<PAGE>
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 December 31, 1994
Commission file number 0-7916
HARMON INDUSTRIES, INC.
IRS Employer Identification Number
44-0657800
State or other jurisdiction of
incorporation or organization
Missouri
(Address of principal executive offices)
1300 Jefferson Court, Blue Springs, Missouri 64015
Registrant's telephone number, including area code:
(816) 229-3345
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
NONE ----------------------------
--------------------------------- ----------------------------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(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
As of March 17, 1995, 6,766,211 common shares were outstanding, and the
aggregate market value of the common stock (based upon the closing bid price of
these shares per NASDAQ for Over-the Counter trading) of Harmon Industries, Inc.
held by non-affiliates was approximately $109,843,000.
The information required by Item 405 of Regulation S-K regarding late filings or
failure to file in connection with Form 3, Form 4 or Form 5 is included herein
under Part III, Item 12.
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DOCUMENTS INCORPORATED BY REFERENCE
PART II
Item 6: Selected Consolidated Pages 14 and 15 of the
Financial Data. Annual Report to Shareholders for the
year ended December 31, 1994.
Item 7: Management's Discussion Pages 16 through 21 of
and Analysis of Financial the Annual Report to
Condition and Results of Shareholders for the year
Operations. ended December 31, 1994.
Item 8: Financial Statements Page 22 through 37 of
and Supplementary Data. the Annual Report to
Shareholders for the year
ended December 31, 1994.
PART III
Item 10: Directors and Executive Pages 3 through 6 of the
Officers of the Registrant. Company's
Proxy Statement,dated March 31, 1995
Item 11: Executive Compensation Pages 6 through 14 of
and Other Information. the Company's Proxy
Statement dated
March 31, 1995.
Item 12: Security Ownership of Page 2 of the
Certain Beneficial Owners Company's Proxy Statement
and Management. dated March 31, 1995.
Item 13: Certain Relationships and Page 6 (last paragraph
Related Transactions of Election of Directors)
and page 6 ("Certain
Transactions") of the
Company's Proxy Statement
dated March 31, 1995.
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HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
PART I
ITEM 1. BUSINESS
The Company is a leading supplier of signal and train control products to
railroads throughout North America and the world. The Company sells its
products to Class I and short line freight railroads and to mass rail transit
customers. Harmon designs, manufactures, markets and services a broad line of
products beneficial to the operating efficiency and safety of its customers.
The products include an extensive line of railroad signal and train control
systems and related components and services. The Company emphasizes innovation
and technology to develop timely and sophisticated solutions to problems that
confront its customers. It also provides customized asset management services
through a warehousing and distribution business. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
A rapidly growing share of the Company's sales now involve combining and
customizing individual products to meet specific customer applications,
representing an evolution for the Company from a supplier of separate products
to an integrator of systems able to provide customers with solutions to complex
problems. To manufacture this product matrix, the Company employs advanced
computerized manufacturing scheduling systems.
Historically, the largest portion of the Company's sales have been derived
from rail/highway crossing warning systems. Through research and development
and selective acquisitions, the Company has improved and expanded its product
line to include train inspection systems, signal control track circuits, wayside
signal control systems, centralized traffic control systems, locomotive control
equipment, and radio communication equipment.
INDUSTRY
FREIGHT RAILROADS
The domestic freight railroad industry includes Class I, regional and short
line railroads. However, the industry is dominated by the 12 large freight
carriers that the Interstate Commerce Commission defines as Class I railroads
because of their significant annual operating revenues. From the 1930's to the
1980's, the Class I freight railroads endured a nearly constant decrease in
their share of the total inter-city freight transportation market. (1) The
reversal of this trend is a result of their ability to offer customers a lower
cost and higher quality method of transporting freight than was provided in the
past. Freight railroads achieved this result through strict cost controls,
reductions in train crew sizes and other employment expenses, divestiture of
unprofitable track segments and other assets unrelated to the railroad industry
and a more marketing oriented operating strategy. The Company has traditionally
sold its products to the freight railroad industry.
Many Harmon products are designed to assist the railroads in cutting costs.
For example, the 40% decrease in Class I employment levels from 1984 to 1993
----------------------
(1)This fact and the other statistical information about the Class I
railroads in this Annual Report come from RAILROAD FACTS, 1994 EDITION, a
recognized industry source for information on Class I railroads.
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required the Class I railroads to look to products like those manufactured by
Harmon to monitor the condition of moving trains, help ensure the safe switching
and passage of trains and facilitate better communication among crew members on
a train and between moving trains and railroad traffic controllers.
Class I railroads have also used Harmon products to increase asset
utilization and productivity. The 38% reduction from 1984 to 1993 in the number
of Class I railroad freight cars in service required the Class I railroads to
look to products like those manufactured by Harmon which permit the railroads to
track more closely the location and performance of a particular train. This
improved utilization of cars and the reduction in employment levels have caused
the freight revenue ton miles per employee hour for Class I railroads to
increase by 95% from 1984 to 1993. The Class I railroads have become more
profitable despite an 18% reduction (in constant 1984 dollars) from 1984 to 1993
in revenue per ton mile.
Many Class I railroads have entered into alliances with large trucking
organizations that have resulted in an increase in the shipment of "intermodal"
freight (i.e., containerized freight that moves from truck to train and back to
truck) for which the railroads have retained the long haul segment. The number
of intermodal have increased 57% from 1984 to 1993. The Company believes that
the willingness of the Class I railroads to enter into such alliances with their
former competitors is a positive development. The Company believes that the
cost reductions and improved efficiencies described above will permit the
Class I railroads to better compete in the long haul segment of the freight
transportation market. The current momentum of the Class I railroads is
important to the success of Harmon.
Class I railroads also have improved profitability by divesting themselves
of assets viewed as unprofitable, including large portions of underutilized
track. From 1984 to 1993, the Class I railroads have reduced their track miles
by 26%, to approximately 186,000 miles. These divestitures permit the Class I
railroads to spend more money on products like those manufactured by Harmon for
their high-traffic corridors. From 1984 to 1993, capital expenditures by
Class I railroads per mile of track owned has increased from approximately
$11,600 to $15,000 per mile of track. Many of these expenditures are for
products, such as the Company's Electro Code product, that reduce the
significant maintenance expenses otherwise incurred by Class I railroads.
Federal legislation in the early 1980's permitted the Class I railroads to
sell some of their lines to short line railroads rather than abandon such track.
Such sales have increased the number of short line railroads to almost 500, with
34 of these short line railroads being above the threshold of either $40.0
million annual revenues or 350 miles of railroad track. Short line railroads
are able to profitably operate sections of track deemed unprofitable by Class I
railroads because they generally have smaller administrative, maintenance and
engineering staffs; are not required to meet the same maintenance and operating
standards as the Class I railroads and are typically not burdened with
restrictive collective bargaining agreements.
The manner in which the short line railroads operate creates significant
opportunities for Harmon. These railroads typically do not have substantial
engineering or maintenance staffs and, therefore, frequently look to Harmon to
provide complete pre-engineered systems. Sales to these customers have become
a meaningful portion of the Company's sales. Harmon expects to continue to
develop products and services that will meet the evolving maintenance and
operating needs of these railroads.
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The market in the freight railroad industry for Harmon products is
influenced by the availability of government funding, the relative health of the
freight railroad industry and the changing needs that such industry has for
various Harmon products. ISTEA (defined later) provides federal funds through
1997 for railroad crossing warning systems in the same amount each year as
existed under previous federal legislation. In addition, Harmon expects the
Class I railroads to continue their recent favorable financial performance.
Accordingly, Harmon expects the equipment maintenance and capital improvement
expenditures of Class I railroads to grow in coming years.
MASS TRANSIT RAILROADS
The mass rail transit industry includes AMTRAK and numerous existing and
proposed commuter and urban transit rail systems. The development of such
systems is generally enhanced by the federal funding provided by ISTEA, which
nearly doubled the federal funding available annually for mass transit projects.
The aggregate amount of federal funds appropriated by ISTEA that is expected to
be made available for such projects between January 1992 and September 1997 is
$31.5 billion. In addition, ISTEA permits local governments to shift funds
otherwise allocated for highway construction into mass transit projects. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Harmon's participation in the expansion of existing or construction of new
mass rail transit systems will generally require a long selling cycle and
generally result in multi-year contracts. In addition, the selling process
requires Harmon to consult regularly with engineers responsible for designing
such systems. Such consultation permits Harmon to better understand the
requirements of proposed projects and help insure that such projects are
designed in a way that will permit use of many Harmon products. See "Business-
Marketing and Sales."
In addition to the mass rail transit projects expected to be expanded or
originated in the next several years, Harmon has targeted existing mass rail
transit systems as potential customers. These systems are under pressure to
increase their capacity and maintain or improve passenger safety. These dual
objectives are met through the increasing use of Harmon products containing
advanced technology to control passenger trains and to install in such trains
equipment that will protect passengers from human error. An example of the
Harmon ability to swiftly address safety concerns is the development by Harmon
of its Ultra Cab product after a highly publicized passenger train accident in
the Northeast Corridor. As a result of that accident, federal regulators
required that all trains operating in the Northeast Corridor be equipped with
automatic devices to guard against human error in responding to signals.
Conrail, the major freight railroad most affected by this requirement, solicited
bids from Harmon and its competitors for development of a product like Ultra
Cab. Harmon won this bid and completed development of Ultra Cab, which now
enjoys a substantial share of the market in the Northeast Corridor.
Harmon's first major contract for new construction in the mass rail transit
market was the St. Louis Metro Link project, which totalled $4.7 million, the
first phase of which entered service in July 1993. This project has served as a
visible and successful entry by Harmon into the transit market. The Company's
transit business has grown to include active transit projects in eight major
cities in North America. It is difficult to estimate the potential size
of this market, particularly since railroad track used extensively by a mass
rail transit operator in some metropolitan areas may be owned and maintained by
a Class I railroad. Accordingly, sales to Class I railroads of Harmon products
expected to upgrade certain areas of railroad track may well be sales that are
related to or result from growth in the mass rail transit industry.
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INTERNATIONAL OPPORTUNITIES
The Company has identified certain international markets as opportunities
for growth. Standards for the railroad industry in Latin America, Canada,
Australia, and certain parts of eastern Asia are generally consistent with the
standards of the United States railroad industry. In addition, some
nationalized railroads in Latin America are now being privatized and United
States freight railroads, many of which are Harmon customers, are potential
purchasers or operators of large portions of such track. Harmon expects that
its current relationships with such railroads will provide it the opportunity to
sell its products to its existing customers for international use. Harmon is
also pursuing strategic alliances with other railroad industry suppliers to
assist Harmon's efforts to penetrate the international markets. The North
American Free Trade Agreement is also expected to provide opportunities for
Harmon in Mexico and Canada because the expected growth in trade will increase
the railroad traffic in both directions across the borders. Harmon recently
acquired the railroad division of SERVO Corporation of America (SERVO),
including SERVO's distributors in Western Europe. These contacts should enable
the Harmon products to become more widely represented in these markets.
BUSINESS STRATEGY
Harmon's business strategy is to utilize its technological expertise,
ability to install turnkey systems, broad product lines, extensive sales network
and customer service orientation to provide high quality products and services
to its customers. Harmon plans to continue to expand and improve its product
lines and services to meet its customers' needs. Harmon expects that the
continued development of its product lines may be accomplished, in part, by
strategic acquisitions of product lines or companies that complement the
Company's current product lines. Internal development of new products will
continue, consistent with Harmon's desire to expand its product base.
The Company intends to improve its leadership position as a vendor to the
freight railroad industry by continuing to expand its long-standing
relationships with Class I railroads, continuing to explore opportunities with
short line railroads, developing new technologies to meet customer needs, and by
adding value through its engineering, installation and asset management services
capabilities. The Company has seen and expects to continue to see a shift in
its revenue mix from revenues generated strictly from the sale of its individual
products to revenues resulting from the sale of complete systems that are
designed, installed and, potentially, maintained by the Company. The Company
plans to utilize its extensive experience and expertise in the freight railroad
industry to expand its presence in the mass rail transit market. The Company
has successfully adapted several of its products to the needs of the mass rail
transit industry and plans to add to the products and services that it can offer
to the mass rail transit market.
In international markets, the Company intends to continue forming strategic
alliances with entities resident in such markets that are familiar with the
local customers, the railroad standards and the individuals making the decision
to purchase equipment. In addition, the ownership or operation by domestic
Class I and short line railroads of railroad track in other countries provides
Harmon the opportunity to sell its existing products to its existing customers
for international use.
The Company will continue its cost control system that subjects all
research and development, acquisition and capital expenditure programs to a
return on investment analysis. If the anticipated return from any such
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expenditure does not meet objectives set by the Company, such expenditure will
generally not be undertaken. The Company is in the process of upgrading its
fully integrated financial, manufacturing and inventory control computer system
that will assist its efforts to further contain costs.
Finally, the Company will continue to enhance its Total Quality System,
promoting continuous improvement in all aspects of the Company's operations.
The Company was one of the first in its industry to institute such a program.
We continued our training and education efforts to finalize implementation
of our total quality system program and to become ISO 9000 certified in 1995.
Our unrelenting pursuit of quality in all aspects of our operations has not gone
unnoticed by our customers. Last year the Union Pacific gave us its "Quality
supplier of the Year" award; later on the Burlington Northern presented us with
their similar award, and Conrail awarded us with its quality certification.
PRODUCTS
The products of the Company can generally be separated into five
categories. SIGNAL SYSTEMS include all Company products related to rail/highway
crossing warning systems including: motion detectors (the Company's PMD and HXP
products, among others); flashing lights and cantilevers; and the design, wiring
and installation of these products. TRAIN CONTROL SYSTEMS include all Company
products related to the control of train movement. These include the Company's
signal control track circuits (Electro Code); interlocking control equipment
(Electro Logic, HLC and VHLC); car-borne equipment (Ultra Cab); and computer-
based traffic control systems (TTM). ASSET MANAGEMENT SERVICES involve a
single-source, rapid delivery service for railroad components by warehousing
commonly-used parts and equipment that are manufactured by the Company and
other vendors. PRINTED WIRING BOARDS include production of customer designed
printed wiring boards for use by other electronics manufacturers. OTHER sales
include train inspection systems, communication equipment and products that do
not readily fit into the other four categories.
DISCONTINUED OPERATIONS
Throughout 1990, the Company made a series of decisions designed to curtail
or sharply reduce the ongoing losses at three of its unprofitable subsidiaries:
Cedrite Technologies, Inc. ("Cedrite"), Phoenix Data, Inc. ("PDI") and Modern
Industries, Inc. ("Modern"). Cedrite manufactured reconstituted railroad ties;
PDI manufactured sophisticated data acquisition and analysis systems for
industrial, scientific and military uses; and Modern fabricated and assembled
grade crossing hardware. Each of these companies had different operating
problems, which required separate analysis and separate action plans. The goal
of these plans was to eliminate losses and cash requirements of these
businesses, leaving the Company with subsidiaries focused in the railroad
electronics business and railroad warehouse operations. The Cedrite operation
was shut down on April 1, 1991.
Since Harmon had announced at 1990 year-end that Cedrite would be sold or
disposed of in 1991, reserves for the estimated loss on the sale of Cedrite as a
going concern were set aside at 1990 year-end. The estimated asset values were
based on independent appraisals. Those amounts proved inadequate, and
additional pre-tax reserves of $3.8 million were required for 1991 because of
unforeseen events that occurred during 1991. At December 31, 1991, four major
pieces of equipment remained unsold, which were valued at nil for book purposes.
In the first quarter of 1992, the Company received a $250,000 non-refundable
deposit for this equipment and recorded a $165,000 after-tax gain on disposal of
discontinued operations. At December 31, 1992, Cedrite owned the land adjacent
to its factory
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in Kansas City, Kansas, and it was carried at its estimated net realizable
value. During 1993, the remainder of Cedrite's assets were written off, the
lease was settled, and Cedrite's interest in the land was tendered back to the
seller. There was no activity in Cedrite in 1994.
PDI was discontinued in 1990, and reserves were set aside at 1990 year-end
in an amount equal to the estimated loss on its sale in 1991. All of PDI's
assets were sold in 1991 as planned. The sale proceeds essentially matched the
reserves; no additional losses were incurred in 1992, 1993 or 1994 and none are
expected in future years.
Modern was merged into another wholly-owned subsidiary of the Company at
year-end 1990. Through a combination of a more effective sales effort and
sharply reduced operating costs, due largely to staff reductions and savings in
manufacturing overhead, the former Modern operation contributed to operating
income in 1992, 1993 and 1994 as compared to an operating loss of $2.4 million
in 1990 when it operated as an independent subsidiary.
PROFILE OF CURRENT OPERATIONS
The Company's current products are summarized by product category in the
following table. The table shows yearly sales and percentages of total sales
from continuing operations for each of the past three years.
<TABLE>
<CAPTION>
Sales by Product or Service Function(1)
Years Ended December 31,
1992 1993 1994
----------------- ----------------- -----------------
(dollars in thousands)
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Signal Systems $34,186 41.4% $ 36,035 36.5% $ 35,448 29.8%
Train Control Systems 29,065 35.2% 37,585 38.0% 45,711 38.4%
Asset Management
Services 3,947 4.8% 10,223 10.3% 20,894 17.5%
Printed Wiring Boards 6,601 8.0% 6,180 6.3% 6,307 5.3%
Other 8,717 10.6% 8,761 8.9% 10,767 9.0%
------ ------ ------ ------ ------- ------
Total $82,516 100.0% $ 98,784 100.0% $119,127 100.0%
------- ------ -------- ------ -------- ------
<FN>
(1)Sales volumes shown above are gross totals and do not include cash
discounts or deferred contract revenue. As a result, there are small
differences between the figures in this table and those presented in the
Consolidated Statements of Operations. See "Financial Statements." The
differences do not affect the validity of the discussion and analysis.
</TABLE>
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PRODUCTS
While the Company's principal products or services have been grouped for
purposes of discussion by primary product or service function, each product or
service interrelates or is complementary to other Company products and
substantially all products and services (except printed wiring boards) are
marketed to the railroad industry.
SIGNAL SYSTEMS include all Company products related to rail/highway
crossing warning systems including: motion detectors (the Company's PMD and HXP
products, among others); flashing lights and cantilevers; and the design, wiring
and installation of complete systems utilizing these products. Rail/highway
crossing warning systems activate flashing lights and audible bells, and
initiate the lowering of crossing gates to provide traffic barriers in
installations so equipped. While the Company offers complete systems, the more
sophisticated electronic equipment that activates the warning lights or crossing
gates is often sold separately.
The Harmon Railroad Crossing Processor (HXP) and the Phase Motion Detector
(PMD) are the trade names for the electronic controllers used in most of these
systems. The HXP is the Company's most sophisticated device for control of
railroad crossing warning devices, and is protected by U.S. patent #4,581,700.
It uses microprocessors to calculate the train's speed and distance to the
crossing and provides a consistent warning time. The less costly PMD activates
the warning device when the approaching train is within a predefined distance
from the crossing and may be used over a wider range of trackside conditions.
For many years, substantial funds have been designated from the federal
highway trust fund for improvement of safety at highway railroad crossings. The
Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) has continued
this categorical funding through September 1997 at the $160 million/year level.
An additional amount of money is available from the general highway funds at the
individual states' discretion. See Management's Discussion and Analysis of
Financial Conditions and Results of Operations.
As with all programs under this Act, with the exception of new Interstate
Highway construction, the federal government is now only paying an 80% share
(vs. 90% share for prior funding), with the remaining amount to be paid by
states and local authorities. Several states have taken steps to raise their
taxes to fill this void.
