SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 9, 1998
DANAHER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-8089 59-1995548
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1250 24th Street, N.W. Washington, D.C. 20037
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 202-828-0850
(Former name or former address, if changed since last report.)
Item 2. Acquisition of Assets
On March 9, 1998, Danaher Corporation acquired controlling
interest (100% ownership will be completed in 1998) of Pacific
Scientific Company. The total cost of acquisition will be
approximately $420 million, inclusive of acquisition costs. The
acquisition will be accounted for as a purchase.
Pacific Scientific is a California corporation with its
principal executive offices located at 620 Newport Center Drive,
Newport Beach, CA 92660. The following description of the
Company's business has been taken from Pacific Scientific's 1996
10-K.
Pacific Scientific has two major business segments: (i)
Electrical Equipment and (ii) Safety Equipment.
Pacific Scientific is in the business of designing,
manufacturing and selling electrical equipment and safety
equipment.
Nearly half of the Company's sales consists of electric
motors, drives and controls. These electric motors and controls
are sold primarily to original equipment manufacturers who
incorporate them into a wide variety of products. Pacific
Scientific motors are used in factory automation, medical,
printing, plastic extrusion and molding, paper converting,
vending, textile, aerospace, fitness and many other types of
equipment.
Safety equipment includes mainly fire detection and
suppression equipment, crew restraints, flight control and
pyrotechnic devices. Safety equipment is sold mainly in the
aviation and aerospace industry. The Company also provides
worldwide sales, service and repair of its products for airlines
and other users of its safety equipment.
The Company has sales offices, representatives and
distributors in most industrial areas of the world. Approximately
28% of the Company's sales are made to customers outside the U.S.
The Company is headquartered in California and has factories in
Arizona, California, Georgia, Massachusetts, Maryland, Oregon,
South Carolina, England, Germany and Mexico.
Item 7. Exhibits
(a) Attachment 1 contains financial statements of Pacific
Scientific as specified under Rule 3.05(b)
1. Years ended December 31, 1997, 1996 and 1995
(b) Attachment 2 contains pro-forma financial statements
and explanatory notes as per Article 11.
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.
DANAHER CORPORATION
By: /s/ C. Scott Brannan
C. Scott Brannan
Vice President and Controller
Pro Forma Income Statement
Year Ended December 31, 1997
(amounts in thousands)
Danaher PSX Adj. Combined
Net Revenues 2,050,968 310,460 2,361,428
Cost of Sales 1,382,475 210,468 (800)F 1,592,143
SG&A 401,608 77,884 7,800 G 487,292
Other -- 4,892 (4,892)B --
Total operating
expenses 1,784,083 293,244 2,108 2,079,435
Operating profit 266,885 17,216 (2,108) 281,993
Interest (income)
expense, net 13,104 1,578 25,000 H 39,682
EBIT 253,781 15,638 (27,108) 242,311
Income taxes 98,975 6,359 (10,833)I 94,501
Net earnings 154,806 9,279 (16,275) 147,810
Pro Forma Balance Sheet
As of December 31, 1997
(amounts in thousands)
DHR PSX Adj. Combined
Assets
Current Assets:
Cash and cash
equivalents 33,317 1,903 (25,000)D 10,220
A/R, net 322,600 50,774 373,374
Total inventories 209,416 46,529 2,000 A 257,945
Prepaids & other 53,006 16,602 69,720
Total current
assets 618,339 115,808 (23,000) 711,259
PP&E 335,223 50,466 385,689
Other assets 72,739 6,772 79,511
Excess of cost over
net assets 853,416 31,343 313,238 C 1,197,997
Total Assets 1,879,717 204,389 290,238 2,374,456
Current Liabilities:
N/P-current 35,527 35,527
A/P 135,190 16,560 151,750
Accrues expenses 353,518 17,368 370,886
Total current
liabilities 524,235 33,928 -- 558,163
Other liabilities 275,881 2,797 278,790
L/T debt 162,720 62,902 395,000 D 620,622
Stockholder's equity: --
Common stock 643 12,461 (12,461)E 643
APIC 336,109 7,146 (7,146)E 336,109
Retained earnings 655,692 84,681 (84,681)E 655,692
Cum. foreign
trans. adj. (6,122) 474 (474)E (6,122)
Treasury stock (69,441) -- (69,441)
Total stockholder's
equity 916,881 104,762 (104,762) 916,881
Total liability &
s/h equity 1,879,717 204,389 290,238 2,374,456
<PAGE>
EXPLANATORY NOTES TO PRO-FORMA FINANCIAL STATEMENTS
(A) Represents an increase in inventory amounts to fair value.
(B) Represents the elimination of a nonrecurring transaction associated
with a business divestiture.
(C) Represents the excess of cost over net assets of Pacific Scientific
Company.
(D) Represents reduction of cash and borrowings necessary to complete
the transaction.
(E) Represents elimination of historical equity balances for Pacific
Scientific.
(F) Represents the effects to the inventory adjustments discussed in
item (A) above and the change in depreciation associated with
establishing new values and useful lives for the acquired fixed
assets.
(G) Represents amortization of the excess of cost over net assets of
Pacific Scientific.
(H) Represents interest associated with the additional borrowings
discussed in item (D) above.
(I) Represents an adjustment to reflect an appropriate effective tax
rate.
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 26, 1997, DECEMBER 27, 1996,
AND DECEMBER 29, 1995 AND INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Pacific Scientific Company:
We have audited the accompanying consolidated balance sheets of Pacific
Scientific Company and subsidiaries (the Company) as of December 26, 1997,
December 27, 1996 and December 29, 1995, and the related consolidated statements
of operations, cash flows and stockholders' equity for each of the fiscal years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pacific Scientific Company and
subsidiaries as of December 26, 1997, December 27, 1996 and December 29, 1995,
and the results of their operations and their cash flows for each of the fiscal
years then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
February 27, 1998 (March 9, 1998, as to Notes 14 and 15)
<PAGE>
PACIFIC SCIENTIFIC COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Years Ended December 26, 1997, December 27, 1996,
and December 29, 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
NET SALES................................................ $310,460 $292,363 $284,663
-------- -------- --------
COSTS AND EXPENSES
Cost of Sales............................................ 210,468 198,348 185,169
Selling and administration............................... 65,600 59,790 58,694
Research and development................................. 12,284 14,281 14,811
Loss on Sale of Automation Intelligence.................. 4,892 0 0
-------- -------- --------
Total costs and expenses............................ 293,244 272,419 258,674
-------- -------- --------
Operating Income....................................... 17,216 19,944 25,989
-------- -------- --------
OTHER EXPENSE
Interest expense -- net.................................. 5,468 5,052 4,281
Other income............................................. (3,890) (2,207) (1,046)
-------- -------- --------
Net other expense................................... 1,578 2,845 3,235
-------- -------- --------
Income from continuing operations before income taxes.... 15,638 17,099 22,754
Income taxes............................................. (6,359) (6,766) (8,651)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS........................ 9,279 10,333 14,103
-------- -------- --------
DISCONTINUED OPERATIONS:
Loss from operations of Solium subsidiary (net of income
tax benefits of $923 for 1997, $6,636 for 1996, and
$1,311 for 1995)....................................... (1,523) (10,164) (1,353)
Loss on disposal of Solium subsidiary (net of income tax
benefit of $7,363)..................................... (12,040) 0 0
-------- -------- --------
Loss from discontinued operations........................ (13,563) (10,164) (1,353)
-------- -------- --------
NET INCOME (LOSS)........................................ $ (4,284) $ 169 $ 12,750
======== ======== ========
EARNINGS (LOSS) PER SHARE
Continuing operations:
Basic earnings per share............................ $0.76 $0.85 $1.18
Diluted earnings per share.......................... $0.76 $0.83 $1.13
Discontinued operations:
Basic loss per share................................ $(1.11) $(0.84) $(0.12)
Diluted loss per share.............................. $(1.11) $(0.82) $(0.11)
Total:
Basic earnings (loss) per share..................... $(0.35) $0.01 $1.06
Diluted earnings (loss) per share................... $(0.35) $0.01 $1.02
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
2
<PAGE>
PACIFIC SCIENTIFIC COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 26, 1997, December 27, 1996,
and December 29, 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................ $ 1,903 $ 2,986 $ 6,123
Short-term investments...................................... 1,300 0 0
Trade receivables -- net.................................... 50,774 47,301 47,715
Inventories................................................. 46,529 49,382 50,242
Deferred income taxes....................................... 9,850 7,023 4,970
Net assets of discontinued Solium operations................ 0 10,734 14,412
Other current assets........................................ 5,452 6,636 6,584
-------- -------- --------
