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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, 1995
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 18, 1996, 6,805,626 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 $88,042,000.
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, 1995.
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, 1995.
Item 8: Financial Statements Page 22 through 37 of
and Supplementary Data. the Annual Report to
Shareholders for the year
ended December 31, 1995.
PART III
Item 10: Directors and Executive Pages 3 through 6 of the
Officers of the Registrant. Company's Proxy Statement, dated
April 1, 1996
Item 11: Executive Compensation Pages 7 through 14 of
and Other Information. the Company's Proxy Statement
dated April 1, 1996.
Item 12: Security Ownership of Pages 2 and 3 of the
Certain Beneficial Owners Company's Proxy Statement
and Management. dated April 1, 1996.
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 April 1, 1996.
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HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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 component
products to an integrator of systems able to provide customers with solutions
to complex problems.
INDUSTRY
FREIGHT RAILROADS
The domestic freight railroad industry includes Class I, regional and
short line railroads. However, the industry is dominated by the 10 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 37% decrease in Class I employment levels from 1985 to
1994 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 32% reduction from 1985 to 1994 in the
number of Class I railroad freight cars in service required the Class I
railroads to
- -------------------------------
(1)This fact and the other statistical information about the Class I
railroads in this Annual Report come from RAILROAD FACTS, 1995 EDITION,
a recognized industry source for information on Class I railroads.
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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 110% from 1985 to 1994. The Class I railroads have become more
profitable despite an 18% reduction (in constant 1985 dollars) from 1985 to
1994 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 amount
of intermodal traffic has increased 78% from 1985 to 1994. 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. While final figures are not yet available for the year
ended December 31, 1995, the total volume of intermodal shipments is estimated
to have decreased approximately 1% to 2% from 1994. The Company does not
believe this to be significant to the overall momentum of the Class I
railroads, as the trucking industry has felt a similar, if not greater,
downturn in business. The growth 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 under-utilized
track. From 1985 to 1994, the Class I railroads have reduced their track miles
by 24%, to approximately 184,000 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 1985 to 1994, capital expenditures by Class
I railroads per mile of track owned has increased from approximately $14,300 to
$17,100 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 519,
with 32 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 the short line railroads 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 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.
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. The Intermodel Surface Transportation Efficiency Act
of 1991 (ISTEA) provides federal funds through 1997 for railroad crossing
warning systems in the same amount each year as existed under previous federal
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legislation. For many years this funding has been dedicated solely to railroad
crossing warning systems. Current discussion in Washington is to convert the
1997 funding, like most other funding, to block grants to the states to be used
for highway safety. If this occurs, it is unknown whether the states would
continue to spend all of these funds on railroad crossing warning systems or
spend all or a portion of them on other highway safety projects.
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, or at least
remain stable, 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. Current expectations are that the 1996 rail
transit project funding will approximate the 1995 level. In addition, ISTEA
permits local governments to shift funds otherwise allocated for highway
construction into mass transit projects.
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 guards against 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 1987 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.
Another example of Harmon addressing safety concerns arose in 1991, when
an over-speeding subway train derailed in New York City and caused several
fatalities. As a result, the New York City Transit Authority embarked on a
program of installing speed measurement and enforcement systems at critical
locations along the subway track. Under sub-contract, Harmon developed a
computer-based system for this application and has since been awarded two
additional sub-contracts for the supply of 23 systems to date. Additional
contracts are anticipated.
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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
as a major contractor. The Company's transit business has grown to include
active transit projects in many major cities in North America. Harmon's
largest single contract to date was with the Chicago Transit Authority (CTA)
for reconstruction of the signal and train control system for the Green Line
elevated line. This contract, totalling over $13 million, was also Harmon's
first as a prime contractor, with construction under its direction. The
project was completed successfully and on time under an extremely aggressive
schedule, and establishes Harmon as a major contender in this market. 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.
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 through 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.
In December 1994, Harmon acquired the railroad division of SERVO Corporation
of America (SERVO), including SERVO's distributors in Europe, Africa and the
Middle East. These marketing relationships 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 compliment 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
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designed, installed and, potentially, maintained by the Company. In 1995, for
the first time, systems sales represented over 50% of total sales. 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
decisions 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 products through 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
expenditure meets objectives set by the Company, such expenditure will
generally be considered for implementation. The Company is continuing the
process of upgrading its fully integrated financial, manufacturing and
inventory control computer system that will assist its efforts to further
contain costs.
The Company continued its training and education efforts to finalize
implementation of its Total Quality System program and to complete its ISO 9000
certification efforts in 1996. The Company's Jacksonville, Florida facility and
the train control portion of its Riverside, California facility became ISO 9000
certified in 1995.
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.
PRODUCT CLASSIFICATIONS
The products of the Company can generally be separated into six
categories. 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). 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. 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. TRAIN INSPECTION SYSTEMS
include all Company products related to monitoring information regarding a
moving train as it passes by a train inspection site. PRINTED WIRING BOARDS
include production of customer designed printed wiring boards for use by other
electronics manufacturers. OTHER sales include products that do not readily
fit into the other five categories.
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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
for each of the past three years.
Sales by Product or Service Function(1)
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1994 1995
------------------- -------------------- ---------------------
(dollars in thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Train Control Systems $37,585 38.0% $ 45,711 38.4% $ 55,437 40.7%
Signal Systems 36,034 36.5% 35,449 29.8% 42,374 31.1%
Asset Management Services 10,223 10.3% 20,894 17.5% 14,194 10.4%
Train Inspection Systems 4,510 4.6% 5,054 4.2% 11,360 8.4%
Printed Wiring Boards 6,180 6.3% 6,307 5.3% 6,752 5.0%
Other 4,252 4.3% 5,712 4.8% 5,999 4.4%
------- ------ -------- ------ -------- ------
Total $98,784 100.0% $119,127 100.0% $136,116 100.0%
------- ------ -------- ------ -------- ------
------- ------ -------- ------ -------- ------
</TABLE>
(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.