Another important provision of this Act is funding for mass transit
projects. Over the life of the Act, $31.5 billion has been allocated for
capital improvements as well as operations funding. This amount almost doubles
that provided by previous legislation. In addition, Congress has given state
highway and transportation departments increased flexibility to determine if
highway funds should be used to fund transit projects. See Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
TRAIN CONTROL SYSTEMS include all Company products related to the control
of train movement. These include the Company's signal control track circuits
(Electro Code); interlocking control equipment such as Electro Logic, the Harmon
Logic Controller (HLC) and the Vital Harmon Logic Controller (VHLC); car-borne
equipment (Ultra Cab); and computer-based dispatch and traffic control systems
(TTM). Signal control track circuits control signals regulating train traffic
by sending and receiving coded electrical impulses using the rails for
transmission. The primary advantage of this method is the elimination of
overhead transmission lines between signal locations. The product also
eliminates the need for some of the expensive electro-mechanical signal relays.
Signal control track circuits are the principal product of Electro Pneumatic
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Corporation (EPC). Computer-based dispatch systems monitor and control train
movement over designated tracks from a central location. These systems provide
important information enabling the railroads to direct the movement of trains
over large sections of track, thereby reducing the number of control towers and
related personnel otherwise required. Although the technology is similar, each
system requires individualized design and specialized software.
Interlocking control equipment controls the track switches and train
signals at intersections or junction points (interlockings) where main tracks
cross or merge, or where trains may cross over between adjacent main tracks at
running speeds. Interlockings generally employ data telemetry to and from a
remote location (site of the computer-based dispatch system) and also frequently
interface to signal control track circuits. Interlockings use standard products
but often require extensive application engineering to define a site-specific
configuration.
Ultra Cab communicates speed commands directly to moving locomotives
through electrical currents in the rails, displays the resulting speed
requirements to the engine crew using colored light signals in the cab, and
enforces compliance with the speed commands by initiating an automatic brake
application if the engineer fails to stay within prescribed limits. These
products are being purchased for several specialized requirements including a
response to a Federal Railroad Administration safety ruling issued approximately
six years ago that affects trains operating in the Northeast Corridor.
PRINTED WIRING BOARDS include production of customer designed printed
wiring boards (PWB) for shipment to other electronics manufacturers. A
substantial portion of the plant capacity for PWB's is used in the Company's own
products.
ASSET MANAGEMENT SERVICES involve a single-source, rapid delivery service
for railroad components by warehousing commonly-used parts and equipment that
are manufactured by the Company and other vendors. Asset management services
include the revenues of CAMCO. In late 1988, CAMCO received its first orders
and began providing services for the railroad industry including assembly and
storing of materials for track projects. CAMCO provides other services
including purchasing and distribution of communication and signal inventory.
CAMCO's success has helped Harmon diversify from a predominantly manufacturing
operation into the service portion of the railroad supply industry.
The category OTHER includes a variety of items. One of these is radio
communication equipment which includes mobile and stationary two-way radios
specifically designed for railroad applications involving transmission of voice
and/or data messages. Another item included is train inspection systems that
monitor information regarding a moving train as it passes by a train inspection
site. The principal product used in these systems is a hot-bearing detector,
which is installed beside the track and is designed to detect overheated
bearings of passing rail cars. Overheated bearings, if not detected in time,
are likely to cause derailments, resulting in substantial expense and liability
to the railroads. Some hot bearing detectors include an auxiliary function to
provide hot wheel detection. Hot wheels can result from sticking brakes on a
car and can cause severe wheel damage and potentially derailments if left
unchecked. Other train inspection products include a device to detect when a
rail car is dragging an unwanted object and a sensor to monitor high or wide
loads.
PRODUCT DEVELOPMENT AND PATENTS
The Company considers product development essential to both maintaining its
market position and to future growth. Product innovation has been a major
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contributor to the Company's profitability during the past few years, as the
railroads have sought more cost effective methods of controlling and
monitoring train operations. Frequently, a customer's technical staff works
closely with the Company's staff on the design of a system or component parts.
The Company will continue to focus on rapid response to customer needs in its
introduction of new products. The Company anticipates increasing its efforts
and expenditures for product development.
The Company continues to develop new products and new variations of
previously successful products, where market demands and competition dictate the
need. Major development efforts have recently concentrated on several key
areas: (i) expanded capabilities for its microprocessor-based interlocking
control and continued development of an assortment of its complementary
accessories and support tools, (ii) continued development of several different
versions of its cab signal and speed enforcement system, (iii) continued
enhancement of the latest generation microprocessor-based system for grade
crossing controls (the HXP-3), (iv) adapted track circuits and accessories for
use in electrified mass rail transit applications, and, (v) initial development
of a "communication-based" control system which will use independent position
tracking equipment on each train, will use messages transmitted over data radio
to report location of trains to the wayside control equipment and send movement
authorities to trains from the wayside control equipment. Development of these
products is expected to maintain the Company's position in the freight railroad
market and improve the Company's ability to compete in the mass rail transit
market.
Consistent with its objective of protecting its position as a leading
developer of technologically advanced products, the Company spent approximately
$3,541,000, $3,442,000 and $4,561,000 in the years ended December 31, 1992,
1993 and 1994, respectively, on research and development activities related
either to the improvement of existing products or to the development of new
products. While the dollar amount classified as research and development has
fluctuated over the years, the number of engineers in the Company's employ has
increased. A significant portion of the engineering resources are involved in
applying recently developed products to specific customer needs. In addition to
expanding its product line by means of internal research and development, the
Company will consider acquisitions of complementary product lines like those
that have previously allowed the Company rapid entry into new areas of the
railroad equipment market. In conjunction with the purchase of the railroad
division of SERVO, the Company obtained their technology and R&D projects along
with a significant research workforce that is already in place.
Although the Company believes that its patents and patent applications have
value, the Company relies primarily on trade secrets to protect its technology.
Rapidly changing technology makes the Company's future success dependent on the
technical competence and creative skill of its personnel.
MARKETING AND SALES
The Company's products are sold to the freight railroads and mass rail
transit industries through experienced direct sales employees who work closely
with the Company's customers to identify existing or potential products to
improve efficiency. The Company's sales force is organized along industry
lines. A separate group is primarily responsible for sales to each of the
market segments: Class I, short line and mass rail transit.
The international marketing organization is assisted by two distributors in
which the Company has a minority interest and that operate in countries where
the Company has a significant market presence. Henkes-Harmon Industries, Pty.
Ltd. is based in Victoria, Australia and sells the Company's products in
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Australia. Vale-Harmon Enterprises, Ltd. is based in Quebec, Canada and sells
Harmon products to the Canadian railroads. The Company also utilizes foreign
nationals to assist the Company's sales staff with sales in other foreign
markets. The addition of the distributor network associated with the SERVO
acquisition should enable Harmon to increase its penetration in the
international market, particularly in Western Europe. Additionally, Harmon
recently announced it has entered into a sales representation agreement with HLK
Services Ltd. USA to increase Harmon's sales representation in China and Hong
Kong.
Harmon is also considering strategic alliances with entities that design
and manage the construction and expansion of track systems to assist Harmon with
sales in the United States and elsewhere. The Company's products are sold
individually or are packaged together as a system to provide a broad array of
combined products and services. Although sales of some of the Company's
products are seasonal, the Company does not consider its business generally to
be seasonal.
The Company is actively pursuing opportunities in the United States mass
rail transit and the international freight railroad markets. Sales in these
areas, especially mass rail transit, are usually large, multi-year contracts for
major new installations compared with individual product sales that typically
occur in the freight market. If the Company is successful in obtaining such
contracts, which are generally awarded on a fixed price bid basis, significant
variations in overall sales and backlog may result.
BACKLOG
The Company's backlog of orders was approximately $44.6 Million at December
31, 1994. Management believes that substantially all of these orders are firm
and will be filled during 1995. The backlog of orders was approximately $40.5
Million at December 31, 1993, the majority of which were filled during 1994.
Although the Company has historically experienced few order cancellations or
delays in filling orders, cancellations could occur and delivery dates could be
extended due to customer requests or production scheduling. During January
1995, two customers cancelled $1.3 Million in orders, which are not included in
the $44.6 Million in backlog noted above. These cancellations were driven by
external forces on our customers and did not arise from problems or complaints
concerning Harmon products or service.
COMPETITION
The Company's business is highly competitive. The Company competes
effectively on the basis of the reliability and design of its products, customer
service and price. Competition will require the Company to continue to
introduce new products and services to its customers. The Company's three major
competitors, all of which are subsidiary units of foreign companies, appear to
have greater financial resources than the Company. Nonetheless, the Company has
demonstrated its ability to develop and introduce new products and expects that
a continuation of such ability will permit it to maintain its competitive
position.
WARRANTY AND FIELD SERVICE
The Company provides a high level of customer support through warranty and
customer service departments. The Company's engineers and technicians provide
field service support, repairs and customer training in the use and maintenance
of the Company's products. These efforts are important to maintain customer
satisfaction and learn of customer needs, but do not now directly generate
significant revenue for the Company.
Page 12 of 72
<PAGE>
MANUFACTURING
Manufacturing consists of the assembly of component parts either purchased
from others or produced internally and the production of printed wiring boards.
The Company generally manufactures products in response to specific customer
orders and specifications and, as a result, does not maintain a significant
finished goods inventory. Furthermore, an increasing number of the products
sold by the Company are incorporated into a complete system that is assembled by
the Company and delivered as a package.
The Company's employees participate in the Total Quality System, working in
teams to improve processes and products. Harmon was one of the first vendors to
the railroad industry to institute a total quality program and considers its
program to be an important part of its continuing efforts to improve its
manufacturing process and products.
The Company is dependent upon a continuing supply, both domestic and
foreign, of some component parts and materials. The Company occasionally
experiences some delays in the availability of certain component parts and
materials, and in many cases suppliers require long lead times. In recent
years, there has been no significant interruption of the Company's business due
to a shortage of components or manufacturing materials.
EMPLOYEES
As of December 31, 1994, the Company had 985 full-time employees. There
were 864 employees in manufacturing, 30 in marketing and sales and 91 in general
and administrative services. Some of the 864 manufacturing employees are
engaged in research and development. The Company estimates that the time
expended on research and development equals approximately 55 full-time
employees. In addition, the Company estimates that approximately 73 full-time
employees are involved in applications engineering. In general, the Company
believes its relations with its employees are excellent. The Company's
employees are not covered by a collective bargaining agreement.
ITEM 2.
PROPERTIES
The Company owns or leases an aggregate of approximately 500,000 square
feet of space for manufacturing, warehousing, research and general office use.
In addition, the Company owns 32 acres of land zoned for industrial use, on
which the Grain Valley manufacturing and research facilities, and the
Warrensburg component plant are located. All real property owned or leased by
the Company is subject to liens arising from the Company's long term debt, as
described in Note 4 of Notes to the Consolidated Financial Statements. The
following table summarizes the Company's principal facilities.
Page 13 of 72
<PAGE>
<TABLE>
<CAPTION>
Floor Space Annual Lease Expiration
Location Principal Use (Square Feet) Payment (1) Date Of Lease
-------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Grain Valley, Design and manufacture 77,750 Owned Owned (2)
Missouri of electronic products
(2 facilities) and railroad signal
systems
Warrensburg, Manufacture of 48,000 Owned Owned
Missouri railroad crossing
warning systems and
hardware
Warrensburg, Manufacture of printed 30,400 Owned Owned
Missouri wiring boards
Jacksonville, Design and manufacture 86,800 $185,050 12-31-96(3)
Florida of railroad crossing
warning systems and
hardware
Omaha, Design of railroad 16,400 $16,400 5-31-97(4)
Nebraska crossing warning
systems
Louisville, Design of railroad 8,293 $42,000 8-31-95
Kentucky crossing warning
systems
Riverside, Administration and 88,027 $337,139 9-30-96
California product design,
(3 facilities) management information
service operations and
manufacture of
electronic products
Riverside, Assembly, storage 60,000 $241,200 8-07-95(5)
California and distribution of
products for the
railroad industry
Riverside, Assembly storage 47,000 $106,000 2-01-96(8)
California and distribution
of products for the
railroad industry
Lee's Summit, Assembly, storage and 20,000 $42,000 4-20-99(60)
Missouri distribution of
products for the
railroad industry
Lee's Summit, Assembly storage 10,000 $30,840 6-30-95(7)
Missouri and distribution
of products for the
railroad industry
Blue Springs, Corporate 14,166 $135,930 11-01-98(9)
Missouri Headquarters
<FN>
(1) For additional discussion and information concerning the Company's lease
commitments, see "Financial Statements - Note 7 of Notes to the
Consolidated Financial Statements."
(2) See "Financial Statements - Note 4 of Notes to the Consolidated Financial
Statements."
(3) The base minimum lease payments increase to $203,410 per year from January
1, 1995 through December 31, 1996.
(4) The full year 1995 - 1997 minimum base lease payment schedule is shown
below:
7/1/94 to 5/31/95 $1,370 per month
6/1/95 to 5/31/96 $1,541 per month
6/1/96 to 5/31/97 $1,678 per month
Page 14 of 72
<PAGE>
(5) The Company has the option to extend and renew this lease for three
successive one year terms after August 7, 1995.
(6) The annual lease payment increases to $66,000, $70,000, $73,000 and $77,000
for the second, third, fourth and fifth years respectively. The Company
may terminate this lease after the thirty-ninth month of the lease upon
payment of a predetermined early termination fee.
(7) The Company has the option to extend and renew this lease for four
successive one year terms after June 30, 1995.
(8) Effective February 1, 1995, the Company leased 47,000 square feet of space
at an annual lease payment of $106,920. The Company has the option to
extend and renew this lease for one year after February 1, 1996.
(9) The Company has the option to renew the lease for up to two successive five
year terms.
</TABLE>
In addition to these facilities, the Company also leases office space in
Grain Valley and Blue Springs, Missouri. The Company owns all significant
machinery and equipment used in its manufacturing operations. Management
believes that its facilities are adequate for current and foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
GRAIN VALLEY MATTER
During the last quarter of 1987, officials of the Company discovered ground
contamination from used solvents classified as hazardous waste at the Grain
Valley, Missouri production facility that it owns. A voluntary report was made
to the State of Missouri Department of Natural Resources ("MDNR"), and
negotiations are underway regarding the extent of remedial or clean up actions
and monitoring requirements. MDNR has approved the Company's Closure/Post-
Closure Plan which sets forth the soil remediation and groundwater monitoring
obligations at this site. The Company and MDNR also have entered into a Consent
Decree which authorizes the Company to implement the approved Closure/Post-
Closure Plan pending the issuance of a post-closure permit. The Company
submitted a post-closure permit application to MDNR in October 1993. No permit
has yet been issued by MDNR in draft or final form. Any groundwater or other
remediation requirements will be set forth in the post-closure permit. To date,
the exact extent of and cost of all remedial action or monitoring which may be
mandated by the MDNR have not been finally determined. Nonetheless, the Company
has designed and installed a system to begin soil remediation and expect that
system will be required to continue in operation until at least January 1996.
The Company has established a trust fund to provide financial assurance for the
anticipated closure and post-closure costs of $700,608 to be incurred over
approximately 30 years. To date, the Company has contributed $393,227 to a
trust to cover these costs.
On September 30, 1991, the EPA issued a Complaint against the Company
alleging violations of the Resource Conservation and Recovery Act ("RCRA") and
Page 15 of 72
<PAGE>
RCRA regulations in its disposal of the solvents that created the contamination
described above. The Complaint initially sought penalties in the amount of
$2,777,000 and proposed certain compliance actions. On December 6, 1993, EPA
amended its Complaint to decrease the amount of proposed penalties to
$2,343,706. The Company is vigorously defending the EPA Complaint and related
proposed penalties under RCRA. Management believes that all of the allegations
are for technical violations.
The case proceeded to hearing before an Administrative Law Judge on January
12-14, 1994, on the issue of penalties. The Company presented evidence on a
variety of penalty reduction theories, including good faith, minor potential
harm to human health and the environment, and economic benefit. On December 12,
1994, the Administrative Law Judge issued an Initial Decision, in which he
assessed penalties of $586,716 against the Company. Additionally, the Judge
issued a Compliance Order requiring the Company to obtain liability coverage for
sudden and non-sudden accidental occurrences, despite a Consent Decree with the
Missouri Department of Natural Resources which excused the Company from this
requirement as long as the Company continued to make semi-annual showings that
the type of insurance required by the regulations was unattainable. On January
9, 1995, the Company filed a Notice of Appeal of the Initial Decision with the
Environmental Appeals Board. On appeal, the Company will argue that the
complaint is barred by the federal statute of limitations, that EPA lacks
jurisdiction to bring the Complaint and that the penalties assessed against the
Company are excessive in light of the Company's discovery during an internal
audit and subsequent voluntary disclosure and clean-up. The Company will also
argue that the Judge's Order for the Company to obtain liability coverage is
inconsistent with the State Consent Decree and violates the spirit of the RCRA
state authorization provisions. EPA did not appeal the Initial Decision, but is
expected to file a reply to the Company's appeal.
Special legal counsel has advised that the penalties sought by EPA in this
case are consistent with its applicable penalty guidelines that were adopted by
the EPA in October, 1990. Based on the Company's cooperation with MDNR (which
has original jurisdiction and, therefore, primary responsibility in the matters
complained by the EPA), in voluntarily disclosing the alleged violations, and in
promptly undertaking all remedial actions specified to date by the MDNR, the
penalties appear to the Company's special legal counsel to be excessive.
However, because so few analogous cases have been disposed of by settlement or
by administrative or judicial proceedings since the new penalty guidelines were
adopted, special legal counsel cannot express an opinion as to the ultimate
amount, if any, of the Company's liability. Since the amount of the penalties
cannot be reasonably determined at this time, no estimate is included here or in
the financial statements.
OTHER MATTERS
The Company has been named as a defendant in several other lawsuits in the
normal course of its business. In the opinion of management of the Company,
after consulting with legal counsel, the liabilities, if any, resulting from
these matters are not expected to have a material effect on the consolidated
financial statements of the Company.
Page 16 of 72
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock trades on The NASDAQ Market under the symbol
HRMN. Stock price quotations can be found in major daily newspapers and in The
Wall Street Journal.
At February 1, 1995, the following securities firms were making a dual
auction market in the Company's common stock:
George K. Baum & Company
Dillion, Read & Co., Inc.
Herzog, Heine, Gedule, Inc.
Piper Jaffray Companies Inc.
Sherwood Securities Corp.
Troster Singer Corporation
The approximate number of holders of record for the Company's common stock
as of March 17, 1995 was 679.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosure as
described in Item 304 of Regulation S-K. There has been no change in the
Company's accountants within the preceding twenty-four months.
Page 17 of 72
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the officers and key employees of the Company.
This information should be read in connection with the Company's Proxy Statement
(Pages 3 through 4).
Principal Occupation
Individual Office Age For the Last Five Years
---------- ------ --- -----------------------
Breshears, Ronald G. VP-Human Resources 48 VP-Human Resources of the
Company since 7/1/81.
Daniels, Richard A. VP-Transit Sales 54 Appointed VP-Transit Sales
2/1/93. Prior to that,
Director Transit/Commuter
Systems of the Company since
April 1991; prior to that held
several positions with the
Company, including VP-
Engineering of Harmon
Electronics, since 1986.
Foudree, Charles M. Exec. VP-Finance, 50 Exec. VP of the Company
Secretary and since 9/9/86. Secretary
Treasurer of the Company since
2/2/82. Treasurer of the
Company since 2/5/74.
Harmon, Robert E. Chairman of the 55 Chairman of the Board
Board of the Company since 2/4/75.
Chief Executive Officer of the
Company from 8/1/90 through
12/31/94. Prior to that,
President of the Company
from 11/17/69 through 7/31/90.