Total Current Assets................................... 115,808 124,062 130,046
Net property................................................ 50,466 49,407 39,127
Restricted cash............................................. 0 6,171 6,143
Note receivable............................................. 0 844 844
Other assets -- net......................................... 38,115 47,607 48,858
-------- -------- --------
Total Assets........................................... $204,389 $228,091 $225,018
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings....................................... $ 0 $ 0 $ 14,897
Accounts payable............................................ 16,560 18,319 19,659
Accrued employee compensation and benefits.................. 4,897 5,406 6,841
Reserve for discontinued Solium operations.................. 2,560 0 0
Other current liabilities................................... 9,911 8,823 6,627
-------- -------- --------
Total Current Liabilities.............................. 33,928 32,548 48,024
-------- -------- --------
Bank Borrowings............................................. 62,902 60,509 41,050
7 3/4% convertible subordinated debentures................. 0 16,974 17,044
Industrial development bonds................................ 0 5,625 5,625
Other long-term liabilities................................. 2,797 5,625 6,789
STOCKHOLDERS' EQUITY:
Common stock, $1 par value.................................. 12,461 12,195 12,071
Additional paid-in capital.................................. 7,146 4,394 3,007
Cumulative translation adjustment........................... 474 (282) (261)
Note receivable from stockholder............................ 0 0 (125)
Retained earnings........................................... 84,681 90,503 91,794
-------- -------- --------
Total Stockholders' Equity............................. 104,762 106,810 106,486
-------- -------- --------
Total Liabilities and Stockholders' Equity........ $204,389 $228,091 $225,018
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
PACIFIC SCIENTIFIC COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended December 26, 1997,
December 27, 1996, and December 29, 1995
<TABLE>
<CAPTION>
NOTE
ADDITIONAL CUMULATIVE RECEIVABLE
COMMON PAID-IN TRANSLATION FROM RETAINED
STOCK CAPITAL ADJUSTMENT STOCKHOLDER EARNINGS TOTAL
------- ---------- ----------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY,
DECEMBER 30, 1994.................... $11,922 $ 610 $ 0 ($125) $80,366 $ 92,773
Net Income............................. 0 0 0 0 12,750 12,750
Common Stock Dividends................. 0 0 0 0 (1,322) (1,322)
Exercise of Stock Options.............. 136 1,965 0 0 0 2,101
Conversion of Debentures............... 13 229 0 0 0 242
Amortization of Restricted Stock
Award................................ 0 55 0 0 0 55
Restricted Stock Benefit............... 0 148 0 0 0 148
Cumulative Translation Adjustment...... 0 0 (261) 0 0 (261)
------- ------ ---- ----- ------- --------
STOCKHOLDERS' EQUITY,
DECEMBER 29, 1995.................... 12,071 3,007 (261) (125) 91,794 106,486
Net Income............................. 0 0 0 0 169 169
Common Stock Dividends................. 0 0 0 0 (1,460) (1,460)
Exercise of Stock Options.............. 120 1,321 0 0 0 1,441
Conversion of Debentures............... 4 66 0 0 0 70
Cumulative Translation Adjustment...... 0 0 (21) 0 0 (21)
Payment of Note Receivable............. 0 0 0 125 0 125
------- ------ ---- ----- ------- --------
STOCKHOLDERS' EQUITY,
DECEMBER 27, 1996.................... 12,195 4,394 (282) 0 90,503 106,810
Net Loss............................... 0 0 0 0 (4,284) (4,284)
Common Stock Dividends................. 0 0 0 0 (1,538) (1,538)
Exercise of Stock Options.............. 262 2,673 0 0 0 2,935
Conversion of Debentures............... 4 79 0 0 0 83
Cumulative Translation Adjustment...... 0 0 756 0 0 756
------- ------ ---- ----- ------- --------
STOCKHOLDERS' EQUITY,
DECEMBER 26, 1997.................... $12,461 $7,146 $474 $ 0 $84,681 $104,762
======= ====== ==== ===== ======= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
PACIFIC SCIENTIFIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
As of December 26, 1997, December 27, 1996, and December 29, 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (4,284) $ 169 $ 12,750
Depreciation and amortization............................... 11,899 11,216 10,448
Loss on sale of Automation Intelligence..................... 4,892 0 0
Loss on disposal of discontinued operations................. 12,040 0 0
Loss from discontinued operations........................... 1,523 10,164 1,353
Loss (gain) on disposal of equipment........................ 526 134 (249)
Deferred income taxes....................................... (5,059) (2,143) 915
Decrease in accrued employee benefit plan liabilities....... (741) (1,074) (504)
EFFECT ON CASH OF CHANGES IN OPERATING ASSETS AND
LIABILITIES, NET OF THE EFFECTS OF BUSINESS ACQUISITIONS
AND DISPOSITIONS
Trade receivables........................................... (2,362) 414 (1,333)
Inventories................................................. 3,938 860 (10,722)
Other assets................................................ 2,914 823 (4,141)
Accounts payable and accrued liabilities.................... (3,127) (1,340) 1,897
Accrued employee compensation and benefits.................. (641) (1,435) 728
Other liabilities........................................... (949) 2,196 (5,302)
-------- -------- --------
Net cash provided by continuing operations.................. 20,569 19,984 5,840
-------- -------- --------
Net cash used by discontinued operations.................... (2,769) (6,486) (1,353)
-------- -------- --------
Net cash flows from operating activities............ 17,800 13,498 4,487
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property....................................... (9,737) (21,551) (19,302)
Payments for business acquisitions, net of cash acquired.... (1,938) 0 (11,949)
Proceeds from sale of Automation Intelligence............... 1,950 0 0
Proceeds from sale of discontinued operations............... 2,500 0 0
Proceeds from disposition of property....................... 141 297 638
Decrease (increase) in restricted cash...................... 6,171 (28) 29
-------- -------- --------
Net cash flows from investing activities............ (913) (21,282) (30,584)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance/repayments of short-term borrowing and debt........ 0 (14,897) 8,747
Issuance/repayment of long-term borrowing and debt.......... 2,393 19,459 21,025
Redemption of Convertible Subordinated Debentures........... (16,974) (70) 0
Redemption of industrial development bonds.................. (5,625) 0 0
Cash dividends on common stock.............................. (1,538) (1,460) (1,322)
Issuances of common stock................................... 3,018 1,511 2,304
Note receivable from stockholder............................ 0 125 0
-------- -------- --------
Net cash flows from financing activities............ (18,726) 4,668 30,754
-------- -------- --------
Effect of exchange rate changes............................. 756 (21) (261)
-------- -------- --------
Net increase (decrease) in cash............................. (1,083) (3,137) 4,396
Cash, Beginning of Period................................... 2,986 6,123 1,727
-------- -------- --------
Cash, End of Period......................................... $ 1,903 $ 2,986 $ 6,123
======== ======== ========
SUPPLEMENTAL INFORMATION:
Interest payments........................................... $ 5,633 $ 5,555 $ 4,918
Income tax payments......................................... 3,776 5,541 6,144
Assets acquired from acquisitions........................... 5,411 0 6,682
Liabilities assumed from acquisitions....................... 3,487 0 1,220
</TABLE>
5
<PAGE>
PACIFIC SCIENTIFIC COMPANY
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS (CONTINUING OPERATIONS)
For the Fiscal Years Ended December 26, 1997, December 27, 1996,
and December 29, 1995
<TABLE>
<CAPTION>
INDUSTRY SEGMENTS CORPORATE
---------------------------- AND
CONSOLIDATED MOTION PROCESS SAFETY ELIMINATIONS NET INTEREST
------------ -------- ------- ------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 26, 1997
Net sales........................ $310,460 $142,858 $97,785 $68,587 $ 1,230 $ 0
Income from continuing operations
before income taxes............ 15,638 7,340* 6,481 6,678 607 (5,468)
Depreciation and amortization.... 11,899 3,711 3,727 2,693 1,768 0
Capital spending................. 9,737 3,667 2,476 2,746 848 0
Identifiable assets.............. 204,389 69,414 60,595 49,020 25,360 0
DECEMBER 27, 1996
Net sales........................ 292,363 124,850 98,433 69,528 (448) 0
Income from continuing operations
before income taxes............ 17,099 9,708 3,199 6,054 3,190 (5,052)
Depreciation and amortization.... 11,216 3,764 3,651 2,797 1,004 0
Capital spending................. 21,551 5,877 3,559 3,118 8,997 0
Identifiable assets.............. 228,091 75,056 65,074 47,264 40,697 0
DECEMBER 29, 1995
Net sales........................ 284,663 128,655 95,045 60,823 140 0
Income from continuing operations
before income taxes............ 22,754 17,778 3,240 4,760 1,257 (4,281)
Depreciation and amortization.... 10,448 3,659 3,569 2,952 268 0
Capital spending................. 19,302 5,774 4,170 2,634 6,724 0
Identifiable assets.............. 225,018 73,734 69,491 48,494 33,299 0
</TABLE>
- ---------------
Notes
* Includes $4,892 loss on the sale of Automation Intelligence.