PRODUCTS
While the Company's principal products and services have been grouped for
purposes of discussion by primary product or service function, each product and
service interrelates or is complementary to other Company products and
services. Substantially all products and services (except printed wiring
boards) are marketed to the railroad industry.
TRAIN CONTROL SYSTEMS include all Company products and services 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 our
subsidiary, Electro Pneumatic Corporation (EPC). Computer-based dispatch
systems monitor and control train movement over designated tracks from a
central location. These
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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
Federal Railroad Administration safety ruling that affects trains operating in
the Northeast Corridor. A more advanced system called Incremental Train
Control System (ITCS) is being developed by the Company. It uses radio data
communications rather than currents in the rails to exchange data between
trains and the wayside equipment, and provides many added features. An initial
installation of ITCS is being done on an Amtrak line in southern Michigan under
an FRA grant to demonstrate enhanced train control technology for High Speed
Rail corridors.
SIGNAL SYSTEMS include all Company products and services 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.
The latest versions of these two products, HXP-3 and PMD-3, represent an
additional leap in technology and performance and offer the convenience of
modular interchangeability between the two 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 a portion of the revenues of our subsidiary, Consolidated Asset
Management Company, Inc. (CAMCO). In late 1988, CAMCO received its first
orders and began providing services for the railroad industry including
assembly and storage of materials for track projects. CAMCO provides other
services including purchasing and distribution of communication and signal
inventory. One of the predominant services is the assembly of containerized
construction kits including
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all material needed for a signal installation project, some of which is not
made by Harmon. These kits greatly improve the productivity of the railroad's
construction crews and are finding growing acceptance in the industry. CAMCO's
success has helped Harmon diversify from a predominantly manufacturing
operation into the service portion of the railroad supply industry.
TRAIN INSPECTION SYSTEMS include all Company products and services related
to monitoring information regarding a moving train as it passes by a train
inspection site. The Company's acquisition of the transportation division of
SERVO Corporation of America in December 1994 has significantly increased its
market share of this product line. 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, may cause derailments, resulting in substantial expense
and potential 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 even
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.
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 is used in the Company's own
products.
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.
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
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) the new Incremental Train Control System (ITCS) for initial
application to the FRA funded demonstration project in Michigan, (ii) a
communication-based train control system called UltraBlock which is intended
for Rail Transit applications, (iii) a new data radio for use in various
telemetry applications including ITCS, (iv) a new two-way voice radio for
locomotive use, and (v) ongoing enhancements to most of the existing products
including crossing warning systems, interlocking controls, signal control track
circuits, train inspection systems, and Ultra Cab. 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
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$3,442,000, $4,561,000 and $5,218,000 in the years ended December 31, 1993,
1994 and 1995, 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 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 rail transit
industries through experienced direct sales employees who work closely with the
Company's customers to identify existing or potential products to improve the
efficiency and enhance the safety of their operations. 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,
rail transit and international.
The international marketing organization is assisted by a distributor in
which the Company has a minority interest. Henkes-Harmon Industries, Pty. Ltd.
is based in Melbourne, Victoria, Australia and sells the Company's products in
Australia and New Zealand. 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 hot box detector
product line acquisition should enable Harmon to increase its penetration in
the international market, particularly in Europe.
The Company considers Mexico and Canada to be a portion of its domestic
market and these countries are serviced by its domestic marketing group. This
effort is enhanced in Canada by using Vale-Harmon Enterprise Ltd., which is
based in Quebec, Canada and sells Harmon products to the Canadian railroads.
Harmon has a minority equity interest in Vale-Harmon.
Harmon is 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.
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The Company is actively pursuing opportunities on freight and passenger
railroads in both the United States and international markets. Sales in the
rail transit market are usually large multi-year contracts for major new
installations compared with shorter term projects or 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 $49.1 Million at
December 31, 1995. Approximately, $1.5 million of these orders have delivery
dates in 1997 and 1998. Management believes the remaining $47.6 million in
orders are firm and will be filled in 1996. The backlog of orders was
approximately $44.6 million at December 31, 1994, the majority of which were
filled during 1995. 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.
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.
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
12
<PAGE>
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, 1995, the Company had 1078 full-time employees. There
were 954 employees in manufacturing, 31 in marketing and sales and 93 in
general and administrative services. Some of the 954 manufacturing employees
are engaged in research and development. The Company estimates that the time
expended on research and development equals approximately 63 full-time
employees. In addition, the Company estimates that approximately 87 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 3 of Notes to the Consolidated Financial Statements. The
following table summarizes the Company's principal facilities.
<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 of 77,750 Owned Owned(2)
Missouri electronic products and
(2 facilities) railroad signal systems
Warrensburg, Manufacture of railroad 48,000 Owned Owned
Missouri crossing warning systems
and hardware
Warrensburg, Manufacture of printed 30,400 Owned Owned
Missouri wiring boards
Jacksonville, Design and manufacture of 86,800 $203,410 12-31-96
Florida railroad crossing warning
systems and hardware
Omaha, Design of railroad 2,000 $ 20,100 3-02-98
Nebraska crossing warning systems
Louisville, Design of railroad 9,765 $ 57,500 8-31-99
Kentucky crossing warning systems
Atlanta, Design and assembly 35,364 Owned Owned
Georgia of railroad crossing
warning systems
Riverside, Administration and product 88,027 $ 344,949 9-30-2001(3)
California design, management
(3 facilities) information service
operations and manufacture
of electronic products
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
FLOOR SPACE ANNUAL LEASE EXPIRATION
LOCATION PRINCIPAL USE (SQUARE FEET) PAYMENT (1) DATE OF LEASE
-------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Hauppauge, Design of electronic 10,000 $100,000 5-1-2000(4)
New York products for the
railroad industry
Riverside, Assembly, storage and 47,000 $103,402 2-01-97
California distribution of products
for the railroad industry
Lee's Summit, Assembly storage and 20,000 $ 66,000 7-01-99(5)
Missouri distribution of products
for the railroad industry
Lee's Summit, Assembly, storage and 10,000 $ 33,000 8-31-96(6)
Missouri distribution of products
for the railroad industry
Blue Springs, Corporate Headquarters 14,166 $135,930 11-01-99(7)
Missouri
</TABLE>
(1) For additional discussion and information concerning the Company's lease
commitments, see "Financial Statements - Note 6 of Notes to the
Consolidated Financial Statements."