Heggestad, Robert E. VP-Technology 56 VP-Technology of the
Company since 10/2/86.
John, James R. President of 46 President of CAMCO since
Consolidated Asset March 1992. Prior to that VP-
Management Co., Inc. Manufacturing of Harmon
(CAMCO) Electronics, Inc. since
February 1987.
Johnson, John W. VP-Domestic Sales 48 Appointed VP-Domestic Sales
2/1/93. Prior to that
Director-Product Support for
the Company since March 1992;
prior to that held several
positions with the Company,
including Sales Manager-Signal
Products, Director of
Engineering for Harmon
Electronics, Director of
Customer Service and Sales
Director since 1972.
Page 18 of 72
<PAGE>
Principal Occupation
Individual Office Age For the Last Five Years
---------- ------ --- -----------------------
Kaiser, Lloyd T. President of 43 President of Harmon
Harmon Electronics, Electronics, Inc. since
Inc. (HEI) March 1992; prior to that
VP-Research & Development
of Harmon Electronics, Inc.
(HEI) since 4/1/91; President
of Phoenix Data, Inc. since
7/15/89; prior to that General
Manager of HEI Component
Division since 9/15/86; prior
to that Sales Mgr. of the
Component Division since
6/9/86.
Olsson, Bjorn E. President & Chief 49 Chief Executive Officer
of the Executive Officer
Company since 1/1/95.
President of the Company since
8/1/90. Chief Operating
Officer of the Company from
8/1/90 through 12/31/94. Prior
to that VP of Corporate
Development of Investment AB
Cardo since 1987.
Ryker, Gary E. Exec. VP-Marketing, 45 Appointed Exec. VP-Marketing,
Sales and Service Sales and Service 2/1/93.
Prior to that VP-Marketing and
Sales of the Company since
9/1/92; prior to that
Marketing and Operations
Director and Marketing and
Support Manager for Railroad
Electronics for Rockwell
International since 1979.
Scheerer, William J. VP-Business 47 Appointed VP-Business
Development Development 1/4/94. Prior to
that held various positions
with the CSX Railroad, the
latest one being Chief
Engineer Train Control for CSX
Transportation.
Schmitz, Stephen L. VP-Controller 41 VP-Controller of the
Company since 11/1/83.
Smith, Noel B. President of 53 President of Electro
Electro Pneumatic Pneumatic Corporation since
Corporation (EPC) 4/1/90. For more than 5 years
prior to that Gen. Mgr. of
Safetran Systems Corporations'
Electronic Div.
Although some of the above have employment agreements which provide for
twelve months of continued employment on a rolling basis, all of the above serve
as officers at the pleasure of the respective Board of Directors and are
appointed for one year terms.
Page 19 of 72
<PAGE>
The following is a list of the Board of Directors of the Company:
Individual Affiliation
---------- -----------
Robert E. Harmon Chairman of the Board
Thomas F. Eagleton Attorney-at-Law, Thompson & Mitchell
St. Louis, Missouri
Bruce M. Flohr Chairman, President, CEO
RailTex, Inc., San Antonio, Texas
Charles M. Foudree Executive Vice President-Finance,
Treasurer and Secretary
Rodney L. Gray Chairman & CEO
Enron International, Inc., Houston, Texas
Herbert M. Kohn Attorney-at-Law, Bryan Cave
Kansas City, Missouri
Douglass Wm. List Management Consultant
Baltimore, Maryland
Gerald E. Myers Management Consultant
Tempe, Arizona
Bjorn E. Olsson Chief Executive Officer and President
Donald V. Rentz President, Graham Wholesale Floral
Graham, Texas
Judith C. Whittaker Vice President-Legal, Hallmark Cards, Inc.
Kansas City, Missouri
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference.
Page 20 of 72
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of Harmon
Industries, Inc. and subsidiaries are incorporated by
reference from the Company's 1994 Annual Report to
Shareholders at the following pages:
Page
----
Independent Auditors' Report 37
Consolidated Balance Sheets -
December 31, 1994 and 1993 22-23
Consolidated Statements of Earnings -
Years ended December 31, 1994, 1993 and 1992 24
Consolidated Statements of Stockholders'
Equity - Years ended
December 31, 1994, 1993 and 1992 25
Consolidated Statements of Cash Flows -
Years ended December 31, 1994, 1993, and 1992 26
Notes to Consolidated Financial
Statements 27-35
(a)(2) Financial Statement Schedules
Selected Financial Data - for the years ended December 31,
1994, 1993 and 1992, are attached hereto at the following
pages:
Independent Auditors' Report on Financial
Statement Schedule 25
Schedule VIII - Valuation and Qualifying
Accounts 26
All other schedules are omitted as they are either not
applicable or the required information is presented in the
footnotes to the financial statements in the annual report.
(a)(3) Exhibits:
Exhibit No. Page
----------- ----
3(i)Amendment to Articles of Incorporation 27
11 Computation of Weighted Averages
Shares Outstanding 28 thru 29
13 Sections of the 1994 Annual Report to
Shareholders 30 thru 53
21 Listing of Subsidiaries 54
N/A Notice of Annual Meeting and
Proxy Statement dated March 31, 1995 55 thru 72
Page 21 of 72
<PAGE>
(b) Reports on Form 8-K:
The Company filed a Form 8-K as of December 20, 1994 reporting
the acquisition of the transportation division of SERVO
Corporation of America. The financial statements related to
this acquisition were filed on March 3, 1995.
Page 22 of 72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 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.
HARMON INDUSTRIES, INC.
Date: March 24, 1995 By: /S/ Bjorn E. Olsson
-------------------
Bjorn E. Olsson
President
Date: March 24, 1995 By: /S/ Charles M. Foudree
----------------------
Charles M. Foudree
Executive Vice President-
Finance
Date: March 24, 1995 By: /S/ Stephen L. Schmitz
----------------------
Stephen L. Schmitz
Vice President-Controller
Page 23 of 72
<PAGE>
SIGNATURES
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 their capacities as directors and on the dates indicated:
By: Date: March 24, 1995
----------------------
Thomas F. Eagleton, Director
By: /S/ Bruce M. Flohr Date March 24, 1995
------------------
Bruce M. Flohr, Director
By: /S/ Charles M. Foudree Date: March 24, 1995
----------------------
Charles M. Foudree, Director
By: Date: March 24, 1995
------------------
Rodney L. Gray, Director
By: /S/ Robert E. Harmon Date: March 24, 1995
--------------------
Robert E. Harmon, Director
By: /S/ Herbert M. Kohn Date: March 24, 1995
-------------------
Herbert M. Kohn, Director
By: /S/ Douglass Wm. List Date: March 24, 1995
---------------------
Douglass Wm. List, Director
By: /S/ Gerald E. Myers Date: March 24, 1995
-------------------
Gerald E. Myers, Director
By: /S/ Bjorn E. Olsson Date: March 24, 1995
-------------------
Bjorn E. Olsson, Director
By: /S/ Donald V. Rentz Date: March 24, 1995
-------------------
Donald V. Rentz, Director
By: /S/ Judith C. Whittaker Date: March 24, 1995
-----------------------
Judith C. Whittaker, Director
Page 24 of 72
<PAGE>
INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders
Harmon Industries, Inc.:
Under date of February 3, 1995, we reported on the consolidated balance
sheets of Harmon Industries, Inc. and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of earnings, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1994, as contained in the 1994 annual report to stockholders. These
consolidated financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the year 1994. In connection
with our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statement schedule as listed under Item 14 of
Form 10-K. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, this financial statements schedule, shen considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Kansas City, Missouri
February 3, 1995
Page 25 of 72
<PAGE>
SCHEDULE VIII
HARMON INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Charged to
Beginning costs and Recoveries Ending
Description Balance Expenses (Deductions) Balance
----------- --------- ---------- ------------ -------
<S> <C> <C> <C> <C>
Year ended December 31,
1992:
Allowance for doubtful
trade accounts
receivable $ 249 $ - $ 17 $ 232
------- ---- ------ ------
------- ---- ------ ------
Reserve for assets
of discontinued
operations $ 5,992 $ - $3,536 $2,456
------- ---- ------ ------
------- ---- ------ ------
Year ended December 31,
1993:
Allowance for doubtful
trade accounts
receivable $ 232 $ - $ (9) $ 241
------- ---- ------ ------
------- ---- ------ ------
Reserve for assets
of discontinued
operations $ 2,456 $ - $2,456 $ -
------- ---- ------ ------
------- ---- ------ ------
Year ended December 31,
1994:
Allowance for doubtful
trade accounts
receivable $ 241 $ 1 $ 118 $ 360
------- ---- ------ ------
------- ---- ------ ------
</TABLE>
Page 26 of 72
<PAGE>
Exhibit 3 (i)
AMENDMENT OF ARTICLES OF INCORPORATION
3. Article Number II of the Harmon Industries, Inc. Restated Articles of
Incorporation was amended by vote of the shareholders on May 10, 1994 to read as
follows:
The aggregate number of shares of all classes of stock which the
Corporation shall have authority to issue is twenty million (20,000,000)
shares, all of which will be common stock having a par value of Twenty-Five
Cents ($.25) per share.
No holder of common stock of the Corporation shall be entitled as of right
to subscribe for, purchase, or receive any part of any new or additional
issue of stock of any class, whether now or hereafter authorized or of any
bonds, debentures, or other securities convertible into stock of any class,
and all such additional shares of stock, bonds, debentures, or other
securities convertible into stock may be issued and disposed of by the
Board of Directors to such person or persons and on such terms and for such
consideration (so far as may be permitted by law) as the Board of Directors
in its absolute discretion, may deem advisable.
Page 27 of 72
<PAGE>
HARMON INDUSTRIES, INC. EXHIBIT 11
FORM 10-K
DECEMBER 31, 1994
COMPUTATION OF EARNINGS PER SHARE (INSTRUCTION H(g))
Computation of the average number of shares of Common Stock outstanding for the
three months ended December 31, 1994, 1993 and 1992.
<TABLE>
<CAPTION>
(1) (2) (3) (4)
Average number of
shares outstanding
as shown on
consolidated statements
Shares of Number of operations (3)
common of days Share days divided by number
stock outstanding (2x1) of days in period
---------- ----------- ---------- ------------------------
<S> <C> <C> <C> <C>
1994
October 1 - December 31 6,459,052 92 584,232,784
Equivalent shares under
the Company's bonus plan 2,110 92 194,118
Options exercised 8,500 4 34,000
2,220 2 4,400
Equivalent shares under the
Company's option plans 97,880 92 9,004,960
Shares issued in acquisition 260,000 12 3,120,000
-----------
606,590,262 6,593,372
----------- ---------
----------- ---------
1993
October 1 - December 31 6,263,337 92 576,227,004
Equivalent shares under
the Company's bonus plan 2,550 92 236,394
Options exercised 1,000 87 87,000
30,000 68 2,040,000
15,200 60 912,000
8,000 18 144,000
1,000 12 12,000
1,500 11 16,500
7,400 5 37,000
1,000 4 4,000
Equivalent shares under the
Company's option plans 242,203 92 22,282,676
-----------
601,997,574 6,543,452
----------- ---------
----------- ---------
1992
October 1 - December 31 5,131,156 92 472,066,260
Options exercised 4,975 52 256,700
4,975 52 256,700
500 18 9,000
2,000 17 34,000
1,000 9 9,000
16,800 3 50,400
Equivalent shares under the
Company's option plans 206,524 92 19,184,206
Equivalent shares under the
Company's bonus plan 2,958 92 271,952
Conversion of convertible
debenture 227,027 1 227,027
-----------
492,110,547 5,349,027
----------- ---------
----------- ---------
</TABLE>
Page 28 of 72
<PAGE>
Computation of the average number of shares of Common Stock outstanding for the
twelve months ended December 31, 1994, 1993 and 1992.
<TABLE>
<S> <C> <C> <C>
1994
Quarter 1 weighted average 6,551,192
Quarter 2 weighted average 6,558,527
Quarter 3 weighted average 6,563,411
Quarter 4 weighted average 6,583,372
----------
Divided by
26,266,502 4 Quarters = 6,566,626
---------- ---------
1993
Quarter 1 weighted average 5,623,334
Quarter 2 weighted average 6,146,910
Quarter 3 weighted average 6,532,649
Quarter 4 weighted average 6,543,452
----------
Divided by
24,846,345 4 Quarters = 6,211,586
---------- ---------
1992
Quarter 1 weighted average 5,176,132
Quarter 2 weighted average 5,265,042
Quarter 3 weighted average 5,306,296
Quarter 4 weighted average 5,349,027
---------
Divided by
21,096,487 4 Quarters = 5,274,622
---------- ---------
</TABLE>
Page 29 of 72
<PAGE>
EXHIBIT 13
Annual Report page 14 of 37
<TABLE>
<CAPTION>
Selected Consolidated Financial Data (unaudited)
(In thousands, except per share data)
Years ended December 31 1994 1993 1992
<S> <C> <C> <C>
Operations
Net sales $ 119,703 $ 99,295 $ 81,899
Cost of sales 81,023 65,716 54,271
Research and development expenses 4,561 3,442 3,541
Gross profit 34,119 30,137 24,087
Selling, general and administrative expenses 21,176 18,558 15,646
Other operating expenses (income) 44 114 137
Operating income 12,899 11,465 8,304
Other expenses 214 388 1,228
Earnings from continuing operations before income taxes 12,685 11,077 7,076
Income taxes 5,046 4,193 2,498
Earnings from continuing operations 7,639 6,884 4,578
Gain (loss) from discontinued operations - - 165
Use of net operating loss carryforward - - 273
Net earnings (loss) $ 7,639 $ 6,884 $ 5,016
Effective income tax rate - continuing operations 39.8% 37.9% 35.2%
Return on sales - continuing operations 6.4% 6.9% 5.6%
Return on year-end equity - continuing operations 17.7% 20.8% 30.1%
Return on year-end equity - total operations 17.7% 20.8% 33.0%
Weighted average outstanding shares 6,567 6,212 5,275
Per Share Data
Earnings from continuing operations $ 1.16 $ 1.11 $ .87
Net earnings (loss) 1.16 1.11 .95
Cash dividends .15 - -
Book value 6.40 5.23 2.82
Price/earnings ratio range 14.2-20.9 10.5-20.9 3.6-13.4
Other Data (At Year-End)
Working capital $ 21,670 $ 21,618 $ 10,740
Total assets 68,395 53,000 38,488
Long-term debt 733 439 4,898
Stockholders' equity 43,063 33,086 15,197
Current ratio 2.03:1 2.33:1 1.72:1
Quick assets ratio 1.03:1 1.32:1 .87:1
Liabilities to equity ratio .59:1 .60:1 1.53:1
Capital additions - continuing operations 3,242 3,189 2,154
Capital additions - total operations 3,242 3,189 2,154
Depreciation and amortization - continuing operations 2,621 2,121 1,936
Depreciation and amortization - total operations 2,621 2,121 1,936
Outstanding shares 6,728 6,328 5,383
</TABLE>
Page 30 of 72
<PAGE>
Annual Report page 15 of 37
<TABLE>
<CAPTION>
Five-Year Ten-Year
Compound Compound
Growth Growth
1991 1990 1989 1988 1987 1986 1985 1984 Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$70,934 $ 72,707 $ 70,154 $ 64,558 $ 57,068 $ 47,223 $ 52,993 $ 44,445 +11.3%+10.4%
45,536 47,478 46,377 42,044 37,995 30,333 34,426 30,649
4,000 3,414 3,200 3,669 3,318 2,360 2,095 2,020
21,398 21,815 20,577 18,845 15,755 14,530 16,472 11,776 +10.6 +11.2
13,550 14,427 13,186 11,965 10,671 9,362 8,497 6,332
1,122 762 (263) (27) 43 145 125 32
6,726 6,626 7,654 6,907 5,041 5,023 7,850 5,412 +11.0 + 9.1
2,118 1,504 1,244 1,301 1,519 885 1,720 761
4,608 5,122 6,410 5,606 3,522 4,138 6,130 4,651 +14.6 +10.6
1,688 2,022 2,506 2,100 1,613 2,039 2,909 2,214
2,920 3,100 3,904 3,506 1,909 2,099 3,221 2,437 +14.4 +12.1
(2,492) (12,306) (2,744) (1,020) (217) - - -
395 - - - - - - -
$ 823 $ (9,206) $ 1,160 $ 2,486 $ 1,692 $ 2,099 $ 3,221 $ 2,437
36.6% 39.5% 39.1% 37.5% 45.8% 49.3% 47.5% 47.6%
4.1% 4.3% 5.6% 5.4% 3.3% 4.4% 6.1% 5.5%
39.6% 53.9% 26.5% 25.9% 16.5% 20.0% 22.9% 15.6%
11.2% N/A 7.9% 18.3% 14.6% 20.0% 22.9% 15.6%
5,066 4,723 4,633 4,479 4,472 4,854 4,430 4,733
$ .57 $ .65 $ .84 $ .78 $ .43 $ .43 $ .73 $ .51 + 6.7 + 8.6
.16 (1.95) .25 .55 .38 .43 .73 .51
- .0625 .125 .125 .125 .125 .125 .0875
1.48 1.20 3.19 3.03 2.60 2.34 2.94 3.21 +15.0 + 7.1
21.9-45.3 N/A 23.0-35.0 9.5-14.8 13.2-22.4 15.4-27.3 8.2-16.1 7.8-13.7
$ 9,660 $ 7,955 $ 14,444 $ 7,037 $ 11,870 $ 11,599 $ 9,962 $ 12,370
36,575 41,408 48,082 42,948 37,984 34,045 30,111 30,627
11,915 17,220 17,688 12,139 14,621 13,793 6,604 6,752
7,377 5,747 14,756 13,557 11,604 10,470 14,038 15,579 +23.9 +10.7
1.71:1 1.49:1 2.08:1 1.45:1 2.17:1 2.36:1 2.17:1 2.65:1
.76:1 .66:1 .84:1 .60:1 1.09:1 .96:1 .90:1 1.07:1
3.96:1 6.21:1 2.26:1 2.17:1 2.27:1 2.25:1 1.14:1 .97:1
1,098 2,187 2,236 1,830 1,504 2,212 2,919 1,467
1,098 4,521 4,589 9,886 3,552 2,212 2,919 1,467
2,022 2,410 2,373 2,541 2,481 2,074 1,775 1,353
2,022 3,511 3,185 2,834 2,531 2,074 1,775 1,353
4,998 4,790 4,628 4,478 4,472 4,472 4,769 4,850
</TABLE>
Page 31 of 72
<PAGE>
Annual Report page 16 of 37
Financial Review
Management's Discussion and Analysis of Financial -Condition and Results of
Operations
Overview
In early 1990, management began a Company-wide restructuring program, which was
gradually implemented over the following two years. The program focused on
maximizing the return on capital employed, reducing costs, improving quality,
shedding unprofitable operations (described below), and establishing strategic
marketing and product development goals.
The beneficial effects of the restructuring became readily apparent by the
end of 1992. Sales rose 15.5% to a record $81.9 million that year, and earnings
from continuing operations increased 57% to $4.6 million. The following year
showed even further progress. Sales, earnings and the order backlog easily
surpassed previous records. Sales for 1994 increased an additional 20.6% to
$119.7 million; net earnings rose to $7.6 million, an 11% gain over 1993
earnings of $6.9 million; long-term debt was reduced to less than one-fifth of
the 1992 level, product introductions were proceeding on schedule, and the
Company entered 1995 with a record year-end backlog of $44.6 million.
Discontinued Operations
During 1990, the Company made a decision to eliminate the losses and ongoing
cash requirements of its three unprofitable subsidiaries: Modern Industries,
Inc. ("Modern"), Phoenix Data, Inc. ("PDI"), and Cedrite Technologies, Inc.