(1) Capital spending is shown exclusive of property purchased in conjunction
with the acquisition of businesses (Note 8).
(2) Identifiable assets are those used by the industry segment involved or an
allocated portion of assets used jointly by two or more segments.
Intangibles and other assets arising from acquisitions of businesses are
allocated to the related segment. General corporate assets primarily consist
of cash and certain property.
6
<PAGE>
PACIFIC SCIENTIFIC COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 26, 1997,
DECEMBER 27, 1996 AND DECEMBER 29, 1995
(1) DESCRIPTION OF BUSINESS
Pacific Scientific Company (the Company) was incorporated in California
in 1937 as a successor to a company in business since 1919. References to the
"Company" include Pacific Scientific and its subsidiaries. The Company's
business is manufacturing and selling the products of its three segments: Motion
Control, Process Control, and Safety.
The Motion Control segment produces electric motors and generators and
related motion control devices such as controllers and drivers. The products are
predominately proprietary and once designed, tend to be produced in quantity and
sold based on unique specifications.
The Process Control segment produces: 1) electronic instruments for
particle measurement, 2) electro-mechanical and electronic controls for use
mainly by electric utilities, including the controls for street and highway
lighting, and 3) customized generators and alternators for aircraft. The
products are predominately proprietary and once designed, tend to be produced in
quantity and sold based on unique specifications.
The Safety segment produces: 1) fire detection and suppression
equipment, 2) personnel safety restraints, 3) mechanical and electro-mechanical
flight control components, 4) pyrotechnics, and 5) provides service for products
already delivered to customers. These products are used mainly in commercial
aircraft and vehicles, but are also used in a variety of other military
aircraft, commercial and industrial applications. In most cases, the Company's
products are reconfigured to meet specific customer needs. The Company generally
receives long-term purchase orders but also responds to spot buyers,
particularly for spare parts.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting policies of the Company conform to generally accepted
accounting principles and are summarized below for the convenience of financial
statement readers.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Pacific Scientific and all its subsidiaries. All material intercompany
balances and transactions have been eliminated.
Foreign Currency Translation
The financial position and results of operations of the Company's
foreign subsidiaries are principally measured using local currency as the
functional currency. Assets and liabilities of these subsidiaries are translated
at the exchange rate in effect at each year-end.
Income statement accounts are translated at the average rate of exchange
prevailing during the year. Translation adjustments arising from differences in
exchange rates from period to period are included in the cumulative translation
adjustment account in stockholders' equity.
Fiscal Year
The Company's fiscal year ends on the last Friday in December.
References to 1997, 1996 and 1995 in these consolidated financial statements
refer to the fiscal years ended December 26, 1997, December 27, 1996 and
December 29, 1995, respectively. In addition, the Company decided to align the
fiscal reporting of its European subsidiaries with the U.S. operations.
Accordingly, European subsidiaries that previously reported
7
<PAGE>
a November 30th year-end were converted to a December year-end during 1997. As
such, the consolidated results of operations for 1997 include the results of the
European subsidiaries for the thirteen months ended December 31, 1997. Such
change was not material. Prior periods have not been restated.
Use of Estimates
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the balance sheet dates and the reported amounts of revenue and expense during
the reporting periods. Actual results could differ from these estimates and
assumptions.
Revenue Recognition
Generally, sales are recorded when products are shipped or services are
rendered with the following exceptions: (1) the unit-of-delivery method is used
for contracts for products substantially reconfigured to the customers' needs
and where many units are delivered over an extended period of time; these types
of contracts generally exist in sales to the Company's aerospace customers, (2)
the percentage of completion method is used for significant contracts for
relatively few deliverable units produced over a period in excess of six months
and (3) revenue for maintenance contracts is deferred and recognized ratably
over the period of the agreement.
In the unit-of-delivery method, sales and estimated average cost of the
units to be produced under a contract are recognized as deliveries are made or
accepted. Changes in estimates for sales, cost and profit are recognized in the
period in which they are determined, using the cumulative catch-up method of
accounting. Any anticipated losses on contracts are charged to operations as
soon as they are determinable.
In the percentage of completion method, revenue and income are
recognized at the completion of measurable tasks rather than upon delivery of
individual units.
Progress payments are netted against work-in-process inventory balances
and were $0, $931,000 and $1,655,000 at the end of 1997, 1996 and 1995,
respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes".
Deferred taxes on income result from temporary differences between the reporting
of income for financial statements and income tax returns.
Fair Value of Financial Instruments
The recorded amounts of cash, trade receivables, accounts payable and
short and long-term borrowings approximate their fair values. Fair values are
estimated using quoted market prices based on information available as of
year-end.
At December 26, 1997, all of the Company's investments represent
held-to-maturity securities and have been recorded at fair value, which
approximates historical cost of the investments. These investments consist
primarily of debt securities of municipalities of the Commonwealth of Puerto
Rico, with contractual maturities beginning in 1998 or later.
Trade Receivables
Trade receivables are presented net of the related allowance for
doubtful accounts, which, at year-end, totaled $1,416,000, $1,663,000 and
$1,151,000 in 1997, 1996 and 1995, respectively. Allowances are determined
principally on the basis of past collection experience.
8
<PAGE>
Inventories
Inventories are stated at the lower of average cost or market and, at
year-end, consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Finished goods...................................... $ 7,640 $ 8,848 $ 4,993
Work-in-process..................................... 10,174 15,822 15,299
Raw material and purchased parts.................... 28,715 24,712 29,950
------- ------- -------
Net Inventories........................... $46,529 $49,382 $50,242
======= ======= =======
</TABLE>
The reserve for excess and obsolete inventory was $6,399,000, $3,325,000
and $3,445,000 for year-end 1997, 1996 and 1995 respectively.
Property and Depreciation
Property is recorded at cost. Additions, major renewals and
improvements, which extend the useful life of the property, are capitalized.
Maintenance, repairs and minor renewals are expensed.
Depreciation of property is computed generally by the straight-line
method over the useful lives of the various classes of assets. Such lives range
from 5 to 30 years for buildings and improvements and from 5 to 20 years for
machinery and equipment. When property is retired or otherwise disposed of, the
cost and accumulated depreciation are removed from the appropriate accounts and
any gain or loss is included in the results of current operations.
Net property at year-end consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Land, building and improvements..................... $18,279 $17,612 $15,903
Machinery and equipment............................. 111,411 99,726 83,901
------- ------- -------
Total..................................... 129,690 117,338 99,804
Less accumulated depreciation....................... 79,224 67,931 60,677
------- ------- -------
Net property.............................. $50,466 $49,407 $39,127
======= ======= =======
</TABLE>
Other Assets
Other assets at year-end consist of the following, net of accumulated
amortization (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Excess of cost over net assets of acquired
businesses, net................................... $31,343 $38,354 $39,641
Patents, trademarks, purchased technology and other
Intangibles, net.................................. 4,952 5,632 6,295
Notes receivable and other assets................... 1,820 3,621 2,922
------- ------- -------
Total other assets -- net................. $38,115 $47,607 $48,858
======= ======= =======
</TABLE>
The excess of cost over net assets of acquired businesses is amortized,
using the straight-line method, over periods not exceeding 40 years. Patents,
trademarks, purchased technology and other intangibles are amortized, using the
straight-line method, over estimated useful lives of 5 to 17 years.