(2) See "Financial Statements - Note 4 of Notes to the Consolidated Financial
Statements."
(3) Consumer price indexed increases (maximum 4% per year) are effective
October 1, 1998 and October 1, 1999. Upon notice by January 1, 1998, the
Company has the right to terminate this lease on October 1, 1998 subject to
an early termination penalty.
(4) Lease payments are as follows:
May 1, 1995 through April 30, 1996 - $100,000/year
May 1, 1996 through April 30, 1997 - $103,612/year
May 1, 1997 through April 30, 1998 - $107,368/year
May 1, 1998 through April 30, 1999 - $111,275/year
May 1, 1999 through April 30, 2000 - $115,338/year
(5) The annual lease payment increases to $70,000, $73,000 and $77,000
effective July 1, 1997, 1998 and 1999, respectively. The Company may
terminate this lease in June 1997 upon payment of a predetermined early
termination fee.
(6) The Company has the option to extend and renew this lease for four
successive one year terms after June 30, 1996.
(7) The Company has the option to renew the lease for up to two successive five
year terms.
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.
14
<PAGE>
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 ongoing 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 expects that system will be required to continue in operation
for some time. The Company completed closure work and submitted its closure
report to MDNR for approval on February 1, 1996. The Company has established a
trust fund to provide financial assurance for the anticipated post-closure
costs of approximately $500,000 to be incurred over approximately 30 years. To
date, the Company has contributed approximately $490,000 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
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
15
<PAGE>
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 has
filed briefs in support of the $586,716 penalty.
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.
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, 1995.
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, 1996, the following securities firms were making a dual
auction market in the Company's common stock:
George K. Baum & Company
Piper Jaffray Companies Inc.
Paine Webber Inc.
The approximate number of holders of record for the Company's common stock
as of March 18, 1996 was 675.
16
<PAGE>
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.
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).
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
INDIVIDUAL OFFICE AGE FOR THE LAST FIVE YEARS
- ---------- ------ --- -----------------------
<S> <C> <C> <C>
Breshears, Ronald G. VP-Human Resources 49 VP-Human Resources of the
Company since 7/1/81.
Daniels, Richard A. VP-Transit Sales 55 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, 51 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.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
INDIVIDUAL OFFICE AGE FOR THE LAST FIVE YEARS
- ---------- ------ --- -----------------------
<S> <C> <C> <C>
Harmon, Robert E. Chairman of the 56 Chairman of the Board of
Board 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 57 VP-Technology of the Company
since 10/2/86.
John, James R. President of 47 President of CAMCO since March
Consolidated Asset 1992. Prior to that VP-Manufacturing
Management Co., Inc. of Harmon Electronics, Inc.
(CAMCO) since February 1987.
Johnson, John W. VP-Domestic Sales 49 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
since 1972.
Kaiser, Lloyd T. President of 44 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; prior to
that 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 50 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.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
INDIVIDUAL OFFICE AGE FOR THE LAST FIVE YEARS
- ---------- ------ --- -----------------------
<S> <C> <C> <C>
Rosewall, Raymond A. President of 44 President of Electro Pneumatic
Electro Pneumatic Corporation and VP-Manufacturing
Corporation (EPC) of Harmon Industries, Inc. since
and VP-Manufacturing 12/27/95. Prior to that Executive
of Harmon Industries, VP Worldwide Sales and Marketing
Inc. for QMS, Inc. since 1992; prior
to that Executive VP Operations
for QMS, Inc. since 1989.
Ryker, Gary E. Exec. VP-Marketing, 46 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 48 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 42 VP-Controller of the Company
since 11/1/83.
</TABLE>
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.
19
<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 and 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.
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 1995 Annual Report to
Shareholders at the following pages:
20
<PAGE>
PAGE
----
Independent Auditors' Report 37
Consolidated Balance Sheets -
December 31, 1995 and 1994 22-23
Consolidated Statements of Earnings -
Years ended December 31, 1995, 1994 and 1993 24
Consolidated Statements of Stockholders'
Equity - Years ended
December 31, 1995, 1994 and 1993 25
Consolidated Statements of Cash Flows -
Years ended December 31, 1995, 1994, and 1993 26
Notes to Consolidated Financial
Statements 27-35
(a)(2) Financial Statement Schedules
Selected Financial Data - for the years ended December 31,
1995, 1994 and 1993, are attached hereto at the following
pages:
Independent Auditors' Report on Financial
Statement Schedule 24
Schedule VIII - Valuation and Qualifying
Accounts 25
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:
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE
----------- ----
<S> <C>
3(ii)By Laws 26 thru 28
10 Stock Buy Back Plan 29 thru 30
10 Harmon Industries, Inc. 1996 Long Term Incentive
Plan (See Proxy Statement Exhibit)
11 Computation of Weighted Average
Shares Outstanding 31 thru 32
13 Sections of the 1995 Annual Report to
Shareholders 33 thru 58
21 Listing of Subsidiaries 59
N/A Notice of Annual Meeting and
Proxy Statement dated April 1, 1996 60 thru 98
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended
December 31, 1995.