("Cedrite"). Modern made grade crossing hardware; PDI manufactured sophisticated
data acquisition and analysis systems, and Cedrite manufactured reconstituted
railroad ties. Each had different operating problems, which required separate
action plans.
At year-end 1990, Modern was merged into Harmon Electronics, Inc., a wholly-
owned subsidiary of the Company. Its operations have contributed to operating
income since then as compared to an operating loss of $2.4 million in 1990, when
it operated as an independent subsidiary.
PDI was discontinued in 1990, and reserves were set aside at 1990 year-end in
an amount equal to the estimated loss on its sale in 1991. All of PDI's assets
were sold in 1991 as planned. The sale proceeds essentially matched the
reserves; no additional losses were incurred in 1992, 1993 or 1994, and none are
expected in future years.
Cedrite was shut down on April 1, 1991, pursuant to a decision made in 1990.
Reserves set aside in 1990 for the anticipated loss proved inadequate, and an
additional $3,775,000 (pre-tax) was required in 1991. During 1991-1993, its
assets were sold off piecemeal or written off against the reserve, and its
outstanding debt was assumed by the Company. In 1992, the Company realized a
gain of $250,000 ($165,000 after taxes) from the sale of certain equipment
related to Cedrite's discontinued operations. In 1993, the Company wrote off
Cedrite's remaining assets and debt against the established reserve. No losses
were incurred in 1994, and none are expected in the future.
Profile of Current Operations
The Company's current sales are summarized by product category in the following
table. The years 1993 and 1992 have been reclassified principally to extract
Asset Management Services (CAMCO) sales of signal and control products into
those descriptive categories. The value-added portion supplied to those products
by CAMCO remains in the CAMCO category. These current classifications more
accurately reflect the reality of product sales than in prior years. The table
shows yearly gross sales and percentages of total sales from continuing
operations for each of the past three years.
Signal Systems include all products related to rail/highway crossing warning
systems that are sold directly to railroad customers, including those sold to
our CAMCO operation under various arrangements it has with its customers. The
products include motion detectors and predictors (the Company's PMD and HXP,
among others); flashing lights and cantilevers; and the design, wiring and
installation of packages comprised of these products.
Page 32 of 72
<PAGE>
Train Control Systems include products related to the control of train
movement. These include signal control track circuits (Electro Code);
interlocking control equipment such as Electro Logic, the Harmon Logic
Controller (HLC) and the Vital Harmon Logic Controller (VHLC); carborne
equipment (Ultra Cab and Ultra Cab II); and computer-based control systems
(TTM).
CAMCO is a single-source, rapid delivery service for railroad components,
warehousing commonly-used parts and equipment that are manufactured by the
Company and other vendors. This service was expanded in 1993 and again in 1994
to include asset and materials management as well as assembly of various
components, which are delivered as a complete unit, ready for installation.
Printed Wiring Boards (PWB) include production of customer designed printed
wiring boards for shipment to other electronics manufacturers.
Other sales include train inspection systems, communication equipment and
products that do not fit readily into the other four categories.
<TABLE>
<CAPTION>
Sales by Product or Service Function*
Years ended December 31,
1994 1993 1992
(Dollars in thousands) Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Signal Systems $ 35,448 29.8% $ 36,035 36.5% $ 34,186 41.4%
Train Control Systems 45,711 38.4% 37,585 38.0% 29,065 35.2%
Asset Management
Services (CAMCO) 20,894 17.5% 10,223 10.3% 3,947 4.8%
Printed Wiring Boards 6,307 5.3% 6,180 6.3% 6,601 8.0%
Other 10,767 9.0% 8,761 8.9% 8,717 10.6%
Total $ 119,127 100.0% $ 98,784 100.0% $ 82,516 100.0%
<FN>
* Sales volumes shown above are gross totals and do not include cash
discounts or deferred contract revenue. As a result, there are differences
between the figures in this table and those presented in the Consolidated
Statements of Operations. The differences do not affect the validity of the
discussion and analysis.
</TABLE>
Results of Operations
Years Ended December 31, 1994, 1993 and 1992
Sales from continuing operations increased 20.6% to $119.7 million in 1994.
Sales in 1993 were $99.3 million, 21.2% above the $81.9 million recorded for
1992. Earnings from continuing operations in 1994 increased 11.0% to $7.6
million ($1.16 per share) compared with $6.9 million ($1.11 a share) in 1993 and
$4.6 million ($.87 a share) in 1992. The increase in earnings in 1994 over those
of 1993 was the result of substantially higher sales but reduced gross margins,
which reflect CAMCO's substantial sales contribution in 1994 and its
traditionally lower margins, and slightly lower interest costs. The increase in
earnings in 1993 over those of 1992 was the result of higher sales, better gross
margins and a reduction in interest expense.
Net earnings were $7.6 million ($1.16 per share) for 1994 compared with $6.9
million ($1.11 a share) for 1993 and $5.0 million ($0.95 per share) for 1992.
The differences between earnings from continuing operations and net earnings for
1992 included a $165,000 gain on disposal of discontinued operations and a
$273,000 extraordinary item. The extraordinary item in 1992 was the amount of an
income tax benefit realized from the utilization of a net operating loss
carryforward.
The table on page 18 presents, for the periods indicated, the percentage
relationship to net sales for certain items reflected in the Company's
Consolidated Statements of Earnings and the percentage increase or decrease in
the dollar amounts of such items year-to-year.
Net Sales
Harmon's 20.6% increase in net sales in 1994 results from a $10.7 million
increase in CAMCO sales, an $8.1 million gain in train control system sales,
much of which relates to rail-transit contracts, and a slight decline in the
sale of signal systems. The
Page 33 of 72
<PAGE>
Annual Report page 18 of 37
Company's 21.2% increase in net sales in 1993 resulted from a $6.3 million gain
in CAMCO sales and a $8.5 million gain in the sales of train control systems.
The substantial gain in the sales of CAMCO in both 1994 and 1993 reflects the
railroads' growing acceptance of its innovative warehousing, assembly and
delivery services. The gain in train control systems in 1994 reflects the
industry's growing acceptance of Harmon's control products, the HLC, VHLC and
Ultra Cab II. The drop in the sale of signal systems in 1994 reflected reduced
demand as the railroads directed their installation efforts toward train control
systems. The signal systems sales decline may also reflect the new federal
assistance reimbursement policy, which requires increased matching funds from
states, for grade highway crossing warning systems. The $8.5 million increase in
the sales of train control systems in 1993 includes the installation of a
control system for the Norfolk Southern Railroad, completion of the first phase
of the St. Louis Metro Link project, other rail transit contracts, and continued
excellent sales of the Company's HLC and VHLC products.
<TABLE>
<CAPTION>
Operating Summary (Continuing Operations) Percentage of Net Sales Percentage of Change
Years ended December 31, 1994 1993 1992
over over over
1994 1993 1992 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 20.6% 21.2% 15.5%
Cost of sales 67.7% 66.2% 66.3% 23.3% 21.1% 19.2%
Research and development 3.8% 3.5% 4.3% 32.5% (2.8)% (11.5)%
Gross profit 28.5% 30.4% 29.4% 13.2% 25.1% 12.6%
Selling, general and
administrative expenses 17.7% 18.7% 19.1% 14.1% 18.6% 15.5%
Other operating expenses, net 0.0% 0.1% 0.2% (61.4)% (16.8)% (87.8)%
Operating income 10.8% 11.6% 10.1% 12.5% 38.1% 23.5%
Interest expense, net 0.2% 0.4% 1.5% (44.8)% (68.4)% (42.0)%
Earnings before income taxes 10.6% 11.2% 8.6% 14.5% 56.5% 53.6%
Income taxes 4.2% 4.2% 3.1% 20.3% 67.9% 48.0%
Net earnings 6.4% 7.0% 5.5% 11.0% 50.4% 56.8%
</TABLE>
Sales of the Company's signal systems are influenced by the financial
condition of the railroad industry, their budgets for planned equipment
expenditures and also by the degree to which the railroads (collectively)
request monies from the federal government's fund to improve the safety at
rail/highway crossings. Legislation covering the amount of rail/highway crossing
funds was enacted as part of the Intermodal Surface Transportation Efficiency
Act of 1991 (ISTEA). The new legislation provided funds of $160 million annually
for a six-year period, but with two important changes from the previous law.
Under ISTEA, the federal government funds only 80% of the cost of approved
rail/highway grade crossing projects (versus 90% under the previous
legislation). In addition, federal funding for rail transit projects was nearly
doubled to $31.5 billion.
Rail transit projects fared better under ISTEA in 1994 and 1993 than
previously with substantially increased funding support for these projects.
ISTEA also permits local governments to shift funds allocated for highway
construction into rail transit budgets, and this is presently occurring in
several areas of the nation.
The market for the remainder of the Company's products is largely dependent
on the financial condition of the railroad industry, the trend of the general
economy, and individual railroads' budgets for capital expenditures and repairs
and maintenance, which subsequent events can alter. For example, the flooding in
many portions of the Midwest in 1993 undoubtedly caused some customers to alter
their proposed equipment expenditures for 1993 to make needed repairs, but its
overall effect on Harmon product sales is believed to have been minimal.
Page 34 of 72
<PAGE>
Annual Report page 19 of 37
Gross Profit
Gross profit for 1994 from continuing operations (expressed as a percentage of
net sales) decreased to 28.5% from 30.4% for 1993. The decline reflects that
CAMCO sales, which are traditionally lower in margin, comprised a greater
percentage of total sales than they did in 1993. In addition, research and
development expenditures (R&D) were higher in 1994 than 1993. Gross profit
margin for 1993 was one percentage point higher than in 1992. The gain
principally reflects the effect of a $17.4 million sales increase and a slight
decline in R&D expenditures in 1993.
Selling, General & Administrative Expenses
Selling, general and administrative expenses (SG&A) for 1994 increased
approximately $2.6 million to $21.2 million (17.7% of net sales) from $18.6
million (18.7%) in 1993 and $15.6 million (19.1%) in 1992. Although SG&A
expenses varied about 1.5 percentage points as a percentage of net sales over
the past three years, the dollar amounts increased $5.5 million during the past
two years. The increased expenditures include an increased rail-transit staff,
ongoing Company-wide implementation of Total Quality Systems and installation of
new computer systems during the past two years. These increases also reflect
higher commission, personnel expenses and insurance costs that accompany higher
sales volume.
Other Operating Expenses
Changes in other operating expenses were insignificant in 1994, 1993 and 1992.
Interest Expense
Interest expense was $264,000 in 1994, $427,000 in 1993 and $1.3 million in
1992. Total Company interest expense has trended progressively lower during the
past three years because of reduced borrowings over the past several years and
declining interest rates through 1993. Increased interest rates in 1994 had
virtually no effect on 1994 interest costs because Harmon's borrowings were
quite modest. Conversion of the $2.1 million, 9% convertible debentures in 1992,
the Company's 1993 stock offering and increased cash flow from operations were
the major elements of interest expense reduction in 1993.
Income Taxes
The Company's effective income tax rate on continuing operations for 1994 was
39.8% compared with 37.9% for 1993 and 35.2% for 1992. Tax rates were higher in
1994 principally because of changes in the federal tax law, prevailing high
state income taxes in California, where Harmon did more business in 1994, and
increased Missouri rates, where Harmon is headquartered. FASB 109, "Accounting
for Income Taxes," was implemented in the first quarter of 1993 without any
significant effect on operating results. See Note 5 of Notes to the Consolidated
Financial Statements.
Inflation
Inflation has been moderate during the past three years, averaging 4% to 5% for
materials and wages. Competitive pressure has required the Company to maintain
or reduce sales prices to sustain market share. Management believes that
competitive pricing pressures will remain for the foreseeable future. Its
program to combat this is to continue to increase productivity, adopt emerging
lower-cost technological advances into its products, expand its available
products through internal development and acquire products or companies in the
railroad industry that will expand Harmon's product or service offerings.
Liquidity and Capital Resources
Cash was down $2.8 million at year-end 1994 compared to 1993 year-end because
$6.7 million cash (and 260,000 common shares) was used to finance the $9.9
million Servo acquisition. Interest-bearing debt was $1.9 million compared with
$644,000. Interest bearing debt increased in 1994 chiefly from an increase in
capitalized lease obligations incurred to purchase computer hardware and
software and the use of $800,000 from its line of credit in 1994. The current
ratio was 2.03:1 at 1994 year-end compared with 2.33:1 twelve months earlier,
and the liabilities-to-equity ratio was .59:1 compared with .60:1.
Page 35 of 72
<PAGE>
Annual Report page 20 of 37
Cash Flow from Operations
Net cash provided from operations was $7.8 million for 1994, $3.1 million for
1993 and $7.3 million for 1992. Cash flow was strong throughout the 1994 year
despite increased working capital needs to finance Harmon's growing business.
Accounts receivable were $3.0 million higher at 1994 year-end. This increase, in
part, reflects unusually large shipments in December of 1994. Even though net
earnings for 1993 were $1.9 million greater than those of 1992, cash flows were
less, largely because higher annual sales required more working capital in 1993
compared with 1992. The increases of $5.9 million in accounts receivable and
$2.6 million in inventories were partially offset by increases of $1.6 million
in accounts payable and $2.1 million for accrued payroll and benefits. The
increase in receivables primarily reflects a $4.9 million increase in 1993
fourth quarter sales.
Cash Flow from Investing Activities
Net cash used in investing activities was $10.4 million in 1994, $4.7 million in
1993 and $2.5 million in 1992. The major difference between 1994 and 1993 was
the Servo acquisition, which required a cash investment of $6.7 million. Capital
expenditures for plant and equipment were similar in 1994 and 1993 at roughly
$3.2 million, approximately $1 million more than was invested in 1992. However,
a record $9.0 million is budgeted for capital expenditures in 1995, subject to
current operating conditions experienced during the year.
Cash Flow from Financing Activities
Net cash used in financing activities was $188,000 in 1994, including $968,000
in shareholder cash dividends, which were reinstituted in 1994. In 1993, Harmon
received nearly $10.5 million from its stock sale of 865,000 Company shares. It
used $6.7 million to retire debt, generating a positive cash effect of
approximately $3.8 million. In 1992, the Company received $13.8 million from the
sale of stock and issuance of debt, and used $18.5 million to retire higher
interest bearing debt.
The net effect of the three separate elements determining cash flow was as
follows: a decrease in net cash of $2.8 million in 1994, and increases of $2.6
million in 1993 and $86,000 in 1992.
At December 31, 1994, the Company had unused lines of credit in the amount
of approximately $19 million compared with approximately $20 million one year
previous. Management believes that its current level of commitments and
projected capital expenditures of approximately $9.0 million can be funded by
cash flow from operations and through current lines of credit.
1995 Outlook
Management is optimistic for 1995, particularly for the second half as the first
half will be burdened with the costs of integrating the Servo acquisition into
the Harmon operation and the cancellation or postponement of certain contracts
due to the uncertainties surrounding the pending Santa Fe-Burlington Northern
merger. Second half volume will be helped by delivery of rail-transit contracts
received in December, 1994, and from the anticipated added contribution from the
Servo acquisition. Harmon entered 1995 with a record year-end backlog of $44.6
million, which included a stronger position in the rail-transit market. The
balance sheet is very strong. There is very little interest-bearing debt, a
current ratio in excess of 2:1, and a $19 million bank line of credit. Our core
business - products, systems and services for the nation's freight hauling
railroads - continues at a high level. In addition, customer acceptance of our
newer products has been excellent.
Earnings in 1995 must increase at least 6% before any increase in earnings
per share can be realized because of an approximate 6% increase in average
outstanding shares anticipated for 1995. This increase in average shares relates
to 260,000 shares used to acquire the transportation division of Servo and
157,600 shares for stock options exercised in 1994.
Page 36 of 72
<PAGE>
Annual Report page 21 of 37
Despite general optimism, there are many uncertainties. Among them are the
degree to which the economy and our customers will continue to grow in the face
of higher interest rates, whether government funding will continue as before -
given the mood in the Congress to reduce federal spending and even to help
defense contractors to enter our businesses, whether our R&D departments can
continue their output of innovative and very successful products, the extent to
which the devalued peso will affect niftier, and the outcome of the
environmental matter discussed in Note 11 to the Consolidated Financial
Statements.
Fourth Quarter Results
Sales for the 1994 fourth quarter were $32.2 million, 12.2% higher than 1993
fourth quarter sales of $28.7 million. Although gross profit dollars were up,
gross profit margins were lower chiefly because research and development
expenditures (R&D) were nearly double those of the same quarter in 1993. The
lower margins along with the increase in selling, general and administrative
expenses (largely because of higher sales and costs to implement MIS systems) in
1994 resulted in reduced net earnings in 1994 fourth quarter to $1.7 million
compared with $2.0 million the prior year. Earnings per share were $0.25
compared to $0.30 a year earlier.
<TABLE>
<CAPTION>
Quarterly Consolidated Statements of Earnings (Unaudited)
(In thousands, except per share data)
1994 1993
Quarters ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 25,902 $ 32,166 $ 29,448 $ 32,187 $20,619 $22,852 $27,134 $28,690
Cost of sales 17,503 21,882 19,997 21,641 13,571 14,791 18,185 19,170
R&D expenditures 990 966 805 1,800 808 845 864 924
Gross profit 7,409 9,318 8,646 8,746 6,240 7,216 8,085 8,596
Selling, general and
administrative expenses 4,837 5,377 4,973 5,989 4,462 4,329 4,508 5,259
Amortization 33 33 11 1 33 34 33 34
Miscellaneous (income)
expense-net (4) (20) 21 (31) 28 (56) (7) 15
Operating income 2,543 3,928 3,641 2,787 1,717 2,909 3,551 3,288
Investment income 14 5 1 30 2 20 2 15
Interest expense 43 80 85 56 151 207 46 23
Pre-tax earnings 2,514 3,853 3,557 2,761 1,568 2,722 3,507 3,280
Income taxes 1,018 1,523 1,406 1,099 589 992 1,310 1,302
Net earnings $ 1,496 $ 2,330 $ 2,151 $ 1,662 $ 979 $ 1,730 $2,197 $1,978
Earnings per common share $ 0.23 $ 0.36 $ 0.33 $ 0.25 $ 0.17 $ 0.28 0.34 $0.30
Weighted average shares (000s) 6,551 6,559 6,563 6,594 5,623 6,147 6,533 6,543
</TABLE>
Quarterly per share amounts may not add to annual amounts due to the timing of
net earnings and changes in common stock equivalents during each year.
Page 37 of 72
<PAGE>
Annual Report page 22 of 37
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(Dollars in thousands)
At December 31, 1994 1993
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 250 $ 3,065
Trade receivables, less allowance for doubtful accounts
of $360,000 in 1994 and $241,000 in 1993 21,457 18,408
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 3) 1,321 504
Inventories:
Work in process 5,763 5,320
Raw materials and supplies 11,955 9,396
17,718 14,716
Income tax receivable 667 -
Deferred tax asset (note 5) 586 828
Prepaid expenses and other current assets 731 337
Total current assets 42,730 37,858
Property, plant and equipment, at cost (note 4):
Land 164 164
Buildings 4,596 4,174
Machinery and equipment 11,680 10,792
Office furniture and equipment 11,711 9,424
Transportation equipment 928 872
Leasehold improvements 1,600 1,393
30,679 26,819
Less accumulated depreciation and amortization 19,610 17,796
Net property, plant and equipment 11,069 9,023
Deferred tax asset (note 5) 500 469
Cost in excess of fair value of net assets acquired, net of
accumulated amortization of $1,349,000 in 1994 and
$1,271,000 in 1993 (note 12) 7,967 78
Deferred compensation asset (note 7) 5,146 4,622
Other assets 983 950
$ 68,395 $ 53,000
</TABLE>
See accompanying notes to consolidated financial statements.
