999 versus modest earnings in fiscal 1998 was the cause of the year-to-year decline in the earnings of affiliates. Those earnings rebounded in fiscal 2000 with a strong performance from our U.S. distribution affiliate. At fiscal 1999 year-end, we announced the closure of our South African distribution subsidiary and recorded a provision to cover anticipated losses from that action. Interest, Taxes and Net Earnings Short-term borrowing increased in fiscal 1999 as significant additional debt was incurred to finance acquisitions, and interest expense increased by almost 40 percent. During the recently completed year, debt was reduced slightly, but a higher average outstanding balance and higher interest rates caused interest expense to increase. The effective income tax rate in fiscal 1998 was above normal due to relatively higher foreign earnings, generally taxed at a higher rate. The substantial tax provision on almost-breakeven pre-tax earnings in fiscal 1999 was caused by: lower tax rates on losses domestically, offset by higher rates on income overseas; and by the lack of a recordable tax benefit on the provision for loss on the closure of our South African distribution subsidiary. In fiscal 2000, limitations on foreign tax credit utilization and a continued high proportion of foreign earnings resulted in a sharp increase in the effective tax rate. Statutory rates generally have remained unchanged. Liquidity and Capital Resources The net cash provided by operating activities in fiscal 1999 was $9 million, up $2 million from the previous year. Despite operating losses for the year, reductions in both accounts receivable and inventory generated solid positive cash flows. In fiscal 2000, cash provided by operations dipped to $7 million. Positive cash flows from earnings, depreciation, and working capital reductions were partially offset by increased contributions to Company pension funds. Expenditures for capital equipment exceeded depreciation by about $2 million in fiscal 1998 as experience helped identify the equipment needed to further improve cell performance. Due to the downturn and a desire to conserve cash, fiscal 1999 and 2000 capital expenditures were reduced from plan, and in the most recently completed year, were well below depreciation. As conditions improve, we expect the level of capital spending will rise to provide for more efficient machinery and to allow further refinement of individual manufacturing cells.

21 Working capital and the current ratio dropped significantly in fiscal 1999 due to the large increase in short-term debt incurred to finance acquisitions. Early in fiscal 2000, the short-term borrowings were replaced with a term revolver. The current ratio of 1.8 at June 30, 1999, rose to 2.2 at the end of fiscal 2000. The book value of the Company, and thus its reported capital structure, changed significantly at both fiscal 1999 and 2000 year-ends. It was reduced by a non-cash charge to equity of $11.1 million at June 30, 1999. The charge was caused primarily by using a more conservative mortality table to estimate pension liabilities and generally reflects the amount by which those liabilities exceed plan assets. In fiscal 2000, principally as a result of good market return on plan assets, the charge was reversed, resulting in a similar increase in equity. In accordance with applicable accounting standards, the after-tax effects of the changes were charged directly to equity and shown in comprehensive income but did not affect reported primary earnings. The Company believes the capital resources available in the form of existing cash, lines of credit (see Footnote F to the consolidated financial statements), and funds provided by operations will be adequate to meet anticipated capital expenditures and other foreseeable business requirements in the future. Other Matters Environmental Matters The Company is involved in various stages of investigation relative to hazardous waste sites on the United States EPA National Priorities List. It is not possible at this time to determine the ultimate outcome of those matters; but, as discussed further in Footnote N to the consolidated financial statements, they are not expected to affect materially the Company's operations, financial position, or cash flows. Note on Forward-Looking Statements Information in this report and in other Company communications that are not historical facts are forward-looking statements, which are based on management's current expectations. These statements involve risks and uncertainties that could cause actual results to differ materially from what appears here. Forward-looking statements include the Company's description of plans and objectives for future operations and assumptions behind those plans. The words "anticipates," "believes," "intends," "estimates," and "expects," or similar anticipatory expressions, usually identify forward-looking statements. In addition, goals established by Twin Disc, Incorporated, should not be viewed as guarantees or promises of future performance. There can be no assurance the Company will be successful in achieving its goals. In addition to the assumptions and information referred to specifically in the forward-looking statements, other factors could cause actual results to be materially different from what is presented here.

22 TWIN DISC, INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 and 1999 (Dollars in thousands) 2000 1999 ---- ---- Current assets: Cash and cash equivalents $ 5,651 $ 4,136 Trade accounts receivable, net 28,828 27,201 Inventories, net 50,190 54,500 Deferred income taxes - 6,004 Other 5,333 5,906 ------- ------- Total current assets 90,002 97,747 Property, plant and equipment, net 34,303 38,935 Investments in affiliates 6,968 6,663 Goodwill, net 14,401 15,235 Deferred income taxes 4,416 4,349 Intangible pension asset - 3,385 Prepaid pension asset 14,335 - Other assets 9,765 10,586 ------- ------- $174,190 $176,900 ======= ======= LIABILITIES and SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 4,571 $ 20,158 Current maturities on long-term debt 2,857 2,857 Accounts payable 11,571 10,724 Deferred income taxes 1,157 - Accrued liabilities 20,752 21,022 ------- ------- Total current liabilities 40,908 54,761 Long-term debt 31,254 17,112 Accrued retirement benefits 23,795 37,567 ------- ------- 95,957 109,440 Shareholders' equity: Common shares authorized: 15,000,000; issued: 3,643,630; no par value 11,653 11,653 Retained earnings 83,228 81,430 Accumulated other comprehensive income (loss) 799 (8,516) ------- ------- 95,680 84,567 Less treasury stock, at cost 17,447 17,107 ------- ------- Total shareholders' equity 78,233 67,460 ------- ------- $174,190 $176,900 ======= ======= The notes to consolidated financial statements are an integral part of these statements.

23 TWIN DISC, INCORPORATED and SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended June 30, 2000, 1999 and 1998 (In thousands, except per share data) 2000 1999 1998 ---- ---- ---- Net sales $177,987 $168,142 $202,643 Cost of goods sold 136,629 132,061 152,515 ------- ------- ------- Gross profit 41,358 36,081 50,128 Marketing, engineering and administrative expenses 31,476 32,755 34,092 ------- ------- ------- Earnings from operations 9,882 3,326 16,036 Other income (expense): Interest income 244 237 550 Interest expense (2,979) (2,070) (1,505) Equity in net earnings (loss) of affiliates 906 (945) 651 Gain on partial sale of affiliate - 1,355 - Loss on closure of subsidiary - (1,140) - Other, net 14 (749) 313 ------- ------- ------- (1,815) (3,312) 9 ------- ------- ------- Earnings before income taxes 8,067 14 16,045 Income taxes 4,294 1,032 6,682 ------- ------- ------- Net earnings (loss) $ 3,773 $ (1,018) $ 9,363 ======= ======= ======= Earnings (loss) per share data: Basic earnings (loss) per share $ 1.34 $ (.36) $ 3.30 Diluted earnings (loss) per share 1.34 (.36) 3.24 Shares outstanding data: Average shares outstanding 2,821 2,835 2,834 Dilutive stock options - 9 52 ------- ------- ------- Diluted shares outstanding 2,821 2,844 2,886 ======= ======= ======= The notes to consolidated financial statements are an integral part of these statements.