21
<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 25, 1996 By: /s/ Bjorn E. Olsson
----------------------------
Bjorn E. Olsson
President
Date: March 25, 1996 By: /s/ Charles M. Foudree
----------------------------
Charles M. Foudree
Executive Vice President-
Finance
Date: March 25, 1996 By: /s/ Stephen L. Schmitz
----------------------------
Stephen L. Schmitz
Vice President-Controller
22
<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 25, 1996
----------------------------
Thomas F. Eagleton, Director
By: /s/ Bruce M. Flohr Date March 25, 1996
----------------------------
Bruce M. Flohr, Director
By: /s/ Charles M. Foudree Date: March 25, 1996
----------------------------
Charles M. Foudree, Director
By: Date: March 25, 1996
----------------------------
Rodney L. Gray, Director
By: /s/ Robert E. Harmon Date: March 25, 1996
----------------------------
Robert E. Harmon, Director
By: Date: March 25, 1996
----------------------------
Herbert M. Kohn, Director
By: /s/ Douglass Wm. List Date: March 25, 1996
----------------------------
Douglass Wm. List, Director
By: /s/ Gerald E. Myers Date: March 25, 1996
----------------------------
Gerald E. Myers, Director
By: /s/ Bjorn E. Olsson Date: March 25, 1996
----------------------------
Bjorn E. Olsson, Director
By: /s/ Donald V. Rentz Date: March 25, 1996
----------------------------
Donald V. Rentz, Director
By: /s/ Judith C. Whittaker Date: March 25, 1996
----------------------------
Judith C. Whittaker, Director
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Harmon Industries, Inc.:
Under date of February 2, 1996, we reported on the consolidated balance sheets
of Harmon Industries, Inc. and subsidiaries as of December 31, 1995 and 1994,
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,
1995, as contained in the 1995 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 1995. 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 statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Kansas City, Missouri
February 2, 1996
24
<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, 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
------ ---- ------ ----
------ ---- ------ ----
Year ended December 31, 1995:
Allowance for doubtful trade
accounts receivable $ 360 $ -- $ 2 $362
------ ---- ------ ----
------ ---- ------ ----
</TABLE>
25
<PAGE>
ITEM 3(ii) BYLAW AMENDMENT
BYLAW AMENDMENT
HARMON INDUSTRIES, INC. -- 3/25/96
RESOLVED, that the Board of Directors hereby amends the Bylaws of the
Corporation by deleting in its entirety Section 13 of said Bylaws and inserting
the following provisions in lieu thereof:
SECTION 13: VACANCIES AND NEWLY CREATED DIRECTORSHIPS; NOMINATIONS OF
DIRECTORS; ELECTION.
(a) Newly created directorships resulting from any increase in the number
of Directors and any vacancies on the Board resulting from death, resignation,
disqualification, removal, or other cause will be filled solely by the
affirmative vote of a majority of the remaining Directors then in office, even
though less than a quorum of the Board, or by a sole remaining Director. Any
Director elected in accordance with the preceding sentence will hold office for
the remainder of the full term of the class of Directors in which the new
directorship was created or the vacancy occurred and which the new directorship
was created or the vacancy occurred and until such Director's successor is
elected and qualified. No decrease in the number of Directors constituting the
Board will shorten the term of an incumbent Director.
(b) Other than persons nominated and elected pursuant to Paragraph (a),
only persons who are nominated in accordance with the following procedures will
be eligible for election as Directors of the Corporation.
(c) Nominations of persons for election as Directors of the Corporation
may be made at a meeting of stockholders (i) by or at the direction of the
Board (including the Director Nomination and Compensation Committee thereof) or
(ii) by any stockholder who is a stockholder of record at the time of giving of
notice provided for in this Bylaw 13 who is entitled to vote for the election
of such Director at the meeting and who complies with the procedures set forth
in this Bylaw 13. All nominations by stockholders must be made pursuant to
timely notice in proper written form to the Secretary.
(d) To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Corporation not less
than 90
1
<PAGE>
calendar days prior to the meeting. To be in proper written form, such
stockholder's notice must set forth or include (i) the name and address, as
they appear on the Corporation's books, of the stockholder giving the notice
and of the beneficial owner, if any, on whose behalf the nomination is made;
(ii) a representation that the stockholder giving the notice is a stockholder
of record of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting for such Director to nominate the
person or persons specified in the notice; (iii) the number of shares of stock
of the Corporation owned beneficially and of record by the stockholder giving
the notice and by the beneficial owner, if any, on whose behalf the nomination
is made; (iv) a description of all arrangements or understandings between or
among any of (A) the stockholder giving the notice, (B) the beneficial owner,
if any, on whose behalf the notice is given, (C) each nominee, and (D) any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder giving the notice;
(v) such other information regarding each nominee proposed by the stockholder
giving the notice as would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission had
the nominee been nominated, or intended to be nominated, by the Board; and (vi)
the signed consent of each nominee to serve as a Director of the Corporation if
so elected. At the request of the Board, any person nominated by the Board for
election as a Director must furnish to the Secretary that information required
to be set forth in a stockholder's notice of nomination which pertains to the
nominee. The presiding officer of the meeting for election of Directors will,
if the facts warrant, determine that a nomination was not made in accordance
with the procedures prescribed by this Bylaw 13, and if so determined, so
declare to the meeting and the defective nomination will be disregarded.
(e) Stockholders shall not have a right to cumulate their votes for
Directors. Directors shall be elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present.