Page 38 of 72
<PAGE>
Annual Report page 23 of 37
<TABLE>
<CAPTION>
At December 31, 1994 1993
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Current debt installments (note 4) $ 1,174 $ 205
Accounts payable 8,646 6,058
Accrued payroll, bonus and employee benefit plan contributions 7,327 5,758
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 3) 1,420 1,523
Federal and state income taxes payable - 518
Other accrued liabilities 2,493 2,178
Total current liabilities 21,060 16,240
Deferred compensation liability (note 7) 3,539 3,235
Long-term debt (note 4) 733 439
Total liabilities 25,332 19,914
Stockholders' equity (notes 4 and 8):
Common stock of $.25 par value; authorized 20,000,000 shares
in 1994 and 10,000,000 in 1993, issued 6,728,252 shares in
1994 and 6,328,437 shares in 1993 1,682 1,582
Additional paid-in capital 22,719 19,513
Retained earnings 18,662 11,991
Total stockholders' equity 43,063 33,086
Commitments and contingencies (notes 4, 7 and 11)
$ 68,395 $ 53,000
</TABLE>
Page 39 of 72
<PAGE>
Annual Report page 24 of 37
<TABLE>
<CAPTION>
Consolidated Statement of Earnings
(Dollars in thousands, except per share data)
Years ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Net sales $ 119,703 $ 99,295 $ 81,899
Cost of sales 81,023 65,716 54,271
Research and development expenditures 4,561 3,442 3,541
Gross profit 34,119 30,137 24,087
Selling, general and administrative expenses 21,176 18,558 15,646
Amortization of cost in excess of fair value
of net assets of subsidiary acquired 78 134 134
Miscellaneous (income) expense - net (34) (20) 3
Operating income 12,899 11,465 8,304
Interest expense (264) (427) (1,318)
Investment income 50 39 90
Earnings from continuing operations
before income taxes 12,685 11,077 7,076
Income tax expense (benefit) (note 5):
Current 5,098 4,561 2,496
Deferred (52) (368) 2
5,046 4,193 2,498
Earnings from continuing operations 7,639 6,884 4,578
Discontinued operations - Estimated gain on
disposal, including provision for operating losses
through disposal date, less applicable income tax
expense of $85,000 in 1992 (notes 2 and 5) - - 165
Earnings before extraordinary item 7,639 6,884 4,743
Extraordinary item - Income tax benefit from utilization
of net operating loss carryforward (note 5) - - 273
Net earnings $ 7,639 $ 6,884 $ 5,016
Earnings per common share:
Continuing operations $ 1.16 $ 1.11 $ .87
Discontinued operations - - .03
Extraordinary item - - .05
Total $ 1.16 $ 1.11 $ .95
Weighted average shares outstanding (000s) 6,567 6,212 5,275
</TABLE>
See accompanying notes to consolidated financial statements.
Page 40 of 72
<PAGE>
Annual Report page 25 of 37
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
Additional Total
Common Paid-in Retained Treasury Stockholders'
Stock Capital Earnings Stock Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991 $ 1,428 $12,883 $ 91 $(7,025) $ 7,377
Net earnings - - 5,016 - 5,016
Common stock issued (notes 7 and 8) 96 2,708 - - 2,804
Balance at December 31, 1992 1,524 15,591 5,107 (7,025) 15,197
Net earnings - - 6,884 - 6,884
Common stock issued (notes 7 and 8):
Stock offering 38 3,411 - 7,025 10,474
Stock options and other 20 511 - - 531
Balance at December 31, 1993 1,582 19,513 11,991 - 33,086
Net earnings - - 7,639 - 7,639
Cash dividends paid ($0.15 per share) - - (968) - (968)
Common stock issued (notes 7, 8 and 12):
Servo acquisition 65 2,860 - - 2,925
Stock options and other 35 346 - - 381
Balance at December 31, 1994 $ 1,682 $22,719 $18,662 $ - $43,063
</TABLE>
See accompanying notes to consolidated financial statements.
Page 41 of 72
<PAGE>
Annual Report page 26 of 37
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years ended December 31, 1994 1993 1992
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 7,639 $ 6,884 $ 5,016
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,621 2,121 1,936
Gain on disposal of discontinued operations (note 2) - - (250)
Gain on sale of property, plant and equipment (6) (7) (9)
Deferred tax expense (benefit) 211 (453) 950
Changes in assets and liabilities:
Trade receivables (3,046) (5,880) (2,530)
Inventories (1,558) (2,572) (442)
Estimated costs, earnings and billings on contracts (920) (850) 266
Prepaid expenses (109) (70) 12
Accounts payable 2,588 1,579 2
Accrued payroll and benefits 1,506 2,107 514
Current income taxes (1,104) (64) 1,225
Other liabilities (319) 21 293
Other deferred liabilities 304 310 413
Discontinued operations - 23 (117)
Total adjustments 168 (3,735) 2,263
Net cash provided by operating activities 7,807 3,149 7,279
Cash flows from investing activities:
Capital expenditures (3,242) (3,189) (2,154)
Proceeds from sale of property, plant and equipment 30 26 29
Deferred compensation contributions (524) (1,240) (373)
Other investing activities (37) 53 229
Net investing activities of discontinued operations - (339) (223)
Servo acquisition (6,661) - -
Net cash used in investing activities (10,434) (4,689) (2,492)
Cash flows from financing activities:
Proceeds from issuance of common stock 300 10,817 2,804
Proceeds from issuance of long-term debt - - 11,033
Net borrowings/(repayments) under line of credit agreements 800 - (2,493)
Payment of dividends (968) - -
Principal payments of long-term debt (320) (6,655) (16,045)
Net cash provided by (used in) financing activities (188) 4,162 (4,701)
Net increase (decrease) in cash and cash equivalents (2,815) 2,622 86
Cash and cash equivalents at beginning of year 3,065 443 357
Cash and cash equivalents at end of year $ 250 $ 3,065 $ 443
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $ 265 $ 492 $ 1,385
Income taxes $ 5,939 $ 3,865 $ 863
</TABLE>
See accompanying notes to consolidated financial statements.
Page 42 of 72
<PAGE>
Annual Report page 27 of 37
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Principles
Principles of Consolidation and Basis of Presentation
The consolidated financial statements of the Company include the accounts of
Harmon Industries, Inc., and its wholly-owned subsidiaries, Harmon Electronics,
Inc., Electro Pneumatic Corporation (EPC), Consolidated Asset Management
Company, Inc. (CAMCO) and Cedrite Technologies, Inc. (Cedrite).
Significant intercompany accounts and transactions have been eliminated in
consolidation.
The operations of Cedrite have been segregated in the accompanying
consolidated statement of earnings and related footnotes as discontinued
operations due to the approval in January 1991 by the Company's Board of
Directors of a formal plan to dispose of the assets of Cedrite. Except as
otherwise indicated, all footnote disclosure contains information relating to
continuing operations.
Nature of Business
The Company is a major supplier of signal and train control products to
railroads throughout North America and the world. It manufactures an extensive
line of railroad signal and communication equipment, traffic control systems,
rail/highway grade crossing hardware and related components.
The Company also provides a single-source, rapid delivery service for
urgently needed railroad components by warehousing commonly-used parts and
equipment, which are manufactured both by Harmon and other vendors.
Inventory Valuation
Inventories are valued primarily at the lower of cost (first-in, first-out) or
market (net realizable value). The components of cost are labor, materials and
an allocation of manufacturing overhead.
Property, Plant and Equipment
Buildings, machinery and equipment, office furniture and equipment,
transportation equipment and leasehold improvements are being depreciated or
amortized using the straight-line method over the estimated useful lives of the
assets, which range from two to thirty-three years. Maintenance and repairs are
charged to operations as incurred. Renewals and betterments are capitalized as
additions to the appropriate asset accounts. Upon sale or retirement of assets,
the cost and related accumulated depreciation applicable to such assets are
removed from the accounts, and any resulting gain or loss is reflected in
operations.
Income Taxes
Effective January 1, 1993 the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. The cumulative effect of that
change in the method of accounting for income taxes in 1993 was immaterial.
Under the asset and liability method of Statement 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Pursuant to the deferred method under APB 11, which was applied in 1992 and
prior years, deferred income taxes were recognized for income and expense items
that are reported in different years for financial reporting purposes and income
tax purposes using the tax rate applicable for the year of calculation. Under
the deferred method, deferred taxes were not adjusted for subsequent changes in
tax rates.
Page 43 of 72
<PAGE>
Annual Report page 28 of 37
Long-term Contracts
Profits on long-term contracts are recorded on the basis of the Company's
estimates of the percentage of completion of individual contracts. That portion
of the total contract price is accrued which is allocable, on the basis of the
Company's engineering estimates of the percentage of completion, to contract
expenditures incurred. Profits are not recorded during the start-up phase of the
contract, which has been determined by the Company to approximate the initial
15% of design and construction. All losses are recognized in the period during
which they become evident.
Cost in Excess of Fair Value of Net Assets Acquired
Cost in excess of the fair value of net assets acquired is amortized on a
straight-line basis generally over fifteen years.
Patents
The cost of patents acquired is being amortized on a straight-line basis over
the estimated remaining economic lives of the respective patents, which is less
than the statutory life of each patent.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
investments purchased with a maturity of three months or less to be cash
equivalents.
Research and Development
Costs incurred in the creation and start-up of new products or in changing
existing products are charged to expense as incurred.
Earnings per Common Share
Earnings per common share are based on the weighted average number of common
shares outstanding. Effect is given to common stock equivalents (stock options),
if dilutive.
Note 2. Discontinued Operations
Cedrite Technologies, Inc.
On January 30, 1991, the Company announced its intention to dispose of Cedrite.
A formal plan of disposal was approved by the Board of Directors.
The estimated loss on disposal at December 31, 1990 included the writedown of
property, plant and equipment to market value based on an independent appraisal,
closedown expenses, loss on fulfilling other obligations and anticipated
operating losses of Cedrite through the shutdown date. On December 5, 1991 the
Company sold the majority of the Cedrite equipment at auction. The remaining
equipment was sold during 1992. In 1993 the remaining long term assets were
written off against the reserve.
Interest expense on the debt associated with discontinued operations was
charged to discontinued operations until the date the operations were
discontinued. Thereafter, all interest expense has been charged to continuing
operations.
Page 44 of 72
<PAGE>
Annual Report page 29 of 37
Note 3. Contracts in Progress
Contract costs on uncompleted contracts are as follows:
<TABLE>
<CAPTION>
Costs and Billings in
estimated excess of
earnings costs and
in excess estimated
(Dollars in thousands) of billings earnings Total
<S> <C> <C> <C>
December 31, 1994:
Costs and estimated earnings $ 11,820 $ 34,666 $ 46,486
Billings 10,499 36,086 46,585
$ 1,321 $ (1,420) $ (99)
December 31, 1993:
Costs and estimated earnings $ 2,023 $ 34,090 $ 36,113
Billings 1,519 35,613 37,132
$ 504 $ (1,523) $ (1,019)
</TABLE>
All receivables on contracts in progress are considered to be collectible
within twelve months.
<TABLE>
<CAPTION>
Note 4. Indebtedness
(Dollars in thousands) 1994 1993
<S> <C> <C>
Industrial revenue bonds $ 140 $ 280
Capitalized lease obligations 967 364
Revolving credit agreement 800 -
Total indebtedness 1,907 644
Less current installments 1,174 205
Long-term debt $ 733 $ 439
</TABLE>
Industrial revenue bonds
The industrial revenue bonds were issued to provide funds to construct and equip
manufacturing and research and development facilities. The bonds bear interest
at 89.7% of the prevailing prime commercial rate but not less than 7.5% (7.6% at
December 31, 1994) and mature in annual installments of $140,000 plus interest
through 1995. They are secured by buildings and equipment with a depreciated
cost of $1,566,000, and land with a cost of $22,000 at December 31, 1994.
Capitalized lease obligations
The Company entered into various computer hardware and software capital lease
agreements totaling $783,000 and $379,000 in 1994 and 1993, respectively.
Monthly installments are due through October 1998. The implied interest rate in
the lease is 8.0%.
Page 45 of 72
<PAGE>
Annual Report page 30 of 37
Revolving credit agreements
The Company has an unsecured $15,000,000 revolving credit agreement available at
December 31, 1994, with no outstanding borrowings. Outstanding borrowings come
due on June 28, 1996 and bear interest at a base rate established by the bank
plus a variable component depending on the Company's funded debt to
capitalization percentage.
The Company has a reducing revolving credit agreement with original total
credit availability of $6,000,000 reducing by $300,000 each quarter beginning
after June 30, 1993. The Company has availability under this agreement of
$3,900,000 reduced by current borrowings of $800,000 at December 31, 1994.
Outstanding borrowings come due on June 28, 1998 and bear interest at a base
rate established by the bank plus a variable component depending on the
Company's funded debt to capitalization percentage (8.75% at December 31, 1994).
Borrowings under this agreement are collateralized by liens against
substantially all of the Company's equipment and machinery.
Covenants
The various indebtedness agreements contain, among other things, covenants
relating to: maintenance of certain levels of consolidated net worth and
limitations of total liabilities; maintenance of certain ratios of debt to
equity and current assets to current liabilities; and certain limitations on the
payment of cash dividends. At December 31, 1994, the Company is in compliance
with all covenants under its indebtedness agreements.
Maturities
At December 31, 1994, long-term debt maturities for 1995 and thereafter are:
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
<S> <C>
1995 $ 1,174
1996 254
1997 275
1998 204
$ 1,907
</TABLE>
Note 5. Income Taxes
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
<S> <C> <C> <C>
Current:
Federal $ 4,193 $ 4,029 $ 1,406
State 905 532 227
Total current 5,098 4,561 1,633
Deferred:
Federal (14) (332) 898
State (38) (36) 52
Total deferred (52) (368) 950
Total income tax expense $ 5,046 $ 4,193 $ 2,583
</TABLE>
Page 46 of 72
<PAGE>
Annual Report page 31 of 37
The income tax expense is reflected in the accompanying consolidated statements
of earnings as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
<S> <C> <C> <C>
Continuing operations $ 5,046 $ 4,193 $ 2,498
Discontinued operations - - 85
Total $ 5,046 $ 4,193 $ 2,583
</TABLE>
Income tax expense attributable to income from continuing operations for
the years ended December 31, 1994, 1993, and 1992, respectively, differed from
the amounts computed by applying the U.S. federal income tax rate of 35 percent
for 1994 and 34 percent for 1993 and 1992 to pretax income from continuing
operations as a result of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
<S> <C> <C> <C>
Computed "expected" tax expense $ 4,440 $ 3,766 $ 2,406
Increase (reduction) in income taxes
resulting from:
State and local income taxes,
net of federal income tax benefit 564 327 184
Research and experimentation credits (11) - (111)
Other, net 53 100 19
$ 5,046 $ 4,193 $ 2,498
</TABLE>
The significant components of deferred income tax expense attributable to
income from continuing operations for the year ended December 31, 1992 are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1992
<S> <C>
Excess of tax over financial statement depreciation $ (25)
Impact of net operating loss carryforward
utilized for financial reporting purposes 914
Deferred compensation (141)
Compensated absences (24)
Other 226
$ 950
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1994 and
1993 are presented below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 1,327 $ 1,213
Compensated absences 256 240
Inventories 186 184
Allowance for doubtful accounts 135 90
Various other reserves 378 665
Total gross deferred tax assets 2,282 2,392
Less valuation allowance 369 351
1,913 2,041
Deferred tax liabilities:
Plant and equipment (827) (744)
Net deferred tax assets $ 1,086 $ 1,297
</TABLE>
Page 47 of 72
<PAGE>
The valuation allowance for deferred tax assets as of January 1, 1993 was
approximately $220,000. The net change in the total valuation allowance for the
years ended December 31, 1994 and 1993 were $18,000 and $131,000, respectively.
Management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the deferred tax
assets.
Note 6. Business Segment Information
The Company and its subsidiaries operate in one reportable segment of railroad
electronics and related products.
Two customers accounted for net sales of approximately $25,735,000 and
$11,015,000 for the year ended December 31, 1994, net sales of approximately
$14,168,000 and $10,136,000 for the year ended December 31, 1993 and net sales
of approximately $11,858,000 and $10,119,000 for the year ended December 31,
1992. The Company has no other unusual credit risks or concentrations.
Note 7. Commitments
The Company has entered into various lease arrangements covering the use of
manufacturing facilities, administrative offices and equipment, all of which are
operating leases. Rental expense related to these leases amounted to $1,398,000,
$1,268,000 and $1,234,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
A summary of non-cancelable long-term operating lease commitments follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
Asset leased
Real Total Com-
Years ended December 31, Equipment property mitments
<S> <C> <C> <C>
1995 $ 125 $ 1,019 $ 1,144
1996 96 764 860
1997 52 292 344
1998 - 298 298
1999 - 188 188
</TABLE>
The Company has future minimum rentals to be received amounting to $152,000
for the year ending December 31, 1995.
It is expected that in the normal course of business, leases that expire
will be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than the
amounts shown for 1995.
Employee Benefits
In 1985, the Company formed an Employee Stock Ownership Plan and Trust (ESOP),
which includes all employees. Company contributions to the ESOP are normally
based on a percentage of pretax earnings.
In January 1992, the Company issued 110,000 shares of common stock to the
ESOP, representing a portion of the 1991 contribution to the plan. The Company
valued such shares at the closing bid price for the common stock as of the issue
date of $4.625.
In 1994 and 1993 no contributions of common stock were made to the ESOP.
ESOP contributions charged to operating expense were $3,045,000, $2,540,000
and $1,547,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
Page 48 of 72
<PAGE>
Annual Report page 33 of 37
The Company and its subsidiaries have various bonus plans based primarily
on Company performance. Accrued and unpaid bonuses at December 31, 1994 and 1993
were $1,467,000 and $1,246,000, respectively.
The Company has a nonqualified, unfunded deferred compensation plan for
certain key executives providing for payments upon retirement, death or
disability. Under the plan, certain employees receive retirement payments equal
to a portion of the three highest continuous years' average compensation. These
payments are to be made for the remainder of the employees' life with a minimum
payment of ten years' benefits to either the employee or his or her beneficiary.
The plan also provides for reduced benefits upon early retirement, disability or
termination of employment. The deferred compensation expense was $522,000,
$426,000 and $493,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
The Company has recorded the assets and liabilities for the deferred
compensation at gross amounts in the Consolidated Balance Sheets because such
assets and liabilities belong to the Company rather than to any plan or trust.
The assets are recorded at cost, and the liability is computed and recorded in
accordance with SFAS 87, "Employers' Accounting For Pensions."
The Company does not provide other post-retirement benefits.
Note 8. Stockholders' Equity
A summary of stock options granted, exercised and expired follows:
<TABLE>
<CAPTION>
Shares Price Per Share
<S> <C> <C> <C>
Balance at December 31, 1991 355,975 $3.92 Average Price
Granted 66,500 5.50-8.25
Exercised (39,275) 3.88-5.50
Expired (30,350) 3.88-5.21
Balance at December 31, 1992 352,850 4.40 Average Price
Granted 32,000 13.38-21.50
Exercised (75,600) 3.88-5.50
Expired (2,000) 4.13
Balance at December 31, 1993 307,250 5.70 Average Price
Granted 42,000 20.50-22.75
Exercised (157,600) 3.88-13.38
Expired (2,000) 5.50-7.25
Balance at December 31, 1994 189,650 $10.44 Average Price
</TABLE>
The Company has exercisable outstanding stock options for 174,045 shares of
common stock at prices ranging from $3.88 to $22.75 a share as of December 31,
1994. In May 1994 and 1993, the Company granted stock options for up to 2,000
common shares to each of the Company's eleven directors as of those dates,
respectively. The options expire on May 31, 1996 and May 28, 1995, respectively.