The $7 million decrease in excess of cost over net assets of acquired
businesses in 1997 was primarily due to the sale of the Automation Intelligence
operation and the write-off of related goodwill.
The Company periodically reviews intangible assets to assure
recoverability, based on undiscounted expected future operating cash flows
derived from related assets, and any impairment in the value of the assets
9
<PAGE>
would be recognized in operating results, if a permanent diminution in value
were to occur. Accumulated amortization of other assets at year-end totaled
$16,447,000, $14,648,000 and $12,613,000 in 1997, 1996 and 1995, respectively.
Earnings per Share
During 1997, the Company adopted SFAS No. 128, which requires the
disclosure of basic and diluted earnings per share for all current and prior
periods. This replaces the current disclosure being made for primary and
fully-diluted earnings per share. All per share amounts have been restated.
Basic earnings per common share is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding during each year, totaling 12,274,000 in 1997, 12,157,000 in 1996
and 11,992,000 in 1995. Diluted earnings per share reflects the maximum
dilution, based on the average price of the Company's common stock as traded on
the New York Stock Exchange each year and is computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if potential dilutive
common shares had been issued. Shares used for calculating diluted earnings per
share were 12,274,000 in 1997, 12,446,000 in 1996, and 12,469,000 in 1995.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value at the time of grant. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. No
compensation cost is recognized by the Company as the terms of the 1995 Stock
Option Plan and those options granted outside of the 1995 Stock Option Plan
require all grants be made at or above fair market value on the date of the
grant. See Notes 6 and 7, "Stockholders' Equity" and "Stock Option Compensation"
for further information regarding the 1995 Stock Option Plan and for SFAS No.
123 disclosure requirements.
Reclassifications and Restatements
Certain amounts previously reported for 1996 and 1995 have been
reclassified to conform to the 1997 financial statement presentation. In
addition, certain amounts have been restated to reflect the reporting of Solium
as a discontinued operation. (See Note 16.)
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for
the reporting and display of comprehensive income and its components in
financial statements. The new statement defines comprehensive income as "all
changes in equity during a period, with the exception of stock issuances and
dividends."
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which requires companies to
define and report financial and descriptive information on an annual and
quarterly basis about their operating segments. This new statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-Retirement Benefits." SFAS No. 132 standardizes
the disclosure requirements for pensions and other post-retirement benefits.
10
<PAGE>
SFAS No. 130, No. 131 and No. 132 will be adopted in the Company's 1998
fiscal year. Management believes that the adoption of these standards will not
have a material effect on the Company's consolidated financial position, results
of operations or cash flows, and any effect will be limited to the form and
content of its disclosures.
(3) BORROWINGS
Debt at year-end consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Bank borrowings:
Long term........................................... $62,902 $60,509 $41,050
Short term.......................................... 0 0 14,897
7 3/4% Convertible subordinated debentures.......... 0 16,974 17,044
Industrial development bonds........................ 0 5,625 5,625
------- ------- -------
Total debt................................ $62,902 $83,108 $78,616
======= ======= =======
</TABLE>
On December 15, 1997 the Company redeemed at par value the remaining
amount of the $30,000,000 7 3/4% convertible subordinated debentures issued in
1983.
The Company maintains a $100,000,000 unsecured line of credit of which
$62,902,000 was outstanding with an additional $2,472,000 committed to back
standby letters of credit. All $100,000,000 can be borrowed at rates that do not
exceed 0.625% over the London Interbank Offered Rate (LIBOR) or at the bank's
prime rate. The average interest rate on borrowed bank funds at the end of 1997
was 6.12%. The long-term credit line expires on September 26, 2000.
On June 4, 1997, the Company redeemed the remaining $5,625,000 of its
Industrial Development Revenue Bonds using funds previously restricted for such
use under the terms of the bond indenture. The remaining amount in restricted
cash of $546,000 was released from restriction and used by the Company to repay
bank debt. The Company's Electro Kinetics Division had issued the bonds in
October 1989 to finance the construction of an industrial facility in the city
of Oxnard, California. The Company concluded in 1997 not to proceed with the
construction.
The bank agreement has loan covenants that require the Company to
maintain certain financial statement ratios. The Company was in compliance with
all required ratios at December 26, 1997.
All bank borrowings at December 26, 1997 of $62,902,000 mature in the
year 2000.
(4) EMPLOYEE RETIREMENT BENEFIT PLANS
The Company has noncontributory, defined benefit pension plans covering
substantially all of its U.S. employees. Non-U.S. subsidiaries have separate
plans. Benefits are generally determined by a formula based on years of service,
final average salary and estimated social security benefits. Pension expense for
the qualified plan totaled $1,742,000, $1,659,000 and $1,417,000 in 1997, 1996
and 1995, respectively.
Pension expense for the qualified plans consists of the following
components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Benefits earned during the year..................... $ 2,698 $ 2,447 $ 1,866
Interest on projected benefit obligation............ 4,468 4,258 4,084
Gain on plan assets (12,536) (657) (8,793)
Net amortization and deferral....................... 7,112 (4,389) 4,260
------- ------- -------
Net pension expense....................... $ 1,742 $ 1,659 $ 1,417
======= ======= =======
</TABLE>
The reconciliation of the funded status of the qualified plans, includes
the amount included in current and non-current employee benefit plan liabilities
in the accompanying consolidated balance sheets. Pension plan
11
<PAGE>
assets consist of corporate equity and debt securities, unallocated insurance
contracts, real estate and short-term investments. The amounts shown for 1997
are estimates made by the plans' actuary, while the amounts for 1996 and 1995
have been adjusted to actuals based on final calculations performed by the
plans' actuary.
The Company's reconciliation of funding status was as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested.................................................... $55,828 $52,498 $50,542
Non-vested................................................ 1,939 1,823 1,548
------- ------- -------
Total............................................. 57,767 54,321 52,090
Effect of estimated future salary increases................. 7,325 6,889 6,289
------- ------- -------
Projected benefit obligation................................ 65,092 61,210 58,379
Plan assets at fair market value............................ (69,750) (57,783) (54,352)
------- ------- -------
Projected benefit obligation over plan assets............... (4,658) 3,427 4,027
Unrecognized transition asset............................... 0 129 441
Unrecognized net actuarial experience gain (loss)........... 2,757 (4,367) (3,574)
------- ------- -------
Recorded pension (assets) liabilities..................... $(1,901) $ (811) $ 894
======= ======= =======
</TABLE>
Significant assumptions used in the determination of pension expense
consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Discount rate on projected benefit obligation............... 7.5% 7.5% 8.5%
Long-term rate of return on plan assets..................... 9.0% 9.0% 9.0%
Rate of future salary increases............................. 4.5% 4.5% 4.5%
</TABLE>
At the end of 1995, the Company changed the discount rate from 8.5% to
7.5% which caused an increase in the 1995 projected benefit obligation of
$6,500,000 and an increase in 1996 pension expense of approximately $500,000.
The Company uses the projected unit credit method for determining both
pension expense and the annual contribution to the plans. The Company's funding
policy is to contribute an amount between the minimum and maximum contributions
allowed for federal income tax purposes. The difference between cumulative
pension expense and contributions has been classified in current and non-current
liabilities in the accompanying consolidated balance sheets, based on expected
contribution funding dates.
In addition, the Company also has a non-qualified supplemental defined
benefit plan applicable to certain senior executives and a director's retirement
plan, both of which provide unfunded benefits. Pension expense for the
nonqualified plans was $640,000, $402,000 and $346,000 in 1997, 1996 and 1995,
respectively.