FURTHER RESOLVED, that the Board of Directors hereby authorizes an amendment of
Section 15 of the Bylaws to delete the Section 15, REMOVAL OF DIRECTORS, in its
entirety and insert in lieu thereof the following:
2
<PAGE>
SECTION 15. REMOVAL OF DIRECTORS: The Shareholders shall have the power
by a two-thirds vote of the holders of shares at any regular meeting or special
meeting expressly called for that purpose, to remove any director from office
with or without cause; and
FURTHER RESOLVED, that the Board of Directors hereby authorizes and directs the
officers of the Corporation to make the foregoing changes in the Bylaws and to
take any and all action necessary to carry out the authority granted in this
resolution.
3
<PAGE>
ITEM 10
STOCK BUY-BACK PLAN
OF
HARMON INDUSTRIES, INC.
STATEMENT OF PURPOSE
The purpose of this Stock Buy-Back Plan (the "Plan") is to enable Harmon
Industries, Inc. (the "Company"), to purchase outstanding Common Stock of the
Company either through private negotiated transactions or through open market
purchases.
STATEMENT OF PLAN
1. ADMINISTRATION. The Plan shall be administered by a Stock Buy-Back
Committee (the "Committee"), composed of three members. The committee shall
consist of the President of the Company, the Executive Vice President-Finance
of the Company and any one of the outside directors sitting on the Ad Hoc
Committee on Change of Control. In the absence or unavailability of either the
President or the Executive Vice President-Finance, an outside director sitting
on the Ad Hoc Committee on Change of Control shall replace him during the
period of absence or unavailability. Subject to the provisions of the Plan,
the Committee is authorized to interpret the Plan, and to make all other
determinations necessary or advisable for its administration.
2. SHARES SUBJECT TO THE PLAN. The Committee may provide for the
purchase in the aggregate of up to 150,000 shares of the outstanding Common
Stock of the Company with funds of the Corporation subject to (i) approval by
securities counsel as to compliance with applicable federal and state
securities laws, including but not limited to rule 10(b)-18 of the Securities
and Exchange Act of 1934, as amended, and (ii) compliance with applicable state
law regarding redemption or repurchase of shares of the corporation's stock.
3. PRICE. The price to be paid for purchase of outstanding Common Stock
of the Company shall be within the parameters established by the Board of
Directors from time to time and subject to authorization by the Committee.
4. PURCHASES. The officers of the Corporation shall execute and carry
out purchases of outstanding Common Stock of the Company, as authorized by the
Committee subject to compliance with applicable law.
5. RESTRICTION ON SHARES PURCHASED. Shares of the Company purchased
pursuant to this Plan shall be held, initially, as
1
<PAGE>
treasury shares. Such shares may, thereafter, be utilized for any purpose
permitted by applicable law and the bylaws of the Company and approved by the
Board of Directors.
6. NOTIFICATION. The Committee shall notify the Board of Directors of
any stock purchases completed under this Plan as soon as practicable after such
purchases.
7. EFFECTIVE DATE AND TERMINATION OF PLAN. This Plan has been adopted
by the Board of Directors on August 10, 1995. The Board of Directors may
terminate this Plan at any time.
8. AMENDMENT OF PLAN. The Board of Directors may at any time amend the
Plan.
2
<PAGE>
EXHIBIT A
---------
HARMON INDUSTRIES, INC.
FORM 10-K
DECEMBER 31, 1995
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, 1995, 1994 and 1993.
<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 (2 X 1) of days in period
--------- ----------- ----------- -----------------------
<S> <C> <C> <C> <C>
1995
October 1 - December 31 6,805,626 92 626,117,592
Equivalent shares under
the Company's bonus plan 2,698 92 248,189
Equivalent shares under the
Company's option plans 25,461 92 2,342,412
628,708,193 6,833,785
----------- ---------
----------- ---------
1994
October 1 - December 31 6,459,052 92 594,232,784
Equivalent shares under
the Company's bonus plan 2,110 92 194,118
Options exercised 8,500 4 34,000
2,200 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 2,559 92 235,394
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
----------- ---------
----------- ---------
</TABLE>
1
<PAGE>
Computation of the average number of shares of Common Stock outstanding for the
twelve months ended December 31, 1995, 1994 and 1993.
<TABLE>
<S> <C> <C> <C>
1995
Quarter 1 weighted average 6,814,783
Quarter 2 weighted average 6,823,650
Quarter 3 weighted average 6,837,112
Quarter 4 weighted average 6,833,785
----------
Divided by
27,309,330 4 Quarters = 6,827,333
---------- ---------
---------- ---------
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 6,593,372
----------
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
---------- ---------
---------- ---------
</TABLE>
2
<PAGE>
Harmon Industries, Inc. and Subsidiaries
Selected Consolidated Financial Data (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993 1992
<S> <C> <C> <C> <C>
Operations
Net sales $ 136,780 $ 119,703 $ 99,295 $ 81,899
Cost of sales 96,094 81,023 65,716 54,271
Research and development expenditures 5,218 4,561 3,442 3,541
Gross profit 35,468 34,119 30,137 24,087
Selling, general and administrative expenses 23,200 21,176 18,558 15,646
Other operating expenses (income) 481 44 114 137
Operating income 11,787 12,899 11,465 8,304
Other expenses 607 214 388 1,228
Pre-tax earnings (continuing operations) 11,180 12,685 11,077 7,076
Income taxes 4,294 5,046 4,193 2,498
Earnings from continuing operations 6,886 7,639 6,884 4,578
Gain (loss) from discontinued operations ---- ---- ---- 165
Use of net operating loss carryforward ---- ---- ---- 273
Net earnings (loss) $ 6,886 $ 7,639 $ 6,884 $ 5,016
Effective tax rate - continuing operations 38.4% 39.8% 37.9% 35.3%
Return on sales - continuing operations 5.0% 6.4% 6.9% 5.6%
Return on equity - continuing operations 14.0% 17.7% 20.8% 30.1%
Return on equity - total 14.0% 17.7% 20.8% 33.0%
Weighted average shares 6,827 6,567 6,212 5,275
Per Share Data
Earnings from continuing operations $ 1.01 $ 1.16 $ 1.11 $ .87
Net earnings (loss) 1.01 1.16 1.11 .95
Cash dividends .15 .15 ---- ----
Book value 7.23 6.40 5.23 2.82
Price/earnings ratio range 13.2-20.3 14.2-20.9 10.5-20.9 3.6-13.4
Other Data At Year-End
Working capital $ 35,014 $ 21,670 $ 20,790 $ 10,740
Total assets 86,845 68,395 53,000 38,488
Long-term debt 12,090 733 439 4,898
Stockholders' equity 49,232 43,063 33,086 15,197
Current ratio 2.60:1 2.03:1 2.28:1 1.72:1
Quick assets ratio 1.16:1 1.03:1 1.32:1 .87:1
Liabilities to equity ratio .76:1 .59:1 .60:1 1.53:1
Capital additions 5,532 3,242 3,189 2,154
Depreciation and amortization 3,906 2,621 2,121 1,936
Outstanding shares (000s) 6,806 6,728 6,328 5,383
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
5 yr. 10 yr.