24 TWIN DISC, INCORPORATED and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended June 30, 2000, 1999 and 1998 (In thousands) 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net earnings (loss) $ 3,773 $ (1,018) $ 9,363 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 6,980 6,454 5,607 (Loss) gain on sale of plant assets (3) 38 (402) Gain on partial sale of affiliate - (1,355) - Loss on closure of subsidiary - 1,140 - Equity in net (earnings) loss of affiliates (906) 945 (651) Provision for deferred income taxes (284) - 2,873 Dividends received from affiliate 600 625 495 Changes in operating assets and liabilities: Trade accounts receivable, net (2,922) 3,898 3,361 Inventories, net 3,211 3,468 (5,673) Other assets (770) (1,757) (7,842) Accounts payable 2,402 (1,360) (2,695) Accrued liabilities 168 (759) 2,777 Accrued/prepaid retirement benefits (5,364) (1,361) (244) ------- ------- ------- Net cash provided by operating activities 6,885 8,958 6,969 ------- ------- ------- Cash flows from investing activities: Proceeds from sale of plant assets 92 24 574 Acquisitions of plant assets (2,134) (6,439) (7,154) Acquisitions of businesses - (16,785) (1,021) Payment for license agreement - - (1,515) ------- ------- ------- Net cash used by investing activities (2,042) (23,200) (9,116) ------- ------- ------- Cash flows from financing activities: Increases (decreases) in notes payable, net (15,000) 15,000 112 Proceeds from long-term debt 18,000 - - Payments of long-term debt (3,857) - - Acquisition of treasury stock (343) - (1,314) Proceeds from exercise of stock options 2 38 1,904 Dividends paid (1,974) (2,282) (2,160) ------- ------- ------- Net cash provided (used) by financing activities (3,172) 12,756 (1,458) ------- ------- ------- Effect of exchange rate changes on cash (156) 535 (291) ------- ------- ------- Net change in cash and cash equivalents 1,515 (951) (3,896) Cash and cash equivalents: Beginning of year 4,136 5,087 8,983 ------- ------- ------- End of year $ 5,651 $ 4,136 $ 5,087 ======= ======= ======= Supplemental cash flow information: Cash paid during the year for: Interest $3,008 $ 2,037 $ 1,505 Income taxes 4,401 127 4,698 The notes to consolidated financial statements are an integral part of these statements.

25 TWIN DISC, INCORPORATED and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME for the years ended June 30, 2000, 1999 and 1998 (In thousands) 2000 1999 1998 ---- ---- ---- Common stock Balance, June 30 $ 11,653 $ 11,653 $ 11,653 ------- ------- ------- Retained earnings Balance, July 1 81,430 84,738 77,424 Net earnings (loss) 3,773 (1,018) 9,363 Cash dividends (1,974) (2,282) (2,160) Stock options exercised (1) (8) 111 ------- ------- ------- Balance, June 30 83,228 81,430 84,738 ------- ------- ------- Accumulated other comprehensive income (loss) Balance, July 1 (8,516) 2,757 2,352 ------- ------- ------- Foreign currency translation adjustment Balance, July 1 3,288 3,418 6,060 Current adjustment (2,489) (130) (2,642) ------- ------- ------- Balance, June 30 799 3,288 3,418 ------- ------- ------- Minimum pension liability adjustment, net Balance, July 1 (11,804) (661) (3,708) Current adjustment, net of related income taxes ($(7,547)in 2000, $7,125 in 1999 and $(1,948) in 1998) 11,804 (11,143) 3,047 ------- ------- ------- Balance, June 30 - (11,804) (661) ------- ------- ------- Accumulated other comprehensive income (loss) Balance, June 30 799 (8,516) 2,757 ------- ------- ------- Treasury stock, at cost Balance, July 1 (17,107) (17,153) (17,632) Shares acquired (343) - (1,314) Stock options exercised 3 46 1,793 ------- ------- ------- Balance, June 30 (17,447) (17,107) (17,153) ------- ------- ------- Shareholders' equity balance, June 30 $ 78,233 $ 67,460 $ 81,995 ======= ======= ======= Comprehensive income (loss) Net earnings (loss) $ 3,773 $ (1,018) $ 9,363 Other comprehensive income (loss) Foreign currency translation adjustment (2,489) (130) (2,642) Minimum pension liability adjustment 11,804 (11,143) 3,047 ------- ------- ------- Other comprehensive income (loss) 9,315 (11,273) 405 ------- ------- ------- Comprehensive income (loss) $ 13,088 $(12,291) $ 9,768 ======= ======= ======= The notes to consolidated financial statements are an integral part of these statements.

26 TWIN DISC, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the significant accounting policies followed in the preparation of these financial statements: Consolidation Principles--The consolidated financial statements include the accounts of Twin Disc, Incorporated and its subsidiaries, all of which are wholly owned. Certain foreign subsidiaries are included based on fiscal years ending May 31, to facilitate prompt reporting of consolidated accounts. All significant intercompany transactions have been eliminated. Translation of Foreign Currencies--Substantially all foreign currency balance sheet accounts are translated into United States dollars at the rates of exchange prevailing at year-end. Revenues and expenses are translated at average rates of exchange in effect during the year. Foreign currency translation adjustments are recorded as a component of shareholders' equity. Gains and losses from foreign currency transactions are included in earnings. Included in other income (expense) of the consolidated statement of operations are foreign currency transaction losses of $144,000, $682,000 and $343,000 in 2000, 1999 and 1998, respectively. Cash Equivalents--The Company considers all highly liquid marketable securities purchased with a maturity date of three months or less to be cash equivalents. Receivables--Trade accounts receivable are stated net of an allowance for doubtful accounts of $704,000 and $534,000 at June 30, 2000 and 1999, respectively. Fair Value of Financial Instruments--The carrying amount reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, notes payable and current maturities on long- term debt approximate fair value because of the immediate short-term maturity of these financial instruments. The carrying amounts reported for long-term debt approximates fair value because the underlying instruments bear interest at, or near, a current market rate. Derivative Financial Instruments--Derivative financial instruments (primarily forward foreign exchange contracts) may be utilized by the Company to hedge foreign exchange rate risk. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes. For financial reporting purposes, forward foreign exchange contracts used to hedge the currency fluctuations on transactions denominated in foreign currencies are marked-to-market and the resulting gains and losses, together with the offsetting losses and gains on hedged transactions, are recorded in the "Other income (expense)" caption in the statement of operations. At June 30, 2000 and 1999, the Company had outstanding forward foreign exchange contracts to purchase $4,500,000 and $2,000,000, respectively, of Belgian francs with a weighted average maturity of 40 days and 33 days, respectively. Inventories--Inventories are valued at the lower of cost or market. Cost has been determined by the last-in, first-out (LIFO) method for parent company inventories, and by the first-in, first-out (FIFO) method for all other inventories. Property, Plant and Equipment and Depreciation--Assets are stated at cost. Expenditures for maintenance, repairs and minor renewals are charged against earnings as incurred. Expenditures for major renewals and betterments are capitalized and amortized by depreciation charges. Depreciation is provided on the straight-line method over the estimated useful lives of the assets for financial reporting and on accelerated methods for income tax purposes. The lives assigned to buildings and related improvements range from 10 to 40 years, and the lives assigned to machinery and equipment range from 5 to 15 years. Upon disposal of property, plant and equipment, the cost of the asset and the related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in earnings. Fully depreciated assets are not removed from the accounts until physically disposed.