In June 1992, the Company granted stock options for up to 1,000 common shares to
each of the Company's nine directors as of that date. The options expired on May
31, 1994.
On December 31, 1992, the Company issued 227,027 shares of common stock as
a result of conversion of the 9% subordinated convertible debentures. The shares
were issued at the conversion price of $9.25 per share.
Page 49 of 72
<PAGE>
Annual Report page 34 of 37
The Company and selling shareholders sold 1,150,000 shares of common stock
in a public offering in April and May 1993 (285,000 shares were sold by
shareholders). The Company received cash proceeds of approximately $10,474,000
from the public offering of 865,000 shares of its common stock in 1993.
The Company issued 260,000 shares of unregistered common stock to Servo
Corporation of America in December 1994 (See Note 12).
Note 9. Affiliates
.The Company has investments of 38% and 20% in unconsolidated affiliates which
are accounted for under the equity method. Equity in earnings (losses) of these
affiliates was not significant for the years ended December 31, 1994, 1993 and
1992. The Company had sales to these related entities totaling $272,000,
$398,000 and $555,000 for 1994, 1993 and 1992, respectively. The Company had
receivables due from these entities of $60,000 and $71,000 as of December 31,
1994 and 1993.
Note 10. Other Financial Information
The Company has classified certain environmental compliance expenses as cost of
sales in the accompanying statements of operations. These expenses amounted to
$164,000, $465,000 and $542,000 for the years ended December 31, 1994, 1993 and
1992, respectively.
Note 11. Litigation
Environmental matter
On September 30, 1991, the United States Environmental Protection Agency (EPA)
issued a complaint against the Company alleging violations of the Resource
Conservation and Recovery Act (RCRA) and RCRA regulations in the disposal of
solvents at the Company's Grain Valley, Missouri, plant. The complaint sought
penalties in the amount of $2,344,000 and proposes certain compliance actions.
In January 1994 the administrative hearing on the penalty assessment was heard.
The decision from that hearing reduced the penalties to $586,000.
Based on the Company's cooperation with the Missouri Department of Natural
Resources (MDNR), which had the original jurisdiction of the matters complained
by the EPA, in voluntarily disclosing the alleged violations and in promptly
undertaking all remedial actions specified by the MDNR, the penalties appear to
the Company's legal counsel to be excessive. However, because so few cases have
been disposed of by settlement, or by administrative or judicial proceedings
since the new penalty guidelines were adopted, legal counsel cannot express an
opinion as to the ultimate amount, if any, of the Company's liability.
The Company has recorded a total of $1,735,000 of environmental compliance
expenses to date relating to this matter. The Company has recorded a liability
for its best estimates of the costs to be incurred relative to the compliance
actions in other accrued liabilities. Since the amount of the penalty cannot be
reasonably determined at this time, no estimate is included for it in the
financial statements.
Other litigation
The Company has been named as a defendant in several other lawsuits in the
normal course of its business. In the opinion of management, after consulting
with legal counsel, the liabilities, if any, resulting from these matters will
not have a material effect on the consolidated financial statements of the
Company.
Page 50 of 72
<PAGE>
Annual Report page 35 of 37
Note 12. Acquisition
On December 20, 1994, the Company acquired the transportation division of Servo
Corporation of America. Servo's transportation division manufactures hot box
detector systems and various components to help railroads monitor the condition
of bearings and wheels on freight and passenger vehicles.
The purchase method of accounting for business combinations was used. The
operating results of this division have been included in the Company's
consolidated results of operations from the date of acquisition and were
insignificant in 1994. The Servo acquisition was made with the issuance of
260,000 shares of unregistered common stock valued at $11.25 per share, as
determined by a fair market value analysis conducted by an independent
investment and securities firm, and $6,661,000 in cash. The fair value of assets
acquired, including goodwill, was $10,283,000 and liabilities assumed totalled
$697,000. Goodwill of $7,967,000 will be amortized over fifteen years on a
straight line basis. Assets acquired included inventory, fixed assets and other
miscellaneous items.
The pro forma results below (unaudited) assume the acquisition occurred at
the beginning of the year ended December 31, 1994 (dollars in thousands, except
per share data).
<TABLE>
<S> <C>
Net sales $131,024
Operating income 13,730
Net earnings 8,152
Earnings per common share 1.19
</TABLE>
Page 51 of 72
<PAGE>
Annual Report page 36 of 37
Report of Management
To the Stockholders of Harmon Industries, Inc.:
The management of Harmon Industries, Inc., is responsible for the preparation,
presentation and integrity of the consolidated financial statements and other
information included in this annual report. The financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles and, as such, include amounts based on management's best estimates
and judgments.
The financial statements have been audited by KPMG Peat Marwick LLP,
independent public -accountants. Their audits were made in accordance with
generally accepted auditing standards and included such reviews and tests of the
-Company's internal accounting controls as they considered necessary.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance at reasonable cost that Company assets are
protected against loss or unauthorized use and that transactions and events are
properly recorded.
The Board of Directors, through its Audit Committee, comprised solely of
directors who are not employees of the Company, meets with management and the
independent public accountants to assure that each is properly discharging its
respective responsibilities. The independent accountants have free access to the
Audit Committee, without management present, to discuss the results of their
work and their assessment of the adequacy of internal accounting controls and
the quality of financial reporting.
Bjorn E. Olsson Charles M. Foudree
President and Chief Executive Officer Executive Vice President -
Finance, Treasurer and Secretary
February 3, 1995
Page 52 of 72
<PAGE>
Annual Report page 37 of 37
Report of Independent Auditors
The Board of Directors and Stockholders of Harmon Industries, Inc. and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of Harmon
Industries, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1994.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Harmon
Industries, Inc. and subsidiaries at December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
February 3, 1995
Page 52 of 72
<PAGE>
EXHIBIT 21
----------
HARMON INDUSTRIES INC.
FILE #0-7916
DECEMBER 31, 1994
LISTING OF SUBSIDIARIES
NAMES UNDER WHICH
SUBSIDIARY NAME BUSINESS IS CONDUCTED JURISDICTION
--------------- --------------------- ------------
Harmon Electronics, Inc. Same Missouri
Electro Pneumatic Corporation Same California
Consolidated Asset
Management Company, Inc. CAMCO Missouri
Cedrite Technologies, Inc. Same Kansas
Page 54 of 72
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements of Harmon Industries, Inc. and subsidiaries as
of December 31, 1994 and the related notes to consolidated financial
statements, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 250
<SECURITIES> 0
<RECEIVABLES> 21,817
<ALLOWANCES> (360)
<INVENTORY> 17,718
<CURRENT-ASSETS> 42,730
<PP&E> 30,679
<DEPRECIATION> (19,610)
<TOTAL-ASSETS> 68,395
<CURRENT-LIABILITIES> 21,060
<BONDS> 733
<COMMON> 1,682
0
0
<OTHER-SE> 41,381
<TOTAL-LIABILITY-AND-EQUITY> 68,395
<SALES> 119,703
<TOTAL-REVENUES> 119,703
<CGS> 85,584
<TOTAL-COSTS> 85,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264
<INCOME-PRETAX> 12,685
<INCOME-TAX> 5,046
<INCOME-CONTINUING> 7,639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,639
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
</TABLE>
<PAGE>
[LOGO]
1300 JEFFERSON COURT
BLUE SPRINGS, MISSOURI 64015
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AT 2:00 P.M. ON MAY 9, 1995
AT THE COUNTRY CLUB OF BLUE SPRINGS
1600 N. CIRCLE DRIVE
BLUE SPRINGS, MISSOURI
To the Holders of Common Stock of Harmon Industries, Inc.:
Notice is hereby given that the Annual Meeting of the Shareholders of Harmon
Industries, Inc. will be held for the following purposes:
1. To elect eleven (11) members of the Board of Directors;
2. To approve the selection of KPMG Peat Marwick LLP, as Auditors for the
forthcoming fiscal year;
3. To vote on a proposal to increase the number of shares covered by the
Company's 1990 Incentive Stock Option Plan from 500,000 to 650,000.
4. To vote on a shareholder proposal to recommend the Company terminate its
practice of paying to members of the Board of Directors a fee for
attending meetings by telephonic conference;
5. To vote on a shareholder proposal to recommend the Company terminate its
practice of granting options to members of the Board of Directors
pursuant to the Company's 1988 Director Stock Option Plan; and
6. To transact such other business as may properly come before the meeting
or any adjournments thereof.
Only shareholders of record at the close of business on March 17, 1995, will
be entitled to notice of and to vote at the meeting and any adjournments
thereof. The transfer books of the Company will not be closed.
Shareholders who do not expect to attend the meeting in person are asked to
date, sign and return the proxy using the enclosed envelope which needs no
postage if mailed in the United States.
BY ORDER OF THE BOARD OF DIRECTORS
Robert E. Harmon
Chairman
1300 Jefferson Court
Blue Springs, Missouri 64015
March 31, 1995
<PAGE>
[LOGO]
1300 JEFFERSON COURT
BLUE SPRINGS, MISSOURI 64015
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 9, 1995
SOLICITATION OF PROXIES
This Proxy Statement and the accompanying form of proxy are being mailed to
shareholders of Harmon Industries, Inc. (the "Company") commencing on March 31,
1995. The enclosed proxy is solicited by and on behalf of the Board of Directors
of the Company to be used at the Annual Meeting of Shareholders, which will be
held at the Country Club of Blue Springs, 1600 N. Circle Drive, Blue Springs,
Missouri on May 9, 1995 at 2:00 p.m. and at any adjournments thereof, for the
purposes set forth in the accompanying Notice of Annual Meeting of Shareholders.
Any shareholder who executes and returns the enclosed proxy has the right to
revoke it, in writing, at any time before it is voted at the meeting.
The Company will bear the cost of solicitation of proxies. In addition to
the use of the mail, proxies may be solicited personally or by telephone or
facsimile by the directors or by a few executives or employees of the Company at
a nominal cost, and the Company may reimburse brokers and other persons holding
stock in their names or in the names of their nominees for their expenses in
sending proxy material to principals.
The Board of Directors of the Company has fixed the close of business on
March 17, 1995, as the record date for the determination of shareholders
entitled to notice of and to vote at the meeting. As of that date, the Company
had 6,766,211 shares of Common Stock outstanding and entitled to vote at the
meeting.
Each share of Common Stock entitles the shareholders to one vote for each
share held. All voting, unless otherwise specifically indicated, requires
approval by majority of the shares of stock represented in person or by proxy at
the meeting and voted on the matter in question. Abstentions and broker
non-votes are tabulated as if no vote was cast for the matter indicated.
Shareholders have the right to accumulate votes in the election of directors,
that is, to cast a total number of votes for one or more nominees for directors
equal to the number of shares held times the number of directors to be elected.
The shareholder may cast his or her votes for one nominee or distribute his or
her votes among two or more nominees. Votes withheld in the election of
directors are not tabulated as a vote for or against the person or persons
indicated. The selection of directors is determined in the order of those
nominees receiving the highest number of votes in favor of election until the
number of nominees to be elected in the election have been selected.
1
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock of the
Company owned beneficially as of March 17, 1995 by each person who, as of that
date, to the best knowledge of management, was the beneficial owner of more than
5% of the outstanding shares or who is a named executive officer. Common Stock
is the only class of voting securities.
<TABLE>
<CAPTION>
PERCENT
TITLE NAME AND ADDRESS OF BENEFICIAL OF
OF CLASS BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
------------------ ------------------------------------------------- --------------- -------------
<C> <S> <C> <C>
Common Stock ROPARBAN, Designee for MidAmerican Bank & Trust, 447,743 6.5%
as Trustee for the Company's ESOP
P.O. Box 1677
Lawrence, Kansas 66044
Common Stock FMR Corp. 433,900(3) 6.3%
82 Devonshire Street
Boston, Massachusetts 02109
Common Stock Robert E. Harmon 253,889(4) 3.7%
Common Stock Charles M. Foudree 43,300(5) 0.6%
Common Stock Bjorn E. Olsson 43,000 0.6%
Common Stock Gary E. Ryker 25,365 0.4%
Common Stock Noel B. Smith 12,365 0.2%
Common Stock Beneficial ownership of all officers and 587,052 8.5%
directors as a group (21 in group)
<FN>
(1) All amounts of shares reflect sole voting and disposition power unless
otherwise indicated. The share amounts reflected in this column include
outstanding shareholdings, as well as unexercised ISOP option shares and
unexercised director option shares (see discussion under caption "Executive
Compensation" herein). Shares allocated under the Company's ESOP are not
included since participants have no disposition power and have only shared
voting rights. Amounts in the ESOP allocated to Messrs. Harmon, Foudree,
Olsson, Ryker and Smith and all officers and directors as a group were
5,006; 4,161; 948; 11; 1,343 and 29,689 shares, respectively.
(2) Percentages are calculated on 6,896,751 shares representing the total of
6,766,211 outstanding shares and 130,540 shares for unexercised director
and ISOP options.
(3) FMR Corp., through its subsidiaries and affiliates, provides investment
advisory and/or management services concerning these shares which are owned
by various institutional clients. It has sole voting power in 389,100
shares and sole dispositive power in 433,900 shares.
(4) Does not include 4,200 shares owned by his wife for which Robert E. Harmon
disclaims beneficial ownership.
(5) 29,000 shares are beneficially owned and held of record by M. Colleen
Foudree as trustee for the M. Colleen Foudree Trust with sole voting and
disposition power. 10,300 shares are held by the Charles M. Foudree Trust
with sole voting and disposition power. The remainder are held by Charles
M. Foudree and represent unexercised director option shares.
</TABLE>
2
<PAGE>
Based on a review of reports on Forms 3, 4 and 5 and amendments to such
forms filed with the Company, the Company is aware of no late filing of such
forms for persons required to file such forms in connection with Section 16(a)
of the Securities Exchange Act of 1934, as amended. The Company is unaware of
any transactions in which there was a failure to file by a reporting person
under such Act.
ELECTION OF DIRECTORS
Eleven directors are to be elected at the Annual Meeting of Shareholders for
one year or until their successors are elected and qualified. It is the
intention of the persons named in the accompanying form of proxy to vote for the
election of the nominees listed below. If, for any reason, any of the nominees
is unable or declines to serve, the proxies will be voted for the other persons
listed or for substitute nominees nominated by management. During fiscal 1994,
the Board of Directors held six meetings. All of the directors nominated for
re-election herein attended greater than 75% of the meetings of both the Board
and the respective committees for which they were eligible to serve.
The Director Compensation and Nomination Committee proposes nominees for
Board positions and evaluates director compensation. The Committee consists of
Herbert M. Kohn (Chairman), Bruce M. Flohr and Judith C. Whittaker. The
Committee met one time during 1994. The Committee will consider proposed
director candidates submitted by shareholders. Proposals for the 1996 election
must be received in writing prior to November 14, 1995.
The Audit Committee of the Board of Directors is composed of Donald V. Rentz
(Chairman), Thomas F. Eagleton, Herbert M. Kohn and Judith C. Whittaker. The
Audit Committee reviews and monitors financial controls throughout the Company,
supervises the internal audit function and monitors the Company's relationship
with the external auditors. The committee met two times in 1994.
The Compensation Committee was composed of Gerald E. Myers (Chairman until
May 10, 1994), Rodney L. Gray, Bruce M. Flohr and Douglass Wm. List during 1994.
On May 10, 1994, Rodney L. Gray became Chairman. The Compensation Committee is a
standing committee of the Board of Directors and establishes executive salary
and bonus levels for the executive officers and the Presidents of the Company's
subsidiaries. During 1994, the Compensation Committee met four times.
3
<PAGE>
DIRECTOR NOMINEES
<TABLE>
<CAPTION>
SERVED
PRINCIPAL CONTINUOUSLY STOCK
OCCUPATION FOR AS A DIRECTOR PERCENT OF OWNED
NAME OF NOMINEE AGE LAST FIVE YEARS SINCE CLASS(2) BENEFICIALLY(1)
------------------------ ----------- -------------------------------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Thomas F. Eagleton 65 Since 1987, University Professor of 05/03/88 0.1% 6,000
Public Affairs, Washington University
in St. Louis, Missouri and member of
the law firm of Thompson & Mitchell;
for more than five years prior to that
a United States Senator from Mis-
souri.
Bruce M. Flohr 56 Since 1977, President of RailTex, Inc. 05/11/93 0.1% 4,000
Charles M. Foudree 50 Executive Vice President of the 07/27/72 0.6% 43,300(3)
Company since Sept. 1986. Treasurer of
the Company since 1974. Secretary of
the Company since 1982.
Rodney L. Gray 42 Since June 1993, Chairman and Chief 05/11/93 0.1% 5,000
Executive Officer of Enron
International, Inc.; prior to that,
Senior Vice-President-Finance and
Treasurer of Enron Corp. from October
1992 to June 1993; prior to that
Vice-President and Treasurer of Enron
Corp.
Robert E. Harmon 56 Chairman of the Board of the Company 10/02/61 3.7% 253,889(4)
since February 1975. Chief Executive
Officer of the Company from November
1969 to December 1994. President of
the Company from November 1969 to July
1990.
Herbert M. Kohn 56 From June 1991, a partner in the law 09/01/85 0.4% 30,400
firm of Bryan Cave; from 1966 to May
1991, a partner in the firm of Linde
Thomson Langworthy Kohn and Van Dyke,
P.C.
Douglass Wm. List 39 Since January 1988, President, List & 05/08/90 0.2% 13,600
Company, Inc., a management consulting
firm based in Baltimore, Maryland.
Since December 1992, also President of
Railway Engineering Associates, Inc.,
having been Vice-President and General
Manager of that company since May
1988.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SERVED
PRINCIPAL CONTINUOUSLY STOCK
OCCUPATION FOR AS A DIRECTOR PERCENT OF OWNED
NAME OF NOMINEE AGE LAST FIVE YEARS SINCE CLASS(2) BENEFICIALLY(1)
------------------------ ----------- -------------------------------------- -------------- ------------- ---------------
Gerald E. Myers 53 Self employed management consultant 05/03/88 0.5% 34,918(5)
since July 1989; prior to that Vice
President of Electronics Materials &
Components Group of Square D Company
since 1985; prior to that Chairman of
the Board, President & Chief Executive
Officer of General Semiconductor
Industries, Inc. (a wholly-owned
subsidiary of Square D) from July
1985.
<S> <C> <C> <C> <C> <C>
Bjorn E. Olsson 49 President and Chief Executive Officer 05/06/86(6) 0.6% 43,000
of the Company since January 1995;
President and Chief Operating Officer
of the Company from August 1990 to
December 1994; prior to that Vice
President of Corporate Development of
Investment AB Cardo since 1987; prior
to that President of SAB NIFE AB, a
subsidiary of Investment AB Cardo
(formerly Wilh. Sonesson AB) since
1982.
Donald V. Rentz 56 President of Graham Wholesale Floral 09/09/70 0.1% 4,000
since 1993; President of Renmar
Company from 1991 to 1993; President
of Morton Cabinet Company, Inc. from
1984 to 1991.
Judith C. Whittaker 56 Since 1992, Vice-President-Legal, of 05/11/93 0.1% 4,000
Hallmark Cards, Incorporated; prior to
that, Associate General Counsel of
Hallmark Cards, Inc. since 1978; from
1988 to present, also
Vice-President/General Counsel of
Univision Holdings, Incorporated, a
subsidiary of Hallmark Cards,
Incorporated.