Compound Compound
1991 1990 1989 1988 1987 1986 1985 Growth Growth
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 70,934 $ 72,707 $ 70,154 $ 64,558 $ 57,068 $ 47,223 $ 52,993 +13.47% +9.95%
45,536 47,478 46,377 42,044 37,995 30,333 34,426
4,000 3,414 3,200 3,669 3,318 2,360 2,095
21,398 21,815 20,577 18,845 15,755 14,530 16,472 +10.21% +7.97%
13,550 14,427 13,186 11,965 10,671 9,362 8,497
1,122 762 (263) (27) 43 145 125
6,726 6,626 7,654 6,907 5,041 5,023 7,850 +12.21% +4.15%
2,118 1,504 1,244 1,301 1,519 885 1,720
4,608 5,122 6,410 5,606 3,522 4,138 6,130 +16.90% +6.19%
1,688 2,022 2,506 2,100 1,613 2,039 2,909
2,920 3,100 3,904 3,506 1,909 2,099 3,221 +17.31% +7.89%
(2,492) (12,306) (2,744) (1,020) (217) -- --
395 -- -- -- -- -- --
$ 823 $ (9,206) $ 1,160 $ 2,486 $ 1,692 $ 2,099 $ 3,221 N/M* +7.89%
36.6% 39.5% 39.1% 37.5% 45.8% 49.3% 47.5%
4.1% 4.3% 5.6% 5.4% 3.3% 4.4% 6.1%
39.6% 53.9% 26.5% 25.9% 16.5% 20.0% 22.9%
11.2% (160.2%) 7.9% 18.3% 14.6% 20.0% 22.9%
5,066 4,723 4,633 4,479 4,472 4,854 4,430
$ .58 $ .66 $ .84 $ .78 $ .43 $ .43 $ .73 +8.88% +3.30%
.16 (1.95) .25 .56 .38 .43 .73 N/M* +3.30%
-- .0625 .125 .125 .125 .125 .125
1.48 1.20 3.19 3.03 2.59 2.34 2.94 +43.24% +9.41%
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
$ 9,660 $ 7,955 $ 14,444 $ 7,037 $ 11,870 $ 11,599 $ 9,962 +34.50% +13.39%
36,575 41,408 48,082 42,948 37,984 34,045 30,111 +15.97% +11.17%
11,915 17,220 17,688 12,139 14,621 13,793 6,604
7,377 5,747 14,756 13,557 11,604 10,470 14,038 +53.66% +13.37%
1.71:1 1.49:1 2.08:1 1.45:1 2.17:1 2.36:1 2.17:1
.76:1 .66:1 .84:1 .60:1 1.09:1 .96:1 .90:1
3.96:1 6.21:1 2.26:1 2.17:1 2.27:1 2.25:1 1.14:1
1,098 4,521 4,589 9,886 3,552 2,212 2,919
2,022 3,511 3,185 2,834 2,531 2,074 1,775
4,998 4,790 4,628 4,478 4,472 4,472 4,769
</TABLE>
*Not Measurable
2
<PAGE>
HARMON INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Harmon's total business has been on an upward trend for the past several years.
The Company has increased its market share with its principal customers, the
Class I and Short-Line Railroads, and it has successfully entered into the new
construction portion of the rail transit market, principally because of its
technology and service. Additionally, the purchasing, materials management and
pre-assembly services supplied by its asset management services subsidiary are
filling an increasing need in the industry as railroads continue to downsize.
Profile of Current Operations
The Company's sales are summarized by product category in the table on page 17.
The table also breaks out gross sales and percentages of total sales for each
of the past three years. Sales of signal and control products by the Company's
asset management services subsidiary (CAMCO) are included in those descriptive
categories. The value-added portion supplied with those products by CAMCO
remains in the asset management services category. A new category, Train
Inspection Systems, is included this year, because its sales reached a
sufficient level to separate them from the "Other" category of previous years.
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 computer-based control systems (TTM).
Signal Systems include all products related to rail/highway crossing warning
systems. 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.
Asset
Management Services provides a single-source, rapid delivery service for
railroad components. It involves warehousing commonly-used parts and equipment
that are manufactured by the Company and by other vendors. This service has
been expanded in recent years to include asset and materials management as well
as assembly of various components, which are delivered as a complete unit,
ready for installation.
Train Inspection Systems include products that monitor the condition of trains
when they pass a train inspection site. The hot box detector is the principal
product, which is installed beside the track to detect overheating bearings in
passing rail cars, a serious condition that could lead to derailments. Other
products include a sensor to identify high or wide loads and a device that
detects foreign objects being dragged under a rail car.
Printed Wiring Boards include production of customer designed printed wiring
boards for shipment to other electronics manufacturers.