27 The Company reviews the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. Investments in Affiliates--The majority of the Company's investments in 20% to 50%-owned affiliates are accounted for using the equity method. Investments in less than 20%-owned affiliates are accounted for using the cost method. Revenue Recognition--Revenues are recognized when products are shipped and title has transferred to the customer. Goodwill--Goodwill consists of costs in excess of net assets of businesses acquired. Goodwill is amortized using the straight-line method over its estimated beneficial lives, not to exceed 40 years. Subsequent to an acquisition, the Company continually evaluates whether later events and circumstances have occurred that indicate whether the goodwill should be evaluated for possible impairment. Goodwill at June 30, 2000 and 1999 of $14,401,000 and $15,235,000, respectively, are net of accumulated amortization of $1,542,000 and $839,000, respectively. Income Taxes--The Company recognizes deferred tax liabilities and assets for the expected future income tax consequences of events that have been recognized in the Company's financial statements. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. The Company does not provide for taxes which would be payable if undistributed earnings of its foreign subsidiaries or its foreign affiliate were remitted because the Company either considers these earnings to be invested for an indefinite period or anticipates that if such earnings were distributed, the U.S. income taxes payable would be substantially offset by foreign tax credits. Management Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ from those estimates. Recently Issued Accounting Standards-During 1998, the Financial Accounting Standards Board (FASB) issued FAS 133 "Accounting for Derivative Instruments and Hedging Activities" which establishes standards for accounting for derivatives and hedging activities. In July 1999, the FASB issued FAS 137, "Deferral of the Effective Date of FAS 133", which delays the effective date of FAS 133 one year. As a result, FAS 133 will be effective for the Company's 2001 fiscal year. The adoption of FAS 133 is not anticipated to have a significant impact on the Company's earnings or financial position. Reclassification--Certain reclassifications have been made to the financial statements of prior years to conform to the presentation for 2000.

28 B. INVENTORIES The major classes of inventories at June 30 were as follows (in thousands): 2000 1999 ---- ---- Finished parts $40,313 $42,405 Work-in-process 5,880 6,385 Raw materials 3,997 5,710 ------ ------ $50,190 $54,500 ====== ====== Inventories stated on a LIFO basis represent approximately 35% of total inventories at June 30, 2000 and 1999. The approximate current cost of the LIFO inventories exceeded the LIFO cost by $20,549,000 and $17,936,000 at June 30, 2000 and 1999, respectively. C. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at June 30 were as follows (in thousands): 2000 1999 ---- ---- Land $ 1,406 $ 1,409 Buildings 22,582 22,698 Machinery and equipment 92,715 95,579 ------ ------ 116,703 119,686 Less accumulated depreciation 82,400 80,751 ------ ------ $34,303 $38,935 ====== ====== D. INVESTMENTS IN AFFILIATES The Company's investments in affiliates consists of a 25% interest in a domestic distributor of Twin Disc products and an investment in Negate Converter Company, LTD., Japan ("Negate"), a manufacturer of power transmission equipment. In March of 1999, the Company sold a portion of its investment in Negate in exchange for a $1.7 million note receivable due in various annual amounts commencing December 31, 2002 through December 31, 2008. The sale was a non-cash transaction for purposes of the consolidated statement of cash flows. As a result, a pre-tax gain of $1,355,000 was recognized in 1999. Prior to the sale the Company accounted for its 25% interest in Negate using the equity method. The Company recognized its share of Negate's loss from April 1, 1998 through the date of sale of $1.5 million. After the sale, the Company accounted for its 19.5% interest using the cost method. Combined condensed financial data for investments in affiliates accounted for under the equity method of accounting are summarized below (in thousands). The balance sheet information for 2000 and 1999 includes the domestic distributor balances only. The statement of operations information for 2000 includes the results of operation of the domestic distributor from June 1, 1999 through May 31, 2000. The statement of operations information for 1999 includes the domestic distributor results from June 1, 1998 through May 31, 1999 and Negate results from April 1, 1998 through the date of sale; the 1998 information includes the domestic distributor results from June 1, 1997 through May 31, 1998 and Negate results from April 1, 1997 through March 31, 1998.

29 2000 1999 ---- ---- Current assets $ 10,145 $ 8,734 Other assets 5,452 5,463 ------- ------- $ 15,597 $ 14,197 ======= ======= Current liabilities $ 6,681 $ 6,530 Other liabilities 235 210 Shareholders' equity 8,681 7,457 ------- ------- $ 15,597 $ 14,197 ======= ======= 2000 1999 1998 ---- ---- ---- Net sales $ 23,866 $116,115 $152,558 Gross profit 9,813 13,008 20,897 Net earnings (loss) 3,624 (3,780) 2,606 E. ACCRUED LIABILITIES Accrued liabilities at June 30 were as follows (in thousands): 2000 1999 ---- ---- Salaries and wages $ 3,989 $ 4,522 Retirement benefits 4,024 3,362 Other 12,739 13,138 ------- ------- $ 20,752 $ 21,022 ======= ======= F. DEBT Notes payable consists of amounts borrowed under unsecured line of credit agreements. Unused lines of credit total $19,488,000 at June 30, 2000. These lines of credit are available predominantly at the LIBOR interest rate plus 1.25% and may be withdrawn at the option of the banks. The weighted average interest rate of the lines outstanding at June 30, 2000 and 1999 was 5.26% and 5.88%, respectively. Included in long-term debt is $17,142,000 and $20,000,000 on 7.37% ten-year unsecured notes, net of $51,000 and 60,000 unamortized debt issuance costs at June 30, 2000 and 1999, respectively. These notes contain certain covenants, including the maintenance of a current ratio of not less than 1.5. Principal payments of $2,857,000 are due in the years 2000 through 2005, with the remaining balance due on June 1, 2006. During 2000 the Company entered into a $20,000,000 revolving loan agreement. This agreement contains certain covenants, including restrictions on investments, acquisitions and indebtedness. The outstanding balance of $17,000,000 at June 30, 2000 is classified as a long-term liability as repayment is not expected within the next year. Notes under this agreement bear interest on a schedule determined by the Company's leverage ratio. The rate was 7.9% at June 30, 2000. Also included in long-term debt is $20,000 and $29,000 of debt related to a foreign subsidiary at June 30, 2000 and 1999, respectively. G. LEASE COMMITMENTS Approximate future minimum rental commitments under noncancellable operating leases are as follows (in thousands): Fiscal Year ----------- 2001 $2,628 2002 2,103 2003 1,429 2004 651 2005 510 Thereafter 1,246 ----- $8,567 ===== Total rent expense for operating leases approximated $3,023,000, $2,941,000 and $2,571,000 in 2000, 1999 and 1998, respectively.