(5) INCOME TAXES
The income tax provision from continuing operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
Federal income taxes...................................... $ 8,861 $ 7,264 $ 4,772
State and foreign income taxes............................ 2,557 1,645 2,964
------- ------- -------
Total current tax provision................................. 11,418 8,909 7,736
Deferred tax provision...................................... (5,059) (2,143) 915
------- ------- -------
Total income tax provision................................ $ 6,359 $ 6,766 $ 8,651
======= ======= =======
</TABLE>
12
<PAGE>
The differences between the income tax provision and income taxes
computed using the U.S. Federal statutory income tax rates (35%) consist of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Tax at U.S. Federal rate.................................. $ 5,471 $ 5,985 $ 7,964
State income taxes, net of Federal tax benefit............ 451 224 854
Amortization of certain other assets...................... 855 330 332
Tax benefit of foreign sales corporation.................. (320) (320) (255)
Effect of foreign operations.............................. 368 632 345
Tax benefit of research and development credits........... (253) (149) (261)
Nondeductible employee expenses........................... 112 161 127
Tax exempt interest income................................ (20) (86) (101)
Original issue discount................................... (40) (15) (7)
Other..................................................... (265) 4 (347)
------- ------- -------
Total............................................. $ 6,359 $ 6,766 $ 8,651
======= ======= =======
</TABLE>
The Company had available net operating losses, subject to certain
limitations, of approximately $1,724,000, which expire at various dates
beginning in 1999.
Net deferred taxes of $9,119,000 at December 26, 1997, $4,060,000 at
December 27, 1996 and $1,917,000 at December 29, 1995, were related to (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
CURRENT LONG-TERM CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Inventories................. $3,746 $3,791 $2,604
Employee benefits........... $ 653 $ 295 $ 455
Accrued liabilities......... 2,130 2,354 1,257
Net operating losses........ 542 112 465 112 430
Warranty liabilities........ 348 428 498
Environmental liabilities... 465 656 200
Receivables................. 329 629 425
Investment credits.......... 272 572
Reserves.................... 3,930 124
Valuation allowance......... (430) (465) (50) (430)
LIABILITIES
Property.................... (250) (1,981) (1,839)
Patents/Trademarks.......... (1,330) (1,511) (1,687)
Other....................... (633) (653) (291) (994) (182)
------ ------- ------ ------- ------ -------
Net deferred tax asset
(liability)............... $9,850 $ (731) $7,023 $(2,963) $4,970 $(3,053)
====== ======= ====== ======= ====== =======
</TABLE>
The valuation allowance was decreased by $35,000 in 1997, $15,000 in
1996, and $129,000 in 1995.
(6) STOCKHOLDERS' EQUITY
The Company has authorized 2,000,000 shares of preferred stock and
30,000,000 shares of Common Stock, of which 12,460,956 shares of Common Stock
were outstanding at December 26, 1997.
The Company maintains a stock option plan that provides for the granting
of options for the purchase of Common Stock to the officers and certain other
key employees. During 1995, the stockholders approved a new stock option plan
(1995 Plan) to replace three previous stock option plans. The 1995 Plan expires
in 2005.
13
<PAGE>
Stock options outstanding represent cumulative grants of options from the 1995
Plan and the predecessor plans and certain other grants as described below.
The maximum number of shares of Common Stock that may be granted in any
calendar year for all purposes under the 1995 Plan shall be one percent (1%) of
the shares of Common Stock outstanding on the first day of such calendar year
provided however that, in the event that fewer than the full aggregate number of
shares of Common Stock available for issuance in any calendar year are issued in
such year, the shares not issued shall be added to the shares available for
issuance in any subsequent year or years. If any shares of Common Stock to which
options have been granted cease to be subject to exercise or purchase, such
underlying shares of Common Stock shall thereafter be available for grants under
the 1995 Plan during any calendar year until expiration of the 1995 Plan in
2005. Stock option activity during 1997, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
ACTUAL AVERAGE ACTUAL AVERAGE ACTUAL AVERAGE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding, beginning
of year........................... 866,223 $11.80 923,517 $10.34 992,772 $ 9.38
Options granted
(per share: $11.94 to $20.88)..... 235,955 12.29 117,000 20.88 108,600 16.75
Options canceled
(per share: $6.25 to $20.88)...... (186,033) 16.47 (53,786) 14.94 (43,199) 12.31
Options exercised
(per share: $4.375 to $20.88)..... (327,197) 9.14 (120,508) 8.02 (134,656) 7.78
-------- -------- --------
Stock options outstanding, end of
year.............................. 588,948 $12.00 866,223 $11.80 923,517 $10.34
======== ======== ========
Stock options exercisable, end of
year.............................. 315,691 505,293 463,387
======== ======== ========
Options available for grant,
end of year....................... 180,920 146,278 117,675
======== ======== ========
</TABLE>
The following table summarizes information concerning current
outstanding and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$5.00-$8.00................................. 149,150 4.27 $ 6.99 149,150 $ 6.99
$8.01-$11.00................................ 31,400 6 $ 9.06 31,400 $ 9.06
$11.01-$14.00............................... 313,486 7 $12.77 102,825 $13.56
$14.01-$17.00............................... 54,350 8 $16.41 22,175 $16.75
$17.01-$21.00............................... 40,562 8.75 $20.88 10,141 $20.88
------- -------
Total............................. 588,948 315,691
======= =======
</TABLE>
In February 1997, the Board of Directors awarded to the new Chairman and
CEO, options for 250,000 shares of the Company's Common Stock. The exercise
price was $12.625 per share, the fair market value on the day of the grant.
These options were not issued under the 1995 Employee Stock Option Plan. The
options vested 20% on February 18, 1997 and an additional 20% vest in each of
the following four years.
In addition, from July through December 1997, the Board of Directors
awarded to certain newly hired key executives options for 305,000 shares of the
Company's Common Stock. These options also were not issued under the 1995
Employee Stock Option Plan. The exercise prices range from $13.94 to $15.25 per
share, based upon the fair market value on the day of the respective grant. The
options vest over four years with 25% vesting in 1998, 1999, 2000 and 2001.
14
<PAGE>
Vesting of all stock options accelerates upon a change of control of the
Company.
Stock option activity for out-of-plan options for 1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
ACTUAL AVERAGE
------- --------
<S> <C> <C>
Stock options outstanding, beginning of
year........................................ 0 $ 0.00
Options granted
(per share: $12.625 to $15.25).............. 555,000 13.48
-------
Stock options outstanding, end of year........ 555,000 $13.48
=======
Stock options exercisable, end of year........ 50,000
=======
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE EXERCISABLE PRICE
------------------------ ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
$12.00-$12.99...................................... 250,000 $12.63 50,000 $12.63
$13.00-$13.99...................................... 200,000 $13.94 0
$14.00-$14.99...................................... 80,000 $14.47 0
$15.00-$15.99...................................... 25,000 $15.25 0
------- ------
Total....................................... 555,000 50,000
======= ======
</TABLE>
On December 21, 1997, the Company adopted a new shareholder protection
plan and declared a dividend distribution of a new right ("Right" or "Rights")
for each outstanding share of Common Stock. The dividend was payable on December
29, 1997, to the stockholders of record at that date and the then existing
rights were redeemed via a distribution of $0.01 per share of Common Stock.
Prior to becoming exercisable, the new Rights are attached to, and trade
together with the Common Stock. Each Right entitles the registered holder to
purchase one one-hundredth of a share of the Company's Series B Junior
Participating Preferred Stock, par value $1 per share, at a price of $75.