Other sales include communication equipment and products that do not fit
readily into the other five categories.
3
<PAGE>
<TABLE>
<CAPTION>
Sales by Product or Years ended December 31,
Service Function* 1995 1994 1993
(Dollars in thousands) Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Train Control Systems $ 55,437 40.7% $ 45,711 38.4% $37,585 38.0%
Signal Systems 42,374 31.1% 35,449 29.8% 36,034 36.5%
Asset Management
Services 14,194 10.4% 20,894 17.5% 10,223 10.3%
Train Inspection Systems 11,360 8.4% 5,054 4.2% 4,510 4.6%
Printed Wiring Boards 6,752 5.0% 6,307 5.3% 6,180 6.3%
Other 5,999 4.4% 5,712 4.8% 4,252 4.3%
Total $136,116 100.0% $119,127 100.0% $98,784 100.0%
</TABLE>
*Sales volumes shown above are gross totals and do not include cash discounts
or deferred contract revenue. As a result, there are minor differences between
the figures in this table and those presented in the Consolidated Statements of
Earnings. The differences do not affect the validity of the discussion and
analysis.
Results of Operations
Years Ended December 31, 1995, 1994 and 1993. Net sales increased 14.3% to
$136.8 million in 1995. Sales in 1994 were $119.7 million, 20.6% above the
$99.3 million recorded for 1993. Net earnings for 1995 were $6.9 million ($1.01
per share), a decrease of 9.9% from the record $7.6 million ($1.16 a share)
earned in 1994, which was 11.0% greater than the $6.9 million ($1.11 a share)
earned in 1993. The decrease in earnings in 1995 was due primarily to a higher
cost of sales principally occasioned by production issues related to the
acquired hot box detector line, operating inefficiencies resulting from
customer-induced delays in shipments, a $657,000 increase in research and
development expenditures and higher interest costs. The increase in earnings in
1994 over those of 1993 was the result of substantially higher sales at
slightly lower margins.
The table on page 18 illustrates 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 14.3% increase in net sales in 1995 was due to gains in system sales
(train control, train inspection and signal). Approximately half of the gain
was the result of the Serrmi acquisition and a resurgence in rail-highway
crossing installation sales (signal systems), which increased Harmon's market
share last year. The remainder reflects gains in shipments on rail transit
contracts and for carborne equipment (train control systems) and hot box
detectors from the Servo acquisition (train inspection systems). Sales of asset
management services were down $6.7 million in 1995 when shipments were delayed
because of railroad merger activity.
The 20.6% increase in net sales in 1994 resulted from a $10.7 million increase
in asset management services revenues, an $8.1 million gain in train control
system sales, much of which was related to rail transit contracts. 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.
4
<PAGE>
Operating Summary
<TABLE>
<CAPTION>
Percentage of Net Sales Percentage of Change
Years ended December 31, 1995 1994 1993
over over over
1995 1994 1993 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 14.3% 20.6% 21.2%
Cost of sales 70.3% 67.7% 66.2% 18.6% 23.3% 21.1%
Research and development 3.8% 3.8% 3.5% 14.4% 32.5% (2.8)%
Gross profit 25.9% 28.5% 30.3% 4.0% 13.2% 25.1%
Selling, general and
administrative expenses 17.0% 17.7% 18.7% 9.6% 14.1% 18.6%
Other operating expenses, net 0.4% 0.0% 0.1% 993.2% (61.4)% (16.8)%
Operating income 8.5% 10.8% 11.5% (8.6)% 12.5% 38.1%
Other expenses 0.4% 0.2% 0.4% 183.6% (44.8)% (68.4)%
Earnings before income taxes 8.1% 10.6% 11.1% (11.9)% 14.5% 56.5%
Income taxes 3.1% 4.2% 4.2% (14.9)% 20.3% 67.9%
Net earnings 5.0% 6.4% 6.9% (9.9)% 11.0% 50.4%
</TABLE>
Sales of the Company's signal systems are influenced by the financial condition
of the railroad industry, the railroads' budgets for planned equipment
expenditures and by the level of activity in authorizing grade crossing warning
system improvements subject to 80% federal support, up to a 1996 authorized
limit of $160 million. Authorization expires in 1997, and future extensions are
uncertain. Rail transit project funding is expected to approximate 1995 levels.
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.
Gross Profit
Gross profit margins for 1995 decreased to 25.9% of sales from 28.5% in 1994.
The decline was caused primarily by inefficiencies in manufacturing the
acquired hot box detector product line, difficulties encountered by the Company
when its shipment stream was interrupted by railroad merger activity, increased
R&D expenditures and from low margins obtained on "pass through" sales that
were part of rail transit contracts.
Gross profit margins for 1994 decreased to 28.5% from 30.4% for 1993. The
decline reflects that asset management services sales, which are traditionally
lower in margin, comprised a greater percentage of total sales than they did in
1993. In addition, R&D expenditures were higher in 1994 than in 1993.
Selling, General & Administrative Expenses
Selling, general and administrative expenses (SG&A) for 1995 increased
approximately $2.0 million to $23.2 million (17.0% of net sales) from $21.2
million (17.7% of net sales) in 1994 and $18.6 million (18.7%) in 1993. The
downward trend as a percentage of net sales reflects gains in cost controls and
the fixed nature of certain costs. The absolute increase in dollars each year
basically reflects the result of inflation,
5
<PAGE>
commissions incident to higher sales volume, and additions to SG&A expenses
incident to two acquisitions made in December 1994 and February 1995. These
expenses were offset somewhat in 1995 by lower profit-based bonuses.
Amortization Expenses
The increase in amortization expenses in 1995 is attributable to the
acquisitions of the hot box detector line of Servo Corporation of America at
the end of 1994 and the assets of Serrmi Services, Inc. in the first quarter of
1995.