30 H. SHAREHOLDERS' EQUITY At June 30, 2000 and 1999, treasury stock consisted of 833,740 and 808,446 shares of common stock, respectively. The Company issued 150 and 2,200 shares of treasury stock in 2000 and 1999, respectively, to fulfill its obligations under the stock option plans. The difference between the cost of treasury shares issued and the option price is recorded in retained earnings. The Company acquired 25,444 shares of treasury stock in 2000. Cash dividends per share were $.70 in 2000, $.805 in 1999 and $.76 in 1998. In 1998, the Company's Board of Directors established a Shareholder Rights Plan and distributed to shareholders one preferred stock purchase right for each outstanding share of common stock. Under certain circumstances, a right may be exercised to purchase one one-hundredth of a share of Series A Junior Preferred Stock at an exercise price of $160, subject to certain anti-dilution adjustments. The rights become exercisable ten (10) days after a public announcement that a party or group has either acquired at least 15% (or at least 25% in the case of existing holders who currently own 15% or more of the common stock), or commenced a tender offer for at least 25% of the Company's common stock. Generally, after the rights become exercisable, if the Company is a party to certain merger or business combination transactions, or transfers 50% or more of its assets or earnings power, or certain other events occur, each right will entitle its holders, other than the acquiring person, to buy a number of shares of common stock of the Company, or of the other party to the transaction, having a value of twice the exercise price of the right. The rights expire June 30, 2008, and may be redeemed by the Company for $.05 per right at any time until ten (10) days following the stock acquisition date. The Company is authorized to issue 200,000 shares of preferred stock, none of which have been issued. The Company has designated 50,000 shares of the preferred stock for the purpose of the Shareholder Rights Plan. I. BUSINESS SEGMENTS AND FOREIGN OPERATIONS The Company and its subsidiaries are engaged in the manufacture and sale of power transmission equipment. Principal products include industrial clutches, hydraulic torque converters, fluid couplings, power-shift transmissions, marine transmissions, universal joints, power take-offs and reduction gears. The Company sells to both domestic and foreign customers in a variety of market areas, principally construction, industrial, energy and natural resources, marine and agricultural. The Company has two reportable segments: manufacturing and distribution. These segments are managed separately because each provides different services and requires different technology and marketing strategies. The accounting practices of the segments are the same as those described in the summary of significant accounting policies. Transfers among segments are at established inter-company selling prices. Information about the Company's segments is summarized as follows (in thousands): Manufacturing Distribution Total ------------- ------------ ----- 2000 Net sales $166,067 $46,726 $212,793 Intra-segment sales 7,176 613 7,789 Inter-segment sales 26,327 690 27,017 Interest income 321 73 394 Interest expense 3,159 125 3,284 Income taxes 3,904 916 4,820 Depreciation and amortization 6,589 264 6,853 Segment earnings 3,464 1,587 5,051 Segment assets 154,971 24,518 179,489 Expenditures for segment assets 1,766 368 2,134

31 Manufacturing Distribution Total ------------- ------------ ----- 1999 Net sales $156,661 $41,426 $198,087 Intra-segment sales 7,235 439 7,674 Inter-segment sales 21,545 726 22,271 Interest income 350 92 442 Interest expense 2,134 228 2,362 Income taxes 519 1,036 1,555 Depreciation and amortization 6,062 291 6,353 Segment earnings 1,147 170 1,317 Segment assets 152,251 25,448 177,699 Expenditures for segment assets 6,017 422 6,439 1998 Net sales $206,812 $46,981 $253,793 Intra-segment sales 24,358 502 24,860 Inter-segment sales 25,959 331 26,290 Interest income 626 129 755 Interest expense 1,481 229 1,710 Income taxes 6,246 1,649 7,895 Depreciation and amortization 5,244 274 5,518 Segment earnings 9,196 2,051 11,247 Segment assets 134,870 27,705 162,575 Expenditures for segment assets 6,626 528 7,154 The following is a reconciliation of reportable segment net sales, earnings (loss) and assets, to the Company's consolidated totals (in thousands): 2000 1999 1998 ---- ---- ---- Net sales Total net sales from reportable segments $212,793 $198,087 $253,793 Elimination of inter-company sales (34,806) (29,945) (51,150) ------- ------- ------- Total consolidated net sales $177,987 $168,142 $202,643 ======= ======= ======= Earnings (loss) Total earnings (loss) from reportable segments $ 5,051 $ 1,317 $ 11,247 Other corporate expenses (1,278) (2,335) (1,884) ------- ------- ------- Total consolidated net earnings (loss) $ 3,773 $ (1,018) $ 9,363 ======= ======= ======= Assets Total assets for reportable segments $179,489 $177,699 Elimination of inter-company assets (18,120) (15,871) Corporate assets 12,821 15,072 ------- ------- Total consolidated assets $174,190 $176,900 ======= ======= Other significant items: Segment Consolidated Totals Adjustments Totals 2000 ------- ----------- ------------ Interest income $ 394 $ (150) $ 244 Interest expense 3,284 (305) 2,979 Income taxes 4,820 (526) 4,294 Depreciation and amortization 6,853 127 6,980 Expenditures for segment assets 2,134 - 2,134 1999 Interest income $ 442 $ (205) $ 237 Interest expense 2,362 (292) 2,070 Income taxes 1,555 (523) 1,032 Depreciation and amortization 6,353 101 6,454 Expenditures for segment assets 6,439 - 6,439