(7) STOCK OPTION COMPENSATION
As described in Note 2, the Company applies APB Opinion No. 25, and
related interpretations, in accounting for its stock option activity. No
compensation cost has been recognized for its 1995 Stock Option Plan and
out-of-plan issues in 1997. Had the Company chosen to adopt the provisions of
SFAS No. 123, and recognized compensation cost based upon the fair value of the
options at grant date, the Company's income from continuing operations per share
for the years ended December 26, 1997, December 27, 1996 and December 29, 1995
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
INCOME FROM CONTINUING OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (IN THOUSANDS): ------ ------- -------
<S> <C> <C> <C>
As reported............................................................ $9,279 $10,333 $14,103
Pro forma.............................................................. $8,727 $10,056 $13,986
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
INCOME FROM CONTINUING OPERATIONS PER COMMON AND COMMON EQUIVALENT SHARES (DILUTED): ------ ------- -------
<S> <C> <C> <C>
As reported............................................................. $ 0.76 $ 0.83 $ 1.13
Pro forma............................................................... $ 0.71 $ 0.81 $ 1.12
</TABLE>
15
<PAGE>
The fair value of the options granted under the 1995 Plan was used to
calculate the pro forma income from continuing operations per common and common
equivalent share above, on the date of grant, using a binomial option-pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Dividend yield............................................. 0.8% 0.6% 0.7%
Expected volatility........................................ 28.2% 36.5% 36.3%
Risk-free interest rate.................................... 5.0% 6.0% 6.0%
Expected life.............................................. 6 Years 6 Years 6 Years
Weighted average fair value of grants...................... $15.39 $18.76 $11.42
</TABLE>
(8) BUSINESS ACQUISITIONS
Effective December 3, 1997, the Company acquired the assets of AEG Servo
Systems Limited (ASSL), a subsidiary of privately held Cegelec S.A., located in
Ennis, Ireland. ASSL is a supplier of brushless servo motors. The acquisition
expands the Company's European motor manufacturing capabilities and provides the
Company with an advanced electromagnetic design center in Europe. Under the
terms of the agreement, accounted for as a purchase, the purchase price was
approximately $2,100,000 in an all-cash transaction, which approximated the book
value of the company. Had the Company acquired ASSL as of the beginning of the
current or prior year, results of operations would not differ materially from
those reported.
Effective December 29, 1995, the Company acquired Met One, Inc., a
privately held company, in an exchange of approximately 983,000 shares of the
Company's common stock, which had an approximate market value of $27.1 million.
Met One is a supplier of instruments that detect, count and measure contaminant
particles mainly in air. The merger allowed the Company to offer its customers a
more comprehensive product line. The merger was accounted for as a pooling of
interests, and accordingly, all prior periods have been restated as if Pacific
Scientific and Met One had always been one company. In the fourth quarter of
1995, the Company recorded a one-time charge of $350,000 to reflect the costs to
combine operations of the two companies.
Combined and separate results of the Company and Met One during the
periods preceding the merger were as follows (in thousands):
<TABLE>
<CAPTION>
1995
--------
<S> <C>
PACIFIC SCIENTIFIC
Net Sales................................................. $267,157
Net income from continuing operations..................... 12,706
MET ONE
Net Sales................................................. $ 17,506
Net Income................................................ 1,397
COMBINED
Net Sales................................................. $284,663
Income from continuing operations......................... 14,103
</TABLE>
The combined financial results presented above include adjustments to
conform accounting policies of the two companies; such adjustments were not
considered material. Intercompany transactions between the two companies for the
periods presented were not material.
On the first day of fiscal year 1995, the Company purchased all the
outstanding shares of Eduard Bautz GmbH ("Bautz"), located in Weiterstadt,
Germany. Bautz is a German manufacturer of high-performance motors and controls.
The acquisition was made to expand the prospects for all of the Company's
electric motors and related products throughout Europe. The purchase price was
approximately $13,500,000 and resulted in the recognition of excess cost over
net assets of acquired businesses of $7,300,000.
16
<PAGE>
(9) LITIGATION
The Company is a co-defendant with certain of its past and present
officers in actions filed in the United States District Court for the Central
District of California. A purchaser of the Company's common stock filed one
action and a purchaser of the Company's convertible debentures filed the second
action. The Federal Court has combined the complaints and ordered that a class
of stockholders and a class of debenture holders be certified. The complaint
alleges that the Company and certain of its officers made false and misleading
statements regarding the Company and its Solium subsidiary. The complaint
further alleges that the market prices of the common stock and the debentures
were "artificially inflated" in the period of October 3, 1994 through July 2,
1996, thereby causing damages to the class members.
The Company is also a co-defendant with certain of its past and present
officers in an action filed in the Superior Court of Orange County, California
by prior stockholders of Met One, Inc. The complaint is similar to the above
class action complaint, alleging that the Company made false and misleading
statements regarding the Company, its Solium subsidiary, and its High Yield
Technology subsidiary. Damages and rescission of the sale are sought based on
several causes of actions.
On December 15, 1997, an action was filed against the Company and its
directors in the Superior Court of California, County of Orange, by William
Steiner, purporting to bring suit as a shareholder on behalf of a proposed class
of all public shareholders of the Company. The complaint alleges, among other
things, that defendants are obligated to "arrange for the sale of [the Company]
to the highest bidder and that, by virtue of certain conduct alleged to have
taken place with respect to the Kollmorgen Tender Offer and Kollmorgen Merger,
and otherwise, the defendants have breached their fiduciary duties and have
failed to exercise independent business judgment." The defendants have never
actually been formally served with the Steiner complaint and, as such, have not
responded to such complaint.
On February 19 and 25, 1998, the Company received two complaints, filed
in the Superior Court of California, County of Orange, and alleging that the
Company and its directors withheld certain information concerning potential
takeover of the Company when it called its 7 3/4% Convertible Subordinated
Debentures due June 15, 2003, for an early redemption. The complaints seek class
certification and further allege damages on behalf of the purchasers of the
Company's convertible debentures.
The Company believes the claims made in these complaints are without
merit and the Company intends to vigorously pursue its defense. The Company, at
this time, is not able to determine the eventual disposition of these matters.
In addition, from time to time, as a normal incident of the nature of
the Company's business, various claims, charges and litigation are asserted or
commenced against the Company. These claims arise from related contractual
matters, personal injury, patents, environmental matters and product liability.
While there can be no assurance that the Company will prevail in any of
the foregoing matters, the Company believes that these matters will not have a
material adverse effect on its consolidated financial position, consolidated
results of operations, or consolidated cash flows. However, in all matters of
litigation, an unfavorable outcome could have an adverse effect on the Company's
consolidated results of operations in the quarter in which that matter is
resolved.
(10)OPERATING LEASES
The Company leases certain facilities and equipment under non-cancelable
operating leases which require the following minimum future rental payments:
1998, $6,158,000; 1999, $5,496,000; 2000, $4,587,000; 2001, $4,018,000; 2002,
$2,993,000; later years, $5,155,000. Rental expense was $6,597,000, $6,225,000
and $6,706,000 in 1997,1996 and 1995, respectively.
(11)PROTECTION OF THE ENVIRONMENT
The Company is currently named a potentially responsible party (PRP)
under the Comprehensive Environmental Response, Compensation and Liability Act
("Superfund") at five (5) sites. As a PRP, the
17
<PAGE>
Company has voluntarily agreed to fund, in participation with others, the
required investigation and remediation at each site. The Company has been
currently allocated responsibility at these sites for between 0.02% and 0.26% of
the waste disposed of at these sites. Although current law seeks to impose joint
and several liability on all responsible parties at any Superfund site, the
Company anticipates that any potential liability or required contribution to the
remediation of these sites will be limited by its small percent contribution to
each site. No accrual has been made under the joint and several liability
concept because the Company believes that the probability that it will have to
pay material costs above its share is remote due to the fact that the other PRPs
generally have substantial assets available to satisfy their obligation and are
participating in the overall cleanup obligation.
The Company is also involved in a remedial response and voluntary
environmental clean-up expenditure at one former facility and monitoring
activity at two other sites; no site is currently subject to any Superfund law
proceeding. In addition, the Company is litigating its responsibility for
environmental remediation of a site never directly operated by the Company. This
site was sold by Sigma Instruments, Inc. prior to the acquisition of Sigma by
Pacific Scientific Company in 1987. The Company believes that it has a number of
defenses to this claim and its current potential exposure is not material.
In many cases, future environmental related expenditures cannot be
quantified with a reasonable degree of accuracy. Accordingly, the cost of
clean-up for which the Company remains primarily liable may be in excess of the
current environmental related accrual of $1,108,000 as of December 26, 1997. It
is the Company's policy to accrue environmental clean-up cost if it is probable
that a liability has been incurred and an amount is reasonably estimable. As
assessment and clean-up proceeds, these liabilities are reviewed and adjusted if
necessary. The Company continues to evaluate possible insurance claims for both
past and future remediation cost.
Ongoing environmental compliance cost, including maintenance and
monitoring costs, are expensed as incurred and are not material.
While it is not feasible to predict the outcome of all pending suits and
claims involving environmental matters, the Company is of the opinion that the
ultimate disposition of these matters will not have a material adverse effect
upon the consolidated financial position, consolidated results of operations, or
consolidated cash flows of the Company.