<FN>
(1) All amounts of shares reflect sole voting and disposition power unless
otherwise indicated. The share amounts reflected in this column include
outstanding shareholdings, as well as unexercised ISOP option shares and
unexercised director option shares (see discussion under caption "Execu-
tive Compensation" herein). Shares allocated under the Company's ESOP are
not included since participants have no disposition power and shared voting
rights. Shares in the ESOP allocated to Messrs. Harmon, Foudree and Olsson
were 5,000; 4,161 and 948 shares respectively.
(2) Percentages are calculated on 6,896,751 shares representing the total of
6,766,211 outstanding shares and 130,540 shares for unexercised director
and ISOP options.
(3) 29,000 shares are beneficially owned and held of record by M. Colleen
Foudree as trustee for the M. Colleen Foudree Trust with sole voting and
disposition power. 10,300 shares are held by the Charles M. Foudree Trust
with sole voting and disposition power. The remainder are held by Charles
M. Foudree and represent unexercised ISOP and director option shares.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
(4) Does not include 4,200 shares owned by his wife for which Robert E. Harmon
disclaims beneficial ownership.
(5) Includes 30,743 shares which are held in a living trust.
(6) Mr. Olsson had previously served as a director of the Company from February
1982 until May 1985.
</TABLE>
Mr. Eagleton serves as an advisory director of Monsanto Chemical
Corporation, a publicly-held company. Ms. Whittaker serves as a director of MCI
Communications Corporation, a publicly-held company. Mr. Flohr serves as an
officer and director of RailTex, Inc., which is a publicly-held company. Mr.
List is a director of Mark VII, Inc., a publicly-held company. Mr. Gray is a
director of Battlemountain Gold Company, a publicly-held company. Mr. Foudree is
a director of OTR Express, Inc., a public company. None of the other director
nominees serves as a director of any other company with a class of stock
registered pursuant to Section 12 of the Securities Exchange Act of 1934 or
subject to the requirements of Section 15(d) of that Act or any company
registered under the Investment Company Act of 1940.
CERTAIN TRANSACTIONS.
Mr. Kohn is currently a partner of the Bryan Cave firm, which the Company
retains as legal counsel for certain matters.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries (determined as
of the end of the last fiscal year), to or on behalf of the Company's Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company or its subsidiaries (hereafter referred to as the "named
executive officers") for the fiscal years ended December 31, 1994, 1993 and
1992:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------
AWARDS
ANNUAL COMPENSATION(1) --------------------------------
-------------------------------------------------------- OPTIONS/ SARS
SALARY BONUS OTHER ANNUAL RESTRICTED STOCK (# OF SHS.)
NAME AND PRINCIPAL POSITION FISCAL YEAR ($)(2) ($)(3) COMPENSATION ($) AWARD(S) ($)(4) (5)
--------------------------- ----------- --------- --------- --------------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Harmon 1994 205,854 124,614 -- -- 2,000
CEO 1993 202,222 79,400 -- -- 2,000
1992 184,688 81,483 -- -- 1,000
Bjorn E. Olsson 1994 219,285 112,914 -- -- 2,000
President & COO 1993 191,487 89,400 -- -- 3,000
1992 179,845 81,483 -- -- 1,000
Charles M. Foudree 1994 157,505 77,514 -- -- 2,000
Executive V.P. - 1993 145,736 69,100 -- -- 2,000
Finance, Secretary 1992 137,690 72,313 -- -- 1,000
and Treasurer
Gary E. Ryker (7) 1994 140,989 73,714 -- -- -0-
V.P. - Marketing 1993 133,824 69,100 -- -- -0-
and Sales 1992 78,589 34,956 -- -- 25,000
Noel B. Smith 1994 135,253 70,814 -- -- -0-
President, Electro 1993 124,800 78,800 -- -- -0-
Pneumatic 1992 119,739 56,102 -- -- -0-
Corporation
<CAPTION>
PAYOUTS
------------- ALL OTHER
LTIP PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($)(6)
--------------------------- ------------- -----------------
<S> <C> <C>
Robert E. Harmon -0- 93,629
CEO -0- 83,440
-0- 82,503
Bjorn E. Olsson -0- 47,091
President & COO -0- 36,547
-0- 33,490
Charles M. Foudree -0- 71,379
Executive V.P. - -0- 60,815
Finance, Secretary -0- 57,139
and Treasurer
Gary E. Ryker (7) -0- 25,342
V.P. - Marketing -0- 8,922
and Sales -0- -0-
Noel B. Smith -0- 47,271
President, Electro -0- 36,181
Pneumatic -0- 33,591
Corporation
<FN>
(1) Includes no perquisites (i.e. auto allowance, club dues or aircraft use)
because in all instances these total less than $50,000 or 10% of the total
of annual salary and bonus reported for each named executive officer.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
(2) Salary includes amounts deferred under the Company's 401(k) at the election
of the named executive officer.
(3) Bonus includes cash and stock components (See discussion under the heading
"Employment Contracts" below.)
(4) Restricted stock awards (100% vested) are described under the heading
"Employment Contracts" below and are included under the "Bonus" column in
this table. At year end 1994, the aggregate restricted stock holdings and
values based on year-end price of $19.50 per share of Messrs. Harmon,
Olsson, Foudree, Ryker and Smith were 3,365 shares ($65,618); 4,365 shares
($85,118); 3,365 shares ($65,618); 365 shares ($7,118) and 1,365 shares
($26,618), respectively.
(5) Includes grants of options under the Company's 1990 Incentive Stock Option
Plan, as well as annual awards to Messrs. Harmon, Olsson and Foudree of
options on 1,000 shares under the Company's non-qualified 1988 Director
Option Plan for 1992. In 1993, the 1988 Director Option Plan annual grants
were increased to 2,000 shares.
(6) Includes allocation of contributions to the Company's Deferred Compensation
Plan and to the Company's non- discriminatory Employee Stock Ownership Plan
(ESOP). The amounts included in this column representing allocation of the
contribution made in 1994 to the Company's ESOP for Messrs. Harmon, Olsson,
Foudree, Ryker and Smith were $18,017; $18,017; $16,040; $15,682; and
$15,097, respectively. The balance shown for each in the column represented
allocation of contributions for such named executive officers to the
Company's Deferred Compensation Plan. (See discussion under the heading
"Pension Plan" below.)
(7) Mr. Gary E. Ryker commenced employment as an officer of the Company on
August 1, 1992. Amounts shown for 1992 represent amounts paid during that
partial year of Mr. Ryker's employment.
</TABLE>
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.
During 1994, none of the named executive officers received a grant of stock
options or stock appreciation rights under the Company's 1990 Incentive Stock
Option Plan. The following table contains information concerning the grant of
stock options under the Company's non-qualified 1988 Director Option Plan to the
named executive officers (see discussion below under "Director Compensation"
below):
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------------------------------------------- VALUE AT ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK PRICE
OPTIONS/SARS APPRECIATION FOR OPTION
OPTIONS/ SARS GRANTED TO EXERCISE OR TERM(3)
GRANTED (1) (# EMPLOYEES IN FISCAL BASE PRICE EXPIRATION ------------------------
NAME OF SHARES) YEAR ($/SH) (2) DATE(1) 5% ($) 10% ($)
--------------------------- --------------- ------------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Harmon 2,000 7.7 20.50 05/31/96 $ 4,203 $ 8,610
Bjorn E. Olsson 2,000 7.7 20.50 05/31/96 4,203 8,610
Charles M. Foudree 2,000 7.7 20.50 05/31/96 4,203 8,610
Gary E. Ryker -0- -0- N/A N/A N/A N/A
Noel B. Smith -0- -0- N/A N/A N/A N/A
<FN>
(1) In their capacities as directors of the Company, on May 31, 1994, Messrs.
Harmon, Olsson and Foudree received an option for 2,000 shares of the
Company's common stock under the Company's non-qualified 1988 Director
Option Plan. For a description of the terms of the options see "Director
Compensation" below.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
(2) The exercise price equals the fair market value of the underlying shares on
the date of grant. Options are exercisable immediately upon grant unless
delays are necessary to avoid the statutory limitations on grants
established under the Internal Revenue Code. The options are exercisable
anytime during a five-year period from date of grant or the date on which
the option was first exercisable.
(3) These amounts represent certain assumed rates of appreciation only and may
have no correlation to current or future actual market conditions.
</TABLE>
OPTION EXERCISES AND HOLDINGS.
The following table provides, for the named executive officers, information
concerning the exercise of stock options during the last fiscal year and
unexercised options held as of the end of the last fiscal year for both the
Company's 1990 ISOP (numbers to the left) and the Company's non-qualified 1988
Director Option Plan (numbers to the right):
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE (IN $) OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SHARES OPTIONS AT
AT 12/31/94 12/31/94(2)(3)
NUMBER OF SHARES
ACQUIRED ON VALUE (IN $) ISOP/DIRECTOR ISOP/DIRECTOR
NAME EXERCISE REALIZED(1) OPTIONS OPTIONS
----------------------------------- ------------------ ------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
Robert E. Harmon -0-/1,000 -0-/13,125 45,800/4,000 707,586/12,250
Bjorn E. Olsson 37,000/1,000 575,971/13,438 1,000/4,000 -0-/12,250
Charles M. Foudree 39,300/1,000 634,679/12,500 -0-/4,000 -0-/12,250
Gary E. Ryker 3,000/-0- 33,950/-0- 22,000/-0- 247,500/-0-
Noel B. Smith 1,650/-0- 28,867/-0- 9,350/-0- 146,047/-0-
<FN>
(1) Market price at exercise less exercise price.
(2) All outstanding options shown are currently exercisable. There are no SARs.
(3) Market price at 12/31/94 ($19.50) less exercise price.
</TABLE>
LONG-TERM INCENTIVE PLANS.
The company has no Long-Term Incentive Plans for which awards are granted or
vested based upon return on equity or changes therein.
PENSION PLANS.
The Company has no defined benefit pension plans. The Company has a
non-qualified, unfunded deferred compensation plan and trust for officers and
key employees, providing for certain payments upon retirement, death or
disability. Under the plan, the employees receive retirement payments equal to a
portion of the average of the three highest consecutive years' compensation.
Upon retirement, these payments are to be made for the remainder of the
employee's life with a minimum payment of ten years' benefits to either the
employee or his beneficiary. The plan provides for reduced benefits upon early
retirement, disability or termination of employment. The amount of the deferred
compensation expense for all covered employees for 1994 was approximately
$522,000 and amounts allocated to the named executive officers are included in
the "All Other Compensation" column of the Summary Compensation Table.
The Company also has an Employee Stock Ownership Plan and Trust ("ESOP").
Employees, including officers of the Company who satisfy the ESOP's eligibility
criteria of hours and service are eligible to participate. Allocations are based
on the ratio of an eligible individual's salary (subject to current regulatory
caps) to the total salaries of all eligible persons. Standards for vesting are
based upon years of service with the Company in accordance with current
regulatory guidelines. Under the
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ESOP, the Company is not required to make any contributions, other than matching
401K funds. However, the Company's current intention is to contribute
approximately 15% of the participating companies' pre-tax earnings to the ESOP.
The 15% contribution would include the funds required to fulfill a portion of
the companies' obligation to match a portion of the employee's 401K
contribution. The contribution to the ESOP for the years ended December 31,
1992, 1993 and 1994 totalled $1,547,000; $2,540,000 and $3,045,000,
respectively, which amounts were paid in cash. The amount of compensation
included in the "All Other Compensation" column of the Summary Compensation
Table includes the amounts of respective annual contributions allocated for the
named executive officers as of March 31 of the preceding year.
CANCELLATION AND REGRANT OF OPTIONS.
During 1994 the Company did not cancel, regrant or reprice any outstanding
stock options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Mr. Gerald Myers (Chairman until May 10, 1994), Mr. Douglass Wm. List, Mr.
Bruce M. Flohr and Mr. Rodney L. Gray served on the Compensation Committee of
the Company for the past fiscal year. On May 10, 1994, Mr. Rodney L. Gray was
named Chairman of the Compensation Committee. None of the members of the
Compensation Committee are officers or employees of the Company. The
Compensation Committee of the Company establishes executive salary and bonus
levels for the executive officers of the Company and the Presidents of its
subsidiaries.
The Company does not believe that any interlocks exist between members of
the Compensation Committee and any third party represented on the Board of
Directors or providing significant services to the Company.
EMPLOYMENT CONTRACTS.
Messrs. Harmon, Olsson, Foudree, Ryker and Smith had employment contracts
with the Company during 1994 which provide for the payment to such officers of
annual salaries of at least $193,200, $250,000, $151,095, $137,865 and $131,250,
respectively. Mr. Harmon retired as Chief Executive Officer at December 31,
1994, at which time his employment contract expired. The employment contracts
have a rolling 12-month term. For the year ended December 31, 1994, these
officers' contracts included an annual cash bonus based on 1994 return on
capital employed as it related to the 1994 budget. If the return on capital
employed is higher than budget, then the bonus increases; if the return is
lower, the bonus decreases. 1994 bonuses under this plan, which are included in
the above table, amounted to $114,100; $102,400; $67,000, $63,200 and $60,300
for Messrs. Harmon, Olsson, Foudree, Ryker and Smith, respectively.
The executive officers of the Company and certain key employees of the
Company and its subsidiaries were also subject to a stock bonus plan whose
contribution is based on a percentage of pre-tax consolidated profits. A portion
of this bonus is normally paid in shares of Harmon stock which are subject to a
two-year trading restriction and are valued at fair market value at time of
issuance. The remainder of the bonus is paid in cash to help offset the
individual's income tax expense. During 1994, a bonus accrued for 1993 was paid
in cash to each of twelve individuals, including the named executive officers,
which bonus was $10,000. During 1995, a bonus accrued for 1994 was paid to each
of thirteen individuals, which bonus was valued at $10,514. (See discussion in
the Compensation Committee Report under "Bonuses" below.)
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION.
The Company's executive compensation program is overseen by the Compensation
Committee, a standing committee of the Board of Directors composed of
non-employee directors. The Compensation Committee was composed of Directors
Rodney L. Gray, Bruce M. Flohr, Douglass Wm. List and Gerald E. Myers during
1994. Prior to May 10, 1994, Gerald E. Myers served as Chairman, and after that
date, Rodney L. Gray served as Chairman. None of these non-employee directors
have any interlock or other relationships with the Company that would call into
question their independence as
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committee members. The Committee determines compensation matters involving
senior executives of the Company and the Presidents of the Company's
subsidiaries. The purpose of the Compensation Committee of the Board of
Directors is to provide guidance and overview monitoring of all executive
compensation and benefit programs with a focus on sustaining the Company's
strong performance values, rewarding improved shareholder value and ensuring
competitive compensation to hold and attract highly-talented executives. The
Committee periodically reviews and monitors in the aggregate, annual salaries of
all such executives and key employees, as well as deferred compensation, bonus
and other incentive compensation plans for executive officers of the Company.
The Committee also has responsibility for reviews and revisions of employment
contracts and the recommended base salary levels under the employment contracts
(subject to minimum levels established in the contracts) for the executive
officers of the Company. The Company also reviews and administers the 1990
Incentive Stock Option Plan of the Company. During 1994, the Committee met four
times.
During 1994 and each of the prior years since 1991, the Committee has
conducted a comprehensive salary and total compensation package analysis for the
officers and key employees of the Company. This analysis was based upon
information on comparable companies provided to the Committee by independent
sources, including Executive Compensation Services, Inc., Growth Resources,
Hewitt Association and William M. Mercer, Inc.
Additionally, during 1994, the Compensation Committee retained William M.
Mercer, Incorporated, to undertake a comprehensive Executive Compensation Review
of executive compensation for the Company, including a comparison to other
companies in the railroad supply industry. The Committee utilized the analysis
and suggestions in the report as part of the basis upon which base salary and
bonus adjustments were evaluated.
The Compensation Committee analyzed the base salary and the total
compensation (base salary plus annual incentives) of the Company's executives as
compared to median survey data and to comparative companies in the rail supply
industry. Overall, base salaries are below (yet competitive with) median survey
data. Total compensation levels for the Company's executives was close to or at
the 75th percentile of survey data. Additionally, base salary increases for the
Company's executives in 1994 averaged a 5.0% increase over the prior year's
level (other than adjustments made for changes of responsibility), which
increases were consistent with the survey data. The survey data sources are
standard general indices constructed and provided by outside vendors and are
believed to be more comparable in size, based on gross sales, than the
performance peer group. Furthermore, the surveys consist of many more data
points than the limited number of companies in the peer performance stock group.
Generally, the Committee compares the Company executive salaries with median
base salaries for similar positions from the surveys, and historically sets base
salaries for the Company's executives below the median of comparable survey
levels. Bonus awards, including those tied to shareholder value indices, are set
as a percentage of base at levels higher than the median of survey percentages
for the respective positions. The Executive Compensation Review undertaken by
Wm. H. Mercer, Incorporated used both broad general surveys and Peer Performance
stock group for comparison purposes.
The Committee believes that the top management of Harmon must operate as a
team and that the cause and effect relationship between the efforts of any one
individual and corporate performance is difficult to discern. Hence, in general,
the compensation of the executive team tends to track as a group with the
performance of the Company. The Committee does, however, make exceptional
decisions where exceptional circumstances exist. Furthermore, the Committee does
establish individual performance objectives and measure individual performance
against these objectives in an effort to ensure that all members of the top
management team are fulfilling the expectations set for them. Recommendations
for base salaries and awards for each individual executive officer are
established after evaluation of individual performance factors (equally
weighted) including the following: knowledge of job responsibilities,
relationship with others, working capacity, initiative, character, leadership,
adaptability, teamwork, administrative ability and individual goal attainment.
The evaluation by
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the Committee includes the degree to which each individual has met individual
performance objectives. These performance objectives are believed to relate
directly to the Company's performance and are therefore related to shareholder
value.
Additionally, in option grants under the 1990 Incentive Stock Option Plan,
the Committee considers the shareholdings and option holdings of both the
individual executive as well as those of other executives on the management
team.
In order to meet the objectives set out above, the Committee has designed
the executive compensation program to be consistent with the Company's overall
pay philosophy. Base salaries, the fixed regular periodic component of pay, are
conservatively established at levels comparable to the median of base salaries
for similar positions at companies with similar levels of sales and overall
financial performance. Annual cash and stock bonuses, which are directly linked
to the short-term financial performance of the Company as a whole, are designed
to provide better than competitive pay only for better than competitive
financial performance. The incentive stock option plan is structured in such a
way as to advance the interests of the Company and its shareholders by
encouraging key employees of the Company to acquire an equity interest in the
success of the Company and to improve shareholder values. The Board of Directors
and the Committee believe that the plan enables the Company to attract and
retain the services of key employees upon whose judgment, interest and special
efforts the successful conduct of the Company's operations is largely dependent.
The incentive stock option plan is intended as a long-term incentive program,
which provides rewards to the executives only to the extent that shareholders
have benefitted. Each of the components is described in more detail below.
BASE SALARY.
On August 4, 1994, the Committee conducted a review of the performance and
compensation of the Company's senior executives, including Robert E. Harmon and
the other named executive officers. This review included key accomplishments of
each officer, an evaluation of achievement of individual goals and objectives,
and an assessment of their contributions to the Company's improved performance.
In reliance in part upon survey data at median levels and his plans for
retirement at December 31, 1994, the Committee recommended that Robert E. Harmon
receive no base salary increase effective September 1, 1994. The Committee also
recommended an increase of 5% for the executive officers and key employees
(including the other named executive officers) except for Mr. Olsson and three
other individuals. Base salary for Mr. Olsson was increased by approximately 33%
over his prior year's base salary as a result of the realignment of his duties.