32 1998 Interest income $ 755 $ (205) $ 550 Interest expense 1,710 (205) 1,505 Income taxes 7,895 (1,213) 6,682 Depreciation and amortization 5,518 89 5,607 Expenditures for segment assets 7,154 - 7,154 All adjustments represent inter-company eliminations and corporate amounts. Geographic information about the Company is summarized as follows (in thousands): 2000 1999 1998 ---- ---- ---- Net sales United States $113,377 $106,051 $133,193 Other countries 64,610 62,091 69,450 ------- ------- ------- Total $177,987 $168,142 $202,643 ======= ======= ======= Long-lived assets United States $ 70,831 $ 65,540 Belgium 8,291 10,362 Other countries 5,306 6,086 Elimination of inter-company assets (4,656) (7,184) ------- ------- Total $ 79,772 $ 74,804 ======= ======= One customer accounted for approximately 10%, 8% and 11% of consolidated net sales in 2000, 1999 and 1998, respectively. Another customer accounted for approximately 6%, 8% and 11% during those years. J. STOCK OPTION PLANS During fiscal 1999, the Company adopted the Twin Disc, Incorporated 1998 Stock Option Plan for Non-Employee Directors, a non-qualified plan, for non-employee directors to purchase up to 35,000 shares of common stock, and the Twin Disc, Incorporated 1998 Incentive Compensation Plan, a plan, where options are determined to be non-qualified or incentive at the date of grant, for officers and key employees to purchase up to 165,000 shares of common stock. The plans are administered by the Executive Selection and Compensation Committee of the Board of Directors which has the authority to determine which officers and key employees will be granted options. The grant of options to non-employee directors is fixed at options to purchase 1,000 shares of common stock per year or 600 at time of appointment. Except as described in the following sentence, all options allow for exercise prices not less than the grant date fair market value, immediately vest and expire ten years after the date of grant. For options under the Incentive Compensation Plan, if the optionee owns more than 10% of the total combined voting power of all classes of the Company's stock, the price will be not less than 110% of the grant date fair market value and the options expire five years after the grant date. In addition, the Company has 95,300 incentive stock option plan options and 63,450 non-qualified stock option plan options outstanding at June 30, 2000 under the Twin Disc, Incorporated 1988 Incentive Stock Option plan and the Twin Disc, Incorporated 1988 Non-Qualified Stock Option Plan for Officers, Key Employees and Directors, respectively. The plans terminated during 1999. Shares available for future options as of June 30 were as follows: 2000 1999 ---- ---- 1998 Stock Option Plan for Non-Employee Directors 23,000 29,000 1998 Incentive Compensation Plan 132,750 159,500

33 Stock option transactions under the plans during 2000, 1999 and 1998 were as follows: Weighted Weighted Weighted Average Average Average 2000 Price 1999 Price 1998 Price ---- -------- ---- ------- ---- -------- Non-qualified stock options: Options outstanding at beginning of year 84,600 $22.55 80,500 $22.50 94,150 $21.71 Granted 12,000 19.94 19,000 24.69 13,100 28.75 Canceled (13,000) 23.31 (14,700) 25.08 - - Exercised - - (200) 26.00 (26,750) 22.81 ------ ------- ------ Options outstanding at June 30 83,600 $22.06 84,600 $22.55 80,500 $22.50 ====== ====== ====== Options price range ($14.00 - $20.00) Number of shares 40,800 Weighted average price $19.36 Weighted average remaining life 5.70 years Options price range ($20.875 - $28.75) Number of shares 42,800 Weighted average price $24.63 Weighted average remaining life 7.39 years Weighted Weighted Weighted Average Average Average 2000 Price 1999 Price 1998 Price ---- -------- ---- ------- ---- ------- Incentive stock options: Options outstanding at beginning of year 132,250 $23.70 124,300 $23.57 161,550 $21.60 Granted 22,800 20.20 33,900 25.80 29,900 29.18 Canceled (35,500) 23.25 (23,950) 26.58 (7,050) 20.15 Exercised (150) 14.00 (2,000) 16.63 (60,100) 21.53 ------- ------- ------- Options outstanding at June 30 119,400 $23.24 132,250 $23.70 124,300 $23.57 ======= ======= ======= Options price range ($14.00 - $20.00) Number of shares 46,050 Weighted average price $19.26 Weighted average remaining life 6.24 years Options price range ($20.875 - $28.75) Number of shares 67,850 Weighted average price $25.24 Weighted average remaining life 7.44 years

34 Options price range ($31.625 - $32.25) Number of shares 5,500 Weighted average price $31.74 Weighted average remaining life 8.00 years The Company accounts for its stock option plans under the guidelines of Accounting Principles Board Opinion No. 25. Accordingly, no compensation cost has been recognized in the statement of operations. Had the Company recognized compensation expense determined based on the fair value at the grant date for awards under the plans, consistent with the method prescribed by FAS 123, the net earnings and earnings per share would have been as follows (in thousands, except per share amounts): 2000 1999 1998 ---- ---- ---- Net earnings (loss) As reported $ 3,773 $(1,018) $9,363 Pro forma 3,648 (1,277) 9,125 Basic earnings (loss) per share As reported $ 1.34 $ (.36) $ 3.30 Pro forma 1.29 (.45) 3.22 Diluted earnings (loss) per share As reported $ 1.34 $ (.36) $ 3.24 Pro forma 1.29 (.45) 3.16 The above pro forma net earnings and earnings per share were computed using the fair value of options at the date of grant (for options granted after June 1995) as calculated by the Black-Scholes option-pricing method and the following assumptions: 21% volatility, 3.8% annual dividend yield, interest rates based on expected terms and grant dates, a 5 year term and an exercise price equal to the fair market value on the date of grant except for incentive options granted to greater than 10% shareholders which are calculated using a 3 year term and an exercise price equal to 110% of the fair market value on the date of grant. For those options granted during 2000, 1999 and 1998 with exercise prices equal to the grant date fair market value, the exercise prices and weighted average fair values of the options were $19.94 and $3.70 in 2000, $25.26 and $5.02 in 1999 and $28.75 and $5.81 in 1998, respectively. For those options granted with exercise prices greater than the grant date fair market value, the exercise prices and weighted average fair values of the options were $21.93 and $2.43 in 2000, $28.08 and $2.71 in 1999, $31.63 and $3.26 in 1998, respectively. K. ENGINEERING AND DEVELOPMENT COSTS Engineering and development costs include research and development expenses for new products, development and major improvements to existing products, and other charges for ongoing efforts to refine existing products. Research and development costs charged to operations totaled $1,852,000, $2,505,000 and $3,104,000 in 2000, 1999 and 1998, respectively. Total engineering and development costs were $6,322,000, $7,829,000 and $8,833,000 in 2000, 1999 and 1998, respectively.