(12)FOREIGN EXCHANGE INSTRUMENTS
The Company enters into forward exchange and option contracts to hedge
foreign currency transactions on a continuing basis for periods consistent with
its committed exposure. The objective of the hedging is to minimize the impact
of foreign exchange rate movements on the Company's earnings and financial
position. Generally, gains and losses on these contracts offset losses and gains
on the assets and liabilities being hedged. The Company does not engage in
currency speculation.
As of December 26, 1997, the Company had approximately $1,296,000 of
outstanding foreign exchange contracts in which foreign currencies could be
purchased. There were no outstanding foreign exchange contracts in which foreign
currencies could be sold at December 26, 1997. All outstanding foreign exchange
contracts served to hedge assets and liabilities. All outstanding foreign
exchange contracts expired during February 1998 without any significant gain or
loss.
(13)INFORMATION BY INDUSTRY SEGMENT
Financial information by industry segment for fiscal years 1997, 1996
and 1995 is summarized on page 6.
International sales totaled $89,900,000 in 1997, $83,226,000 in 1996 and
$80,695,000 in 1995.
The Company's net sales under prime contracts to defense agencies of the
U.S. Government were $6,500,000 in 1997, $12,727,000 in 1996 and $7,256,000 in
1995.
(14)RECENT DEVELOPMENTS
On December 15, 1997, Kollmorgen Corporation ("Kollmorgen"), through a
wholly owned subsidiary, commenced an unsolicited tender offer for a majority of
the shares of Pacific Scientific Company's (the
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<PAGE>
"Company," "Pacific Scientific," or "Registrant") common stock ("Common Stock")
for $20.50 in cash (the "Kollmorgen Tender Offer") and a second step merger (the
"Kollmorgen Merger") of the Company into a Kollmorgen subsidiary in which the
Company's shareholders would receive, for each share of Common Stock, Kollmorgen
stock with a value of $20.50, subject to certain conditions that could render
the value of such stock less than or greater than $20.50.
On December 17 and 21, 1997, the Board met to consider the Kollmorgen
Tender Offer and related matters. At those meetings, the Board considered the
Company's business, financial condition, results of operations, current business
strategy and future prospects, recent and historical market prices for the
Common Stock, the terms of the Kollmorgen Tender Offer and the Kollmorgen
Merger, strategic and other potential alternatives to the Kollmorgen Tender
Offer and the Kollmorgen Merger, and other matters, including information
presented by the Company's management, BancAmerica Robertson Stephens ("BARS")
and the Company's legal advisors. At its December 21st meeting, the Board
unanimously (i) determined to redeem the preferred share purchase rights then
issued and outstanding under the Company's then-existing preferred share
purchase rights plan and simultaneously adopted a new Preferred Share Purchase
Rights Plan (the "Rights Plan"); (ii) declared a dividend distribution of new
preferred share purchase rights (the "Rights") under the Rights Plan; (iii)
declined to render the then-existing rights or the Rights applicable to the
Kollmorgen Tender Offer or the Kollmorgen Merger; and (iv) declined to recommend
or approve the Kollmorgen Tender Offer or the Kollmorgen Merger.
During the period following commencement of the Kollmorgen Tender Offer,
the Board, together with the Company's management and its legal and financial
advisors, continued to evaluate the Company's strategic alternatives. A variety
of third parties contacted members of the Company's management and BARS to
express an interest in the possibility of pursuing a transaction with the
Company were the Board to entertain such a possibility. As part of the Board's
evaluation process, BARS was directed to contact, on a confidential basis, third
parties who might have an interest in pursuing a transaction with the Company.
Beginning on January 5, 1998, BARS, on behalf of the Company, arranged for more
than 40 parties to execute customary confidentiality agreements.
During the period following BARS' distribution of confidential
information to third parties, BARS responded to questions and provided
additional information to various parties to which it previously had provided
information, in order to assist such parties in their review of the Company. The
Company, through BARS, also received oral preliminary indications of interest
from certain of these parties as to the price levels such parties would be
willing to consider in an acquisition transaction involving the Company.
Over the weekend of January 23 and during the week of January 25, 1998,
the Company's management and BARS continued to have discussions and due
diligence meetings with several parties. On January 28, 1998, the Company's
counsel delivered to attorneys to several parties a proposed form of merger
agreement.
Beginning on January 30, 1998, the Company's legal advisors, with the
assistance of management and the Company's financial advisors, discussed and
negotiated the form of contract or merger agreement with such interested
parties. Also on January 30, Kollmorgen increased the cash and stock price of
its unsolicited tender offer and merger to $23.75 per share. On January 31,
1998, following continued discussions and negotiations, the Board received the
interested parties' final offers, each of which contemplated all-cash tender
offers followed by a cash merger. After discussion and analysis, including the
opinion of BARS, the Board unanimously approved and adopted an Agreement and
Plan of Merger (the "Merger Agreement") with DH Holdings Corp ("Holdings") a
wholly owned subsidiary of Danaher Corporation, a Delaware corporation
("Parent") which, at $30.25 per share, represented the highest cash price any
bidder was willing to offer (the "Offer"). The Board also unanimously
recommended that shareholders accept the Offer and tender their shares pursuant
thereto and vote in favor of approval and adoption of the Merger Agreement and
the merger with Holdings (the "Merger"), to the extent required by applicable
law.
On February 2, 1998, Kollmorgen terminated the Kollmorgen Tender Offer.
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<PAGE>
In accordance with the Merger Agreement, on February 6, 1998, ACC
Acquisition Corp., a California corporation (the "Purchaser") and an indirect
wholly owned subsidiary of Parent, offered to purchase all outstanding shares of
Common Stock, par value $1.00 per share, including the associated Rights
(together with the Common Stock, the "Shares"), at $30.25 per Share, net to the
seller in cash, on the terms and subject to the conditions set forth in the
Offer to Purchase (the "Tender Offer").
On February 26, 1998, the Company distributed to its shareholders a
proxy statement in preparation for a special meeting (the "Special Meeting") of
shareholders to consider the Offer if the pending Tender Offer failed to acquire
at least 90% of the outstanding Common Stock by March 27, 1998.
As of March 9, 1998, the date on which the Tender Offer closed, Company
shareholders tendered approximately 93.8% of the outstanding shares of Company
Common Stock and the Purchaser accepted such shares for payment. The Merger
contemplated by the Merger Agreement will, in accordance with the provisions of
the California General Corporation Law (the "CGCL"), be consummated without a
shareholder vote, and the Special Meeting will not be held. The Merger is
expected to be completed on or about March 31, 1998.
There were no expenses incurred with rejecting the Kollmorgen Tender
Offer and with negotiating the Merger Agreement with Danaher Corporation in
fiscal 1997. Costs have been incurred since the first of 1998, and these have
been reported as a prepaid expense. When the Merger is complete, expenses paid
to third parties totaling approximately $11.0 million will be recognized in the
quarter in which the Merger is finalized or terminated.
(15)SEVERANCE ARRANGEMENTS -- CHANGE OF CONTROL
On December 21, 1997, the Company adopted the 1997 Pacific Scientific
Company Change of Control Severance Plan (the "Severance Plan") to establish its
severance policies and commitments in the change in control context. The
Severance Plan was adopted to guarantee severance benefits to key employees in
the event of their termination following a change of control of the Company. The
Severance Plan explicitly precludes any provision from taking effect to the
extent that it would prevent a business transaction from qualifying for pooling
of interests accounting. Similarly, the Severance Plan generally prohibits
payments that the Company believes will be subject to golden parachute tax
penalties or that would be nondeductible under the deduction limit on
nonperformance-based compensation under Section 162(m) of the Code. Although the
Company believes that the benefits provided to Messrs. Hill, Schlotterbeck and
Hickman will not constitute excess parachute payments, the Company has agreed to
indemnify such individuals from any taxes, penalties and costs in the event it
is ultimately determined that such benefits constitute excess parachute
payments. Subject to the foregoing, the Severance Plan authorizes the Company's
Executive Committee to extend participation selectively to the Company's
corporate officers and corporate staff, to its group and division presidents, to
persons who directly report to division presidents, to other comparable
employees and to other key employees. The Company's Executive Committee has thus
far extended severance benefits to 51 individuals. Each of the Company's
executive officers has been designated as a participant in the Severance Plan.