The three other individuals received base salary increases in a range of
approximately 9% to 20% to bring their base salary levels comparative to median
survey levels. The new base salary levels for all executives were established by
the Committee and presented to the Board of Directors at its August 1994
meeting.
BONUSES.
All of the executive officers of the Company, including the named executive
officers, were subject to a stock bonus plan. The bonus is based on a percentage
of pre-tax consolidated profits set by the plan at 1%. The percentage has not
been changed since the plan was established in 1987. The plan includes a fixed
percentage but no range of minimum or maximum levels are set in the plan. The
Committee is currently evaluating replacement of the stock bonus plan with a
long-term incentive plan tied to stock ownership requirements. A portion of this
bonus is normally paid in shares of Harmon stock which are subject to a two-year
trading restriction and are valued at fair market value at time of issuance. The
remainder of the bonus is normally paid in cash to help offset the individual's
income tax expense associated with the bonus. During 1993, a bonus for fiscal
year 1992 was paid to each of twelve individuals including the named executive
officers, which bonus was $8,123 ($3,515 in cash and $4,068 represented by 365
shares of common stock of the Company.) During 1994, a bonus in cash for fiscal
year 1993 was paid to each of twelve individuals including the named executive
officers,
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which bonus was $10,000. Each recipient was required to use the cash payment to
exercise outstanding stock options held by the recipient and to pay the
resulting income taxes attributable to the exercise. The stock bonus for 1994
(to be paid in 1995) will be $10,514 for each of thirteen officers. The stock
bonus will be paid as either (i) $5,316 in cash and $5,198 represented by 460
restricted shares of common stock of the Company, or (ii) ISOP options for 1,100
shares. To the extent that an officer receives ISOP options, there is no current
cost to fund the grant and there is no tax deduction at the time of the grant of
the option. See discussion below under "Incentive Stock Option Plan" for details
of option term and exercise price. The decision of payment of the stock bonus in
the form of an option is believed to be consistent with the goal of increasing
the common stock ownership of the Company's executive officers.
The Company maintained for its executive officers and key employees during
1994 an additional cash bonus plan the "ROCE bonus plan" based on Return on
Capital Employed as compared to the budget adopted by the Board of Directors.
Operating budgets for the Company and its subsidiaries, which provide the base
for the ROCE bonus plan, are approved by the Board of Directors. The ROCE bonus
plan provides for increases in bonus, if the return on capital employed is
higher than budget, as well as a decrease in bonus, or no bonus, if the return
is lower than budget. There is no maximum limit on the amount of bonus which
could be payable under the ROCE plan. The formula for Return on Capital Employed
is the sum of pretax earnings from continuing operations plus interest expense
divided by the sum of average total assets minus non-interest bearing
liabilities. Thus, the percentage may be increased by maximizing operating
income while minimizing the total assets necessary for the operation of the
business to produce that operating income. As a consequence, the bonus of each
participant is determined by comparison of annual operating results and use of
capital employed to budgeted levels. For 1994, budgeted ROCE on a consolidated
basis was 30.8%, and actual ROCE for 1994 on the same basis was 34.2%. The
Committee annually evaluates total bonus compensation paid under the return on
capital employed plan (ROCE) and the relative percentage participation levels of
key employees. For 1994, the percentage participation levels for Messrs. Harmon,
Olsson, Foudree, Ryker and Smith were 7.8%, 7.8%, 6.6%, 7.7% and 6.6%,
respectively.
Amounts payable under the ROCE plan for 1994 for Messrs. Harmon, Olsson,
Foudree, Ryker and Smith were $114,100; $102,400; $67,000; $63,200 and $60,300
and are included in the "Bonus" column of the Summary Compensation Table above.
The Committee believes that the ROCE plan encourages the creation of shareholder
wealth by creating incentives both to maximize operating profit for the Company
and minimize capital employed. Additionally, the ROCE Plan rewards efficiencies
in production and innovation in quality-based productivity techniques.
On December 7, 1994, the Committee approved a modification of the current
executive cash bonus plan of the Company effective for fiscal 1995. The
Committee referred to the Mercer Executive Compensation Review and
recommendations contained in that report. The Committee approved a new executive
cash bonus plan based on 70% weighting for ROCE and 30% weighting for earnings
growth. The new proposal establishes target base bonus levels as a percentage of
current base salary. Percentages are 30%, with the exception of Mr. Olsson,
whose target base bonus is established at 40% of his base salary. The base bonus
levels of Messrs. Olsson, Foudree, Ryker and Smith are $100,000; $45,329;
$41,360; and $39,375, respectively. Mr. Harmon is not eligible for participation
in the executive cash bonus plan due to his retirement on December 31, 1994. The
actual bonus is calculated based on actual performance numbers for ROCE as
compared to budget and earnings growth based on primary earnings per share as
compared to an Earnings Growth Rate Target established by the Board of Directors
at 20% for fiscal 1995. The ROCE portion of the formula accounts for 70% of the
base bonus and is adjusted as follows based on the ratio of actual versus budget
ROCE: under 75% of budgeted ROCE--no bonus award; from 75% to 99% of budgeted
ROCE--pro-rated award; at 100% of budgeted ROCE--100% of potential ROCE bonus
and for each 1% above budgeted ROCE a $7,000 incremental increase for each
officer. The earnings growth factor is calculated on a comparison between
primary earnings per share for the fiscal year as compared to an annual Earnings
Growth Rate Target established by the Board of Directors. The growth rate target
for fiscal 1995 will be 20%
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and for each 1% plus or minus deviation of actual results from the Earnings
Growth Rate Target, the awards under the earnings growth factor for each officer
will be modified by plus or minus 5%. This new executive cash bonus plan has
been expanded to include not only the traditional ROCE measurement standard, but
also earnings growth as a critical indicator of financial health of the Company.
The objective of this Incentive Bonus Plan is to provide an additional incentive
to each officer of the Company to advance the interests of the Company and its
stockholders and create a more direct tie between annual performance and
increased shareholder values.
INCENTIVE STOCK OPTION PLAN.
The Committee considers outstanding option holdings in determining whether
to grant additional options under the Company's 1990 Incentive Stock Option Plan
to any individual. No named executive officer received a grant of options
pursuant to the ISOP during 1994 since the Committee believed that their
holdings of outstanding options were sufficient to meet the goals described
above. The Board approved of an option grant, effective on commencement of
employment on January 4, 1994, on 20,000 shares under the ISOP for a newly-hired
executive officer of the Company, who was not a named executive officer. The
exercise price for shares granted under the ISOP are determined by the closing
price for the Company's stock on the date of grant. Options are exercisable
immediately upon grant unless delays are necessary to avoid the statutory
limitations on grants established under the Internal Revenue Code. The options
are exercisable anytime during a five-year period from date of grant or the date
on which the option was first exercisable.
SUMMARY.
For the past fiscal year, combined salary and bonus have increased for Mr.
Robert E. Harmon by 17.3%. For 1994, the Company continued its strong growth
record. This growth was evidenced by record sales of $119.7 million, an increase
of 21% over 1993 levels. The Company also enjoyed record net earnings of $7.6
million, an 11% increase and record year-end backlog levels. Additionally, the
Company completed the acquisition of a significant product line in December 1994
which is expected to improve strategic positioning of the Company. Finally, the
return on assets and return on equity comparisons to the peer performance group
based on 1993 annual results indicate that the Company's return on assets at 15%
and return on equity at 29% rank the Company number one in each category among
all members of the performance peer group.
Gerald E. Myers (Chairman) Douglass Wm. List
Bruce M. Flohr Rodney L. Gray
PERFORMANCE GRAPH.
The Company has included in this proxy statement, a graph of five-year
shareholder returns on an indexed basis comparing the Company's common stock
performance to other broad market indices or an index of selected peer group
companies. The Board of Directors has approved a peer group of the Company and
ten other manufacturing and service companies in the railroad supply industry.
Revenues (on a 12-month trailing basis) for these companies range from
$109,500,000 to $2,641,300,000, as compared to $119.7 Million for the Company.
Total Assets for these companies range from $68,400,000 to $1,857,100,000, as
compared to $68.4 Million for the Company. The peer group consists of the
following companies: Harsco Corporation; Trinity Industries, Inc.; The Timken
Companies; Morrison Knudsen Corporation; Varlen Corporation; Brenco,
Incorporated; L.B. Foster Company; Union Switch & Signal Corporation; ABC Rail
Products,Inc.; Wabash National Corporation and the Company. In addition, the
performance graph shows comparisons between the Company, the peer group and the
S&P Composite 500 Stock Index. Data points for the performance graph comparisons
are included in the Legend below. All indices have been weighted for market
capitalization. The following performance graph also sets forth the percentage
of cumulative total return for the last fiscal year and cumulative return since
January 1, 1990.
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TOTAL RETURN TO SHAREHOLDERS
Comparison of Five-Year Cumulative Total Return* Among the Company, Peer
Performance Group and S&P Composite 500 Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HARMON INDUSTRIES PEER GROUP S&P 500
<S> <C> <C> <C>
Dec. 1989 100 100 100
Dec. 1990 53.29 84.94 96.89
Dec. 1991 75.34 105.23 126.28
Dec. 1992 176.4 126.81 135.88
Dec. 1993 338.1 170.46 149.52
Dec. 1994 288.93 158.24 151.55
</TABLE>
*Assumes that the value of the Company's common stock, Performance Peer Group
and S&P 500 Index were each $100 on December 31, 1990 and that all dividends
were reinvested.
DIRECTOR COMPENSATION
The Board of Directors' compensation package calls for annual fees of $8,000
plus travel expenses to and from the meetings for each director. In addition,
the directors who are not employees of the Company receive $500 for each Board
or separate committee meeting in which the director participates by attending or
through telephonic conference. In addition, each chairman of the respective
committees of the Board of Directors receives an annual payment of $500 for
acting as chairman of their committee.
The package also grants each director an annual non-qualified option to
purchase 2,000 shares of the Company's Common Stock at a price equal to the
closing market price for the last day of May in the year in which the option is
granted. This option is exercisable at any time during a two year period
following the date of grant. Stock issued under this plan will be subject to a
two year trading restriction. In accordance with this package, the Company
granted a stock option to purchase up to 2,000 shares to each of its eleven
directors on May 30, 1993. These options, which expire May 31, 1995, have an
exercise price of $13.38 per share. On May 31, 1994, options for 2,000 shares
were granted to each of the directors, which options expire May 31, 1996 and
have an exercise price of $20.50 per share. During 1994, outstanding director
options for 1,000 shares each were exercised by Messrs. Eagleton, Foudree,
Harmon, Kohn, List, Myers, Olsson and Rentz and Ms. Whittaker.
On December 8, 1994, the Board of Directors approved a compensation package
for Mr. Robert E. Harmon, in his capacity as Chairman of the Board effective
January 1, 1995. The expanded duties of the Chairman include the following:
representing the Company at national trade association meetings; assisting in
lobbying efforts; assisting in overseas representation of the Company; assisting
the
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CEO in acquisitions; assisting in the development of relationships with
securities analysts and investors; assisting with sales and promotional calls;
providing advisory services to the CEO; and conducting all Board meetings. The
Chairman's annual compensation, subject to review each year, will be
approximately $147,000 for fiscal 1995 and $73,000 for fiscal 1996.
APPROVAL OF SELECTION OF AUDITORS
Management recommends voting to approve the selection of KPMG Peat Marwick
LLP as Auditors for the Company for the forthcoming fiscal year. This firm has
served continuously as Auditors for the Company since 1969.
A representative of KPMG Peat Marwick LLP will be present at the Annual
Meeting of Shareholders and will be available to make a statement, if he or she
desires to do so, and to answer appropriate questions asked by the shareholders.
APPROVAL OF INCREASE IN THE NUMBER OF SHARES
COVERED BY COMPANY'S 1990 INCENTIVE STOCK OPTION PLAN.
Management recommends voting to increase from 500,000 to 650,000 the number
of shares covered by the Company's 1990 Incentive Stock Option Plan (the "ISOP
Plan"). On September 26, 1990, the Board of Directors adopted the ISOP Plan,
subject to approval by a majority of the shares of stock represented at the
Company's annual meeting of shareholders in May 1991. At the time the ISOP Plan
was adopted, outstanding and previously approved options totaling 378,200 shares
were then held by officers of the Company under the Company's 1988 Non-Qualified
Option Plan. Those options were terminated by the agreement of the holders
thereof, and the Board of Directors then granted options totaling 349,475 shares
under the ISOP Plan.
When approved by the shareholders in May 1991, the ISOP Plan authorized the
issuance of a maximum of 500,000 shares of common stock of the Company, then
described as approximately 10% of the outstanding shares of the Company's common
stock. There are currently approximately 6,700,000 shares outstanding. As of
December 31, 1994, the Board of Directors of the Company had awarded options
pursuant to the ISOP Plan so that the amount available to be granted in the
future under the ISOP Plan totals 136,975. The Board of Directors favors
increasing the number of shares that can be issued upon exercise of such options
to provide sufficient shares for use for incentive bonuses for existing and
future officers of the Company. Such action would be consistent with past
efforts undertaken by the Board of Directors to both increase stock ownership by
executives of the Company and more closely align the financial interests of
executives of the Company with interests of the shareholders of the Company. The
options granted pursuant to the ISOP Plan have no value unless the market price
of the common stock of the Company increases subsequent to the grant of the
option.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL. PROXIES
SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED UNLESS SHAREHOLDERS SPECIFY
A DIFFERENT CHOICE.
SHAREHOLDER PROPOSALS
Mr. Louis Glaser, 1155 Francis Place, St. Louis, Missouri 63117, owner of
4,800 shares of common stock of the Company in joint tenancy with Roberta
Glaser, has informed the Company he intends to present two proposals at the
meeting. Although the Company is not required to permit a single shareholder to
communicate two proposals in this proxy, the proposals submitted by Mr. Glaser
both relate to the single subject of director compensation. For that reason, the
Company has in this instance agreed to permit communication of both proposals,
which are described separately below and which will be voted on separately at
the meeting.
SHAREHOLDER PROPOSAL NO. 1
Mr. Glaser has informed the Company he intends to present the following
proposal at the meeting:
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"RESOLVED: that the shareholders of the Company recommend the
Company terminate its practice of paying to members of the Board
of Directors a fee of $500 for attending meetings by telephonic
conference."
The following statement was submitted by Mr. Glaser in support of such
proposal:
"Payment to Board members of $500.00 for telephonic conversations that may
require a few minutes of time is without any basis and can only be considered
another windfall and perk granted to the Board member beyond his or her annual
salary. A board member receiving an $8,000.00 annual salary should be expected
to spend a few minutes on the telephone to cast his or her vote during any such
Board meetings."
STATEMENT OF DIRECTORS "AGAINST" SHAREHOLDER PROPOSAL NO. 1.
The Company has worked diligently in recent years to create a Board that has
a broad range of experience and is geographically diverse. The Board is
convinced that this strategy has provided substantial benefits to the Company.
In addition, the work of the Board is increasingly allocated to working
committees composed of members of the Board. An ancillary result of these two
changes is that some Directors can only make their substantial contribution to
meetings of the Board and the various working committees of the Board if they
are permitted to participate by phone.
There is no evidence to suggest that members of the Board who participate in
meetings by telephone are either less prepared than those attending in person or
unable to provide the meaningful participation in such meetings that they would
be able to provide if attending in person. To the contrary, the experience of
the Company suggests that phone participation both requires the same amount of
preparation by the Board member participating by phone and does not unduly
diminish the ability of such Board member to participate effectively. The
proposal does not suggest that members of the Board participating in person at a
meeting should not receive the $500 fee for attending such meeting. The duration
of meetings of the Board is typically four to six hours and committee meetings
average two to three hours. Participation in meetings by telephonic conference
does not add to or diminish the time required by each director to participate in
the meeting. Additionally, the preparation time for each director is not
materially different whether attending in person or by telephonic conference.
Finally, the participation by directors through telephonic conference has been
rarely used. During 1994, individual directors participated in Board or
Committee meetings through telephonic conference in only three instances,
representing less than 5% of all attendance by directors at Board or Committee
meetings. The Board sees no difference in the benefits to the Company provided
by those attending by telephone and those attending in person. Accordingly, the
Board believes that participation in either manner warrants receipt of the $500
fee.
THE BOARD OF DIRECTORS FAVORS A VOTE AGAINST THIS SHAREHOLDER PROPOSAL.
PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED UNLESS SHAREHOLDERS
SPECIFY A DIFFERENT CHOICE.
SHAREHOLDER PROPOSAL NO. 2
Mr. Glaser has informed the Company he intends to present the following
proposal at the meeting:
"RESOLVED: that the shareholders of the Company recommend the
Company terminate its practice of granting options to members of
the Board of Directors pursuant to the Company's 1988 Director
Stock Option Plan."
The following statement was submitted by Mr. Glaser in support of such
proposal:
"Board members receive an annual salary of $8,000.00 plus reimbursement of
travel expenses to and from the meetings and plus $500.00 for each meeting
attended in person. Such basic compensation is adequate payment to such board
member for his or her services. To give each member a two-year option within
which to purchase the Company's stock at a price below the then prevailing
market value would be a windfall and a perk benefitting such member of the Board
at the expense of other shareholders who do not receive this risk-free
investment opportunity."
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STATEMENT OF DIRECTORS "AGAINST" SHAREHOLDER PROPOSAL NO. 2.
The 1988 Director Stock Option Plan (the "Plan") provides to each Director
each year the option to purchase only 2,000 shares of common stock of the
Company. The exercise price for those options is the market price of the common
stock of the Company at the time the options are granted, and the options lapse
if not exercised within two years. Because the Company has not incurred the
expense to cause the Plan to be characterized as a "qualified plan," the
Directors do not obtain the tax and securities law benefits that other
publicly-traded companies frequently choose to make available to their directors
as a part of such an option plan. Stock issued upon exercise of director options
is "restricted" stock, which under current law must be held at least two years
before sale on the open market.
The Company seeks to attract, retain, and motivate the best qualified
individuals to serve as members of its Board. The Board believes that the
Company would be inhibited in attracting, retaining, and motivating the most
qualified and experienced persons were it limited in its ability to compensate
such individuals with stock options. The Plan provides an economical form of
compensation as it requires no cash and its value is contingent on an increase
in the price of the common stock of the Company. The Directors believe that
Directors' benefits are not excessive, in view of the very valuable services
these experienced business leaders impart to the Company.
In recent years, many companies have adopted methods of compensating
officers and directors that relate compensation to performance of a company's
common stock. Compensation like the options provided through the Plan provide
the Board with an incentive to identify more closely with the interests of the
other shareholders of the Company. Benefits of the Plan to Directors are
directly related to the value of common stock of the Company and compensate the
Directors for providing value to all shareholders.
Finally, shareholders of the Company voted overwhelmingly at the Company's
1993 annual meeting to double, from 1,000 to 2,000, the number of options made
available to each Director pursuant to the Plan. The Board believes the reasons
for supporting that change in the Plan remain valid and to eliminate the Plan
would be disadvantageous to the Company.
THE BOARD OF DIRECTORS FAVORS A VOTE AGAINST THIS SHAREHOLDER PROPOSAL.
PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED UNLESS SHAREHOLDERS
SPECIFY A DIFFERENT CHOICE.
SHAREHOLDER PROPOSALS--1996 MEETING
In the event any shareholder intends to present a proposal at the Annual
Meeting of Shareholders to be held in 1996, such proposal must be received by
the Company, in writing, on or before November 12, 1995, to be considered for
inclusion in the Company's next Proxy Statement.
OTHER MATTERS
Management is not aware of any other matters which may come before the
meeting. However, if any other matters properly come before the meeting, it is
the intention of the persons named in the accompanying form of proxy to vote the
proxy in accordance with their best judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
Robert E. Harmon
Chairman
March 31, 1995
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