35 L. RETIREMENT PLANS The Company has noncontributory, qualified defined benefit pension plans covering substantially all domestic employees and certain foreign employees. Domestic plan benefits are based on years of service, and, for salaried employees, on average compensation for benefits earned prior to January 1, 1997 and on a cash balance plan for benefits earned after January 1, 1997. The Company's funding policy for the plans covering domestic employees is to contribute an actuarially determined amount which falls between the minimum and maximum amount that can be contributed for federal income tax purposes. Domestic plan assets consist principally of listed equity and fixed income securities. In addition, the Company has unfunded, non-qualified retirement plans for certain management employees and directors. Benefits are based on final average compensation and vest upon retirement from the Company. In addition to providing pension benefits, the Company provides health care and life insurance benefits for certain domestic retirees. All employees retiring after December 31, 1992, and electing to continue coverage through the Company's group plan, are required to pay 100% of the premium cost. The following table sets forth the Company's defined benefit pension plans' and other postretirement benefit plan's funded status and the amounts recognized in the Company's balance sheets and income statements as of June 30 (dollars in thousands): Other Post Pension retirement Benefits Benefits ---------------- -------------- 2000 1999 2000 1999 ---- ---- ---- ---- Change in benefit obligation: Benefit obligation, beginning of year $115,865 $104,156 $ 32,749 $ 28,619 Service cost 1,518 1,517 19 23 Interest cost 8,028 7,254 2,265 1,978 Actuarial (gain) loss (6,806) 11,384 (1,481) 4,548 Benefits paid (9,518) (8,446) (3,325) (2,419) ------- ------- ------ ------ Benefit obligation, end of year $109,087 $115,865 $ 30,227 $ 32,749 ======= ======= ====== ====== Change in plan assets: Fair value of assets, beginning of year $ 98,283 $100,265 $ - $ - Actual return on plan assets 16,876 4,279 - - Employer contribution 7,048 2,185 3,325 2,419 Benefits paid (9,518) (8,446) (3,325) (2,419) ------- ------- ------ ------ Fair value of assets, end of year $112,689 $ 98,283 $ - $ - ======= ======= ====== ====== Funded status $ 3,602 $(17,582)$(30,227)$(32,749) Unrecognized net transition obligation 606 836 - - Unrecognized actuarial loss 4,398 19,972 6,817 8,755 Unrecognized prior service cost 2,495 3,167 - - ------ ------ ------ ------- Net amount recognized $ 11,101 $ 6,393 $(23,410)$(23,994) ====== ====== ====== ======= Amounts recognized in the balance sheet consist of: Prepaid benefit cost $ 14,335 $ - $ - $ - Accrued benefit liability (3,234) (16,343) (23,410) (23,994) Intangible asset - 3,385 - - Deferred tax asset - 7,547 - - Minimum pension liability adjustment - 11,804 - - ------- ------ ------- ------- Net amount recognized $ 11,101 $ 6,393 $(23,410)$(23,994) ======= ====== ======= =======

36 Weighted average assumptions as of June 30: Discount rate 8.00% 7.25% 8.00% 7.25% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 5.00% 5.00% (37) Pension Benefits -------------------------- 2000 1999 1998 ---- ---- ---- Service cost $ 1,518 $ 1,517 $ 1,328 Interest cost 8,028 7,254 7,235 Expected return on plan assets (8,532) (8,617) (6,750) Amortization of prior service cost 672 672 672 Amortization of transition obligation 179 183 185 Recognized net actuarial loss 699 102 92 ------ ------ ------ Net periodic benefit cost $ 2,564 $ 1,111 $ 2,762 ====== ====== ====== Postretirement Benefits -------------------------- 2000 1999 1998 ---- ---- ---- Service cost $ 19 $ 23 $ 21 Interest cost 2,265 1,978 2,153 Recognized net actuarial loss 457 399 205 ------ ------ ------ Net periodic benefit cost $ 2,741 $ 2,400 $ 2,379 ====== ====== ====== Effective January 1, 1998, the Company changed certain of its actuarial assumptions including the mortality table used and the assumed retirement age for the defined benefit plans and the postretirement plan. The changes resulted in an increase to the benefit obligation and unrecognized actuarial loss of approximately $10 million. The pension plans held 62,402 shares of Company stock with a fair market value of $1,065,000 and $1,252,000 at June 30, 2000 and 1999, respectively. The assumed weighted average health care cost trend rate was 6% in fiscal year 2000 and 1999. A 1% increase in the assumed health care cost trend would increase the accumulated postretirement benefit obligation by approximately $2.0 million and the interest cost by approximately $140,000. A 1% decrease in the assumed health care cost trend would decrease the accumulated postretirement benefit obligation by approximately $1.9 million and the interest cost by approximately $130,000. The Company sponsors defined contribution plans covering substantially all domestic employees and certain foreign employees. These plans provide for employer contributions based primarily on employee participation. The total expense under the plans was $1,699,000, $1,572,000 and $1,582,000 in 2000, 1999 and 1998, respectively.

37 M. INCOME TAXES United States and foreign earnings (loss) before income taxes were as follows (in thousands): 2000 1999 1998 ---- ---- ---- United States $ 367 $(3,555) $ 7,944 Foreign 7,700 3,569 8,101 ------ ------ ------ $ 8,067 $ 14 $16,045 ====== ====== ====== The provision (credit) for income taxes is comprised of the following (in thousands): 2000 1999 1998 ---- ---- ---- Currently payable: Federal $ 664 $(1,376) $ 154 State 6 49 114 Foreign 3,908 2,359 3,541 ------ ------ ------ 4,578 1,032 3,809 ------ ------ ------ Deferred: Federal (137) 402 2,582 State 220 (292) 183 Foreign (367) (110) 108 ------ ------ ------ (284) - 2,873 ------ ------ ------ $ 4,294 $ 1,032 $ 6,682 ====== ====== ====== The components of the net deferred tax asset as of June 30, were as follows (in thousands): 2000 1999 ---- ---- Deferred tax assets: Retirement plans and employee benefits $ 4,852 $12,826 Alternative minimum tax credit carryforwards 301 599 Foreign tax credit carryforwards 1,933 1,968 State net operating loss and other state credit carryforwards 771 1,075 Research credit carryforwards - 135 Other 3,950 2,581 ------ ------ 11,807 19,184 ------ ------ Deferred tax liabilities: Property, plant and equipment 5,744 6,182 Other 2,804 2,649 ------ ------ 8,548 8,831 ------ ------ Total net deferred tax assets $ 3,259 $10,353 ====== ======