Pursuant to those benefits, in the event a "change in control" occurs and a
participant is terminated by the Company (or its successor) without cause or
resigns for "good reason" (as defined under the Severance Plan), within two
years from the date of such event, the individual would receive a lump sum
severance benefit of from 12 to 130 weeks of salary and target bonus, depending
on the individual's position (130 weeks in the case of Messrs. Hill,
Schlotterbeck and Hickman and from 52 to 104 weeks in the case of other
executive officers), and would receive group insurance benefit continuation for
an equivalent period. The severance benefits provided to Messrs. Hill,
Schlotterbeck and Hickman in their respective Employment Agreements do not add
to their benefits under the Severance Plan. In no event, however, would
participants receive less than one month of severance for each year of service
to the Company (subject to an 18-month cap).
For the purpose of the Severance Plan, a "change of control" includes
each of the following: (i) consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of substantially all the assets of
another entity, in each case, unless, following such transaction, (A) all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Common Stock and the Company's outstanding voting
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<PAGE>
securities immediately prior to such transaction beneficially own, directly or
indirectly, more than 60%, respectively, of the then-outstanding shares of
Common Stock and the combined voting power of the then outstanding voting
securities, as the case may be, of the surviving entity in such transaction in
substantially the same proportions as their ownership, immediately prior to such
transaction of the then-outstanding shares of Common Stock and then-outstanding
voting securities, as the case may be, (B) no individual, entity or group
(excluding any employee benefit plan (or related trust) of the Company or such
corporation resulting from such transaction) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then-outstanding shares of Common
Stock of the corporation resulting from such transaction or the combined voting
power of the outstanding securities of such corporation except to the extent
that such ownership existed prior to such transaction, and (C) at least a
majority of the members of the Board resulting from such transaction were
members of the Board at the time of the execution of the initial agreement, or
of the action of the Board, providing for such transaction; (ii) the acquisition
by any individual, entity or group of 20% or more of either the outstanding
shares of Common Stock or the combined voting power of the outstanding voting
securities of the Company (in either case other than acquisitions by the
Company, directly from the Company and by employee benefit plans of the Company
or any entity controlled thereby; (iii) individuals who, as of December 21,
1997, constitute the Board (the "Incumbent Board") cease for any reason to
constituted at least a majority of the Board (except that any individual
becoming a director subsequent to such date whose election, or nomination for
election by the Shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered a member
of the Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or threatened
election contest, including a contest for the removal of directors and certain
other contests); (iv) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company; and (v) the Board adopts a resolution
to the effect that, for purposes of the Severance Plan, a change in control has
occurred. Such a change of control occurred on March 9, 1998, the date on which
the Tender Offer effected by Purchaser was completed -- i.e., when the Company
shareholders tendered approximately 93.8% of the outstanding shares of Company
Common Stock and the Purchaser accepted such shares for payment. The Merger
contemplated by the Merger Agreement will, in accordance with the provisions of
the CGCL, be consummated without a shareholder vote, and the Special Meeting
previously called by the Company will not be held. The Merger is expected to be
completed on or about March 31, 1998.
The Severance Plan will expire on December 31, 2002 unless terminated
sooner, which the Company can do prior to a change in control, other than in
anticipation of a change in control. If the proposed merger with Danaher
Corporation is consummated, costs associated with the Severance Plan, estimated
to be approximately $3.8 million (excluding the pre-existing employee
agreements), would be recognized in the quarter implemented.
(16)DISCONTINUED OPERATIONS
On April 9, 1997, the Company announced that it would seek a strategic
buyer for its Solium technology and equipment, phase-out the Solium subsidiary,
and discontinue operations. An after-tax loss from discontinued operations of
$13.6 million was reported in 1997. This amount was composed of $12.1 million of
estimated loss on disposal of assets and a loss of $1.5 million from operations
in the first quarter of 1997.
On December 4, 1997, the Company completed the sale of the assets of its
Solium subsidiary to Chicago Miniature Lamp, Inc. ("CHML"). In addition, the
Company granted CHML the exclusive worldwide license for the advanced Solium
technology line of electronic fluorescent ballast products. Under the license
agreement, the Company will also receive royalty payments from future sales of
the Solium product line.
As of December 26, 1997, the $2.6 million reserve for discontinuance of
Solium operations will be used in connection with certain assets, the building
lease, severance and other expenses.
All financial information contained herein has been restated to reflect
Solium as a discontinued operation.
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<PAGE>
(17)BUSINESS DIVESTMENTS
On December 26, 1997, the Company sold its Automation Intelligence Inc.
subsidiary to Sanyo Denki, Co., Ltd. of Japan. The sale resulted in a one-time
pre-tax loss of $4.9 million.
(18)DIVIDENDS AND QUARTERLY INFORMATION (UNAUDITED)
Selected quarterly information for fiscal years 1997, 1996 and 1995
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Q-1 Q-2 Q-3 Q-4 YEAR
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1997
Net sales..................................... $72,464 $78,603 $76,677 $82,716 $310,460
Gross profit.................................. 23,178 25,765 24,373 26,676 99,992
Income from continuing operations(1).......... 2,718 3,088 3,219 254 9,279
Income per common share (basic)............... 0.22 0.25 0.26 0.02 0.76
Income per common share (diluted)............. 0.22 0.25 0.26 0.02 0.76
Loss from discontinued operations(2).......... (13,563) 0 0 0 (13,563)
Loss per common share (basic)................. (1.11) 0.00 0.00 0.00 (1.11)
Loss per common share (diluted)............... (1.11) 0.00 0.00 0.00 (1.11)
Net income (loss)............................. (10,845) 3,088 3,219 254 (4,284)
Net income (loss) per common share (basic).... (0.89) 0.25 0.26 0.02 (0.35)
Net income (loss) per common share
(diluted).................................. (0.89) 0.25 0.26 0.02 (0.35)
Dividends per common share.................... $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.12
1996
Net sales..................................... $74,041 $72,174 $70,898 $75,250 $292,363
Gross profit.................................. 24,116 23,972 22,675 23,252 94,015
Income from continuing operations............. 3,095 2,406 2,248 2,584 10,333
Income per common share (basic)............... 0.26 0.20 0.18 0.21 0.85
Income per common share (diluted)............. 0.25 0.19 0.18 0.21 0.83
Loss from discontinued operations............. (1,204) (6,144) (1,378) (1,438) (10,164)
Loss per common share (basic)................. (0.10) (0.51) (0.11) (0.12) (0.84)
Loss per common share (diluted)............... (0.10) (0.49) (0.11) (0.12) (0.82)
Net income (loss)............................. 1,891 (3,738) 870 1,146 169
Net income (loss) per common share (basic).... 0.16 (0.31) 0.07 0.09 0.01
Net income (loss) per common share
(diluted).................................. 0.15 (0.30) 0.07 0.09 0.01
Dividends per common share.................... $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.12
1995
Net sales..................................... $68,959 $72,979 $70,417 $72,308 $284,663
Gross profit.................................. 22,105 25,048 25,074 27,267 99,494
Income from continuing operations............. 2,922 3,513 3,574 4,094 14,103
Income per common share (basic)............... 0.28 0.30 0.29 0.31 1.18
Income per common share (diluted)............. 0.27 0.29 0.28 0.29 1.13
Income (loss) from discontinued operations.... 24 (254) (490) (633) (1,353)
Income (loss) per common share (basic)........ 0.00 (0.02) (0.04) (0.06) (0.12)
Income (loss) per common share (diluted)...... 0.00 (0.02) (0.04) (0.05) (0.11)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Q-1 Q-2 Q-3 Q-4 YEAR
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net income.................................... 2,946 3,259 3,084 3,461 12,750
Net income per common share (basic)........... 0.28 0.28 0.25 0.25 1.06
Net income per common share (diluted)......... 0.27 0.27 0.24 0.24 1.02
Dividends per common share.................... $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.12
</TABLE>
- ---------------
Notes:
(1) The fourth quarter 1997 includes a $4,892,000 pre-tax loss on the sale of
Automation Intelligence.
(2) The first quarter 1997 includes a $13,563,000 after-tax loss from
discontinuing the Solium operation. All quarters reported for discontinued
operations are related to Solium.
23