38 Following is a reconciliation of the applicable U.S. federal income taxes to the actual income taxes reflected in the statements of operations: 2000 1999 1998 ---- ---- ---- U.S. federal income tax at 34% $ 2,743 $ 5 $5,455 Increases (reductions) in tax resulting from: Foreign tax items 1,387 463 173 Accrual for prior years 150 74 705 Other, net 14 490 349 ---- ----- ----- $ 4,294 $1,032 $6,682 ==== ==== ==== N. CONTINGENCIES The Company is involved in various stages of investigation relative to hazardous waste sites, two of which are on the United States EPA National Priorities List (Superfund sites). The Company's assigned responsibility at each of the Superfund sites is less than 2%. The Company has also been requested to provide administrative information related to two other potential Superfund sites but has not yet been identified as a potentially responsible party. Additionally, the Company is subject to certain product liability matters in the normal course of business. At June 30, 2000, the Company has accrued approximately $1,050,000, which represents management's best estimate available for possible losses related to these contingencies. This amount has been provided over the past several years. Based on the information available, the Company does not expect that any unrecorded liability related to these matters would materially affect the consolidated financial position, results of operations or cash flows. O. ACQUISITIONS In January 1999, the Company purchased the mechanical power take-off product business from Rockford Powertrain, Inc. for approximately $13.5 million. This transaction was accounted for using the purchase method of accounting and resulted in goodwill of approximately $11 million which is being amortized over 30 years. In February 1999, the Company purchased Technodrive S.p.A of Decima, Italy for approximately $3.9 million, net of cash acquired of $700,000. This transaction was accounted for using the purchase method of accounting and resulted in goodwill of approximately $2.9 million which is being amortized over 25 years. Technodrive manufactures industrial power take- offs, clutches, hydraulic pump mount drives and marine transmissions. The pro forma affects of the acquisitions are not significant to the net sales, net (loss) earnings, and earnings per share amounts reported in the financial statements. P. CLOSURE OF SUBSIDIARY In June 1999, the Company approved a plan to terminate operations at its South African subsidiary, Twin Disc (South Africa) Pty. Ltd, early in fiscal 2000. The Company recorded a loss of $1,140,000 in 1999 related to the termination of operations, which consists primarily of the recognition of cumulative translation losses of $829,000 with the remaining amounts related to disposals of inventories and fixed assets, and severance benefits. The results of the subsidiary's operations through June 30, 1999 are included in the consolidated financial statements.

39 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders Twin Disc, Incorporated Racine, Wisconsin In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders' equity and comprehensive income and cash flows present fairly, in all material respects, the financial position of Twin Disc, Incorporated and Subsidiaries at June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Milwaukee, Wisconsin July 21, 2000

40 FINANCIAL SUMMARY 2000 1999 1998 1997 1996 (In thousands of dollars, except where noted) Statement of Operations Net sales $177,987 $168,142 $202,643 $189,942 $176,657 Costs and expenses, including marketing, engineering and administrative 168,105 164,816 186,607 177,342 164,486 Earnings from operations 9,882 3,326 16,036 12,600 12,171 Other income (expense) (1,815) (3,312) 9 80 (1,264) Earnings before income taxes 8,067 14 16,045 12,680 10,907 Income taxes 4,294 1,032 6,682 4,951 4,348 Net earnings (loss) 3,773 (1,018) 9,363 7,729 6,559 Balance Sheet Assets Cash and equivalents 5,651 4,136 5,087 8,983 2,043 Receivables, net 28,828 27.201 28,320 32,428 34,917 Inventories 50,190 54,500 53,280 47,844 51,083 Other current assets 5,333 11,910 6,893 8,707 8,597 Total current assets 90,002 97,747 93,580 97,962 96,640 Investments and other assets 49,885 40,218 31,646 26,544 30,344 Fixed assets less accumulated depreciation 34,303 38,935 35,728 34,249 35,715 Total assets 174,190 176,900 160,954 158,755 162,699 Liabilities and Shareholders' Equity Current liabilities 40,908 54,761 29,553 29,621 34,002 Long-term debt 31,254 17,112 19,949 19,944 19,938 Deferred liabilities 23,795 37,567 29,457 35,393 33,578 Shareholders' equity 78,233 67,460 81,995 73,797 75,181 Total liabilities and shareholders' equity 174,190 176,900 160,954 158,755 162,699

41 FINANCIAL SUMMARY (CONTINUED) 2000 1999 1998 1997 1996 (In thousands of dollars, except where noted) Comparative Financial Information Per share statistics Basic earnings (loss) 1.34 (.36) 3.30 2.78 2.36 Diluted earnings (loss) 1.34 (.36) 3.24 2.75 2.34 Dividends .70 .805 .76 .70 .70 Shareholders' equity 27.87 23.79 28.94 26.48 27.07 Return on equity 4.8% (1.5%) 11.4% 10.5% 8.7% Return on assets 2.2% (.6%) 5.8% 4.9% 4.0% Return on sales 2.1% (.6%) 4.6% 4.1% 3.7% Average shares outstanding 2,820,534 2,834,909 2,833,663 2,781,174 2,776,805 Diluted shares outstanding 2,820,730 2,843,877 2,886,209 2,808,226 2,805,123 Number of shareholder accounts 1,480 1,138 774 845 913 Number of employees 999 1,029 1,078 1,081 1,080 Additions to plant and equipment 2,134 6,439 7,154 4,734 4,140 Depreciation 5,766 5,648 5,205 5,141 5,071 Net working capital 49,094 42,986 64,027 68,341 62,638

42 DIRECTORS MICHAEL E. BATTEN Chairman, Chief Executive Officer MICHAEL H. JOYCE President, Chief Operating Officer JAMES O. PARRISH Vice President-Finance & Treasurer JOHN A. MELLOWS Chairman and Chief Executive Officer, Charter Manufacturing Co., (A privately held producer of bar, rod wire and wire parts), Maccan, Wisconsin PAUL J. POWERS Retired Chairman, President-Chief Executive Officer, Commercial Interject Corp., (Manufacturer of Hydraulic Components, Fluid Purification Products, Pre- Engineered Buildings and Stamped Metal Products), Youngstown, Ohio RICHARD T. SAVAGE Retired Chairman, President-Chief Executive Officer, Moline Manufacturing Company, (Manufacturer of Heat Exchange Equipment), Racine, Wisconsin DAVID L. SWIFT Retired Chairman, President-Chief Executive Officer, Acme-Cleveland Corporation, (Manufacturer of Diversified Industrial Products), Pepper Pike, Ohio GEORGE E. WARDEBERG Vice Chairman, Wisconsin Energy Corp. (A holding company with subsidiaries in electric, natural gas, energy services and manufacturing), Milwaukee, Wisconsin DAVID R. ZIMMER Former Executive Vice President, United Dominion Industries, (Manufacturer of Diversified Engineered Products), Charlotte, North Carolina DAVID R. RAYBURN Executive Vice President of Operations, Moline Manufacturing Company, (Manufacturer of Heat Exchange Equipment), Racine, Wisconsin

43 OFFICERS MICHAEL E. BATTEN Chairman, Chief Executive Officer MICHAEL H. JOYCE President, Chief Operating Officer JAMES O. PARRISH Vice President-Finance & Treasurer HENRI-CLAUDE FABRY Vice President-Marine and Distribution LANCE J. MELIK Vice President-Corporate Development Vice President-Transmission and Industrial Products FRED H. TIMM Corporate Controller & Secretary PAUL A. PELLIGRINO Vice President-Engineering ARTHUR A. ZINTEK Vice President-Human Resources

44 CORPORATE DATA ANNUAL MEETING Twin Disc Corporate Offices, Racine, WI, 2:00 PM, October 20, 2000 SHARES TRADED New York Stock Exchange: Symbol TDI ANNUAL REPORT ON SECURITIES AND EXCHANGE COMMISSION FORM 10-K SINGLE COPIES OF THE COMPANY'S 2000 ANNUAL REPORT ON SECURITIES AND EXCHANGE COMMISSION FORM 10-K WILL BE PROVIDED WITHOUT CHARGE TO SHAREHOLDERS AFTER SEPTEMBER 30, 2000, UPON WRITTEN REQUEST DIRECTED TO THE SECRETARY, TWIN DISC, INCORPORATED, 1328 RACINE STREET, RACINE, WISCONSIN 53403. TRANSFER AGENT & REGISTRAR Firstar Trust Company, Milwaukee, Wisconsin INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP, Milwaukee, Wisconsin GENERAL COUNSEL von Briesen, Purtell, & Roper,s.c., Milwaukee, Wisconsin CORPORATE OFFICES Twin Disc, Incorporated, Racine, Wisconsin 53403, Telephone: (414) 638-4000 WHOLLY OWNED SUBSIDIARIES Twin Disc International S.A., Nivelles, Belgium Twin Disc Italia S.R.L., Viareggio, Italy Technodrive S.p.A, Decima, Italy Twin Disc (Pacific) Pty. Ltd., Brisbane, Queensland, Australia Twin Disc (Far East) Ltd., Singapore Mill-Log Equipment Co., Inc., Coburg, Oregon Southern Diesel Systems Inc., Miami, Florida TD Electronics, Inc., Loves Park, Illinois MANUFACTURING FACILITIES Racine, Wisconsin; Nivelles, Belgium; Decima, Italy; Loves Park, Illinois SALES OFFICES DOMESTIC Racine, Wisconsin; Coburg, Oregon; Portland, Oregon; Kent, Washington; Miami, Florida; Jacksonville, Florida; Loves Park, Illinois FOREIGN Nivelles, Belgium; Brisbane and Perth Australia; Singapore; Viareggio, Italy; Decima, Italy; Chambery, France; Edmonton, Canada; Vancouver, Canada MANUFACTURING LICENSES Negate Converter Company, Ltd., Tokyo, Japan

45 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Twin Disc, Incorporated, the registrant (a Wisconsin Corporation) owns 100% of the following subsidiaries: 1.Twin Disc International, S.A. (a Belgian corporation) 2.Twin Disc Technodrive Srl (an Italian corporation) 3.Twin Disc Srl (an Italian corporation) 4.Twin Disc (Pacific) Pty. Ltd. (an Australian corporation) 5.Twin Disc (Far East) Ltd. (a Delaware corporation operating in Singapore and Hong Kong) 6.TD Electronics, Inc. (a Wisconsin corporation) 7.Mill-Log Equipment Co., Inc. (an Oregon corporation) 8.Southern Diesel Systems Inc. (a Florida corporation) 9. Technodrive SARL (A French corporation) The registrant has no parent nor any other subsidiaries. All of the above subsidiaries are included in the consolidated financial statements.

46 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Twin Disc, Incorporated on Form S-8 (Twin Disc, Incorporated 1988 Incentive Stock Option Plan , Twin Disc, Incorporated 1988 Non-Qualified Stock Option Plan for Officers, Key Employees and Directors, Twin Disc, Incorporated 1998 Incentive Compensation Plan and Twin Disc, Incorporated 1998 Stock Option Plan for Non-Employee Directors) of our reports dated July 21, 2000, on our audits of the consolidated financial statements and financial statement schedule of Twin Disc, Incorporated as of June 30, 2000 and 1999 and for the years ended June 30, 2000, 1999 and 1998, which reports are included (or incorporated by reference) in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Milwaukee, Wisconsin September 22, 2000

47 EXHIBIT 24 POWER OF ATTORNEY The undersigned directors of Twin Disc, Incorporated hereby severally constitute Michael E. Batten and James O. Parrish , and each of them singly, true and lawful attorneys with full power to them, and each of them, singly, to sign for us and in our names as directors the Form 10-K Annual Report for the fiscal year ended June 30, 2000 pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, and generally do all such things in our names and behalf as directors to enable Twin Disc, Incorporated to comply with the provisions of the Securities and Exchange Act of 1934 and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures so they may be signed by our attorneys, or either of them, as set forth below. JOHN A. MELLOWES ) - - - - - - - - - - - - - - - - - - - - - John A. Mellowes, Director ) ) ) PAUL J. POWERS ) - - - - - - - - - - - - - - - - - - - - - Paul J. Powers, Director ) ) ) DAVID B. RAYBURN ) - - - - - - - - - - - - - - - - - - - - - David B. Rayburn, Director ) ) ) RICHARD T. SAVAGE ) - - - - - - - - - - - - - - - - - - - - - Richard T. Savage, Director ) ) ) July 28, 2000 DAVID L. SWIFT ) - - - - - - - - - - - - - - - - - - - - - David L. Swift, Director ) ) ) GEORGE E. WARDEBERG ) - - - - - - - - - - - - - - - - - - - - - George E. Wardeberg, Director ) ) ) DAVID R. ZIMMER ) - - - - - - - - - - - - - - - - - - - - - David R. Zimmer, Director )

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF TWIN DISC, INCORPORATED AND SUBSIDIARIES SET FORTH IN THE ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-2000 JUN-30-2000 5,651 0 29,532 704 50,190 90,002 116,703 82,400 174,190 40,908 31,254 11,653 0 0 66,580 174,190 177,987 177,987 136,629 136,629 31,476 0 2,979 8,067 4,294 3,773 0 0 0 3,773 1.34 1.34