Other Operating Expenses
Changes in other operating expenses were insignificant in 1995, 1994 and 1993.
Interest Expense
Interest expense was $741,000 in 1995, $264,000 in 1994 and $427,000 in 1993.
The increase for 1995 was the result of increased borrowings related to the
acquisitions and to provide working capital. Interest costs were lower in 1994
as borrowings were less than in 1993.
Income Taxes
The Company's effective income tax rate for 1995 was 38.4% compared with 39.8%
for 1994 and 37.9% for 1993. Tax rates were lower in 1995 because Harmon did
more business in states with lower tax rates than it did in 1994.
Tax rates were higher in 1994 than in 1993 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 tax rates, where
Harmon is headquartered. See Note 4 of Notes to the Consolidated Financial
Statements.
Inflation
Inflation has been moderate during the past three years, averaging 3% to 4% 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 supply industry that will expand Harmon's product or service offerings.
Liquidity, Cash Flow and Capital Resources
The Company had a very strong balance sheet at 1995 year-end. Total assets were
$86.8 million, up $18.5 million. Stockholders' equity rose to $49.2 million
($7.23 per share) from $43.1 million ($6.40 per share). Working capital was $35
million, which produced a current ratio of 2.6:1 compared to 2.0:1 a year
earlier. Cash was down $926,000 and interest-bearing debt was up $10.5 million
in 1995. Cash was used to fund the acquisition of Serrmi ($1.2 million),
capital expenditures of $5.5 million, increased receivables of $3.9 million
(largely because of $4.3 million increase in sales in the 1995 fourth quarter),
and to support increased year-end inventories and increases in contracts in
progress.
At year-end 1995, the Company had an $18 million line of working capital credit
and had borrowed $11.5 million. Capital expenditures for 1996 are expected to
be approximately $8 million, roughly $2.5 million higher than the capital
expenditures for 1995.
1996 Outlook
6
<PAGE>
There is much to be optimistic about for 1996. The Company's core business is
solid. It begins the new year with a record backlog of $49.1 million, up $4.5
million from the year earlier backlog of $44.6 million. The shipment delays
that accompanied the railroad merger activity in 1995 are largely over, and
business is returning to normal. Further, the production and inventory
difficulties that surrounded the integration of the acquired hot box detector
product line are largely behind the Company, although the hot box detector
line's profit margins will be below their targeted levels for the next several
months as some high cost inventory remains to be sold off. In addition,
customer acceptance of our newer products has been excellent.
Despite the favorable climate for increased business for Harmon, there are some
uncertainties to consider as well. Among them are whether the economy will
perform as well in 1996, whether government funding for rail transit and grade
crossing warning systems will continue as before - given the mood in the
Congress to reduce federal subsidies, whether our R&D departments will continue
their output of innovative and very successful products, and what the outcome
will be for the environmental matter discussed in Note 10 to the Consolidated
Financial Statements.
Further, the railroad industry remains acquisition minded. Mergers typically
create short-term problems, particularly with shipment continuity and immediate
new business. Long-term, however, mergers often prove beneficial as the
surviving entity often consolidates traffic patterns to strengthen its
operation, which for Harmon translates into additional orders for signal and
control systems.
Finally, we are operating at near-capacity in several areas of our business.
Accordingly, we will spend substantial sums of money over the next several
years to expand capacity in order to bid on larger contracts and to produce
larger and more complex systems. We are addressing these issues by expanding
our manufacturing space at several locations and increasing the size of our
research and development center to accommodate many additional engineers.
We also intend to increase our total capacity by outsourcing certain functions
that would be more expensive to do in-house with our present volume of
business. Management also recognizes that capacity can be increased by joining
forces with others, particularly on very large installations, such as
multimillion dollar contracts that will be bid on this year by suppliers to the
rail transit industry. We will also make some major changes internally in 1996
to improve our cost effectiveness and the overall management of our processes.
We view these expenditures as the price of admission to reach the next level of
annual sales.
Other
There are no pending accounting pronouncements which will have a significant
effect on the Company's financial statements.
7
<PAGE>
Fourth Quarter Results
Sales for the 1995 fourth quarter were $36.5 million, 13.5% higher than 1994
fourth quarter sales of $32.2 million. Cost of sales as a percentage of sales
was 70.8% in 1995 compared with 67.2% in 1994, which reflected a higher margin
product mix in 1994 than in 1995. Net earnings for the 1995 fourth quarter were
$1.8 million ($0.27 per share) compared with $1.7 million ($0.25 per share) in
the year earlier period.
While this year's final quarter reflected increased sales and earnings from the
same quarter a year ago, we expected to perform better than we did. We
anticipated higher volume and geared up accordingly for rush shipments that
were subsequently delayed for a month and more. In an effort to compensate for
these delays as much as possible, we rescheduled other projects. We put all our
factories on heavy production schedules and outsourced some engineering
capacity that we would normally have done in-house at lower cost. In addition,
we were forced to expedite material to get our rescheduled projects out in a
timely manner. Thus a combination of lower volume, primarily due to delayed
shipping schedules among our customers, and higher costs incurred due to an
effort to compensate as much as possible, negatively affected our earnings.
<TABLE>
<CAPTION>
Quarterly Consolidated
Statements of Earnings
(Unaudited) 1995 1994
(Dollars in thousands,
except per share data)
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 $29,415 $32,854 $38,026 $36,485 $25,902 $32,166 $29,448 32,187
Cost of sales 21,330 21,971 26,954 25,839 17,503 21,882 19,997 21,641
R&D expenditures 1,022 1,236 1,503 1,457 990 966 805 1,800
Gross profit 7,063 9,647 9,569 9,189 7,409 9,318 8,646 8,746
Selling, general and
administrative expenses 5,612 5,990 5,464 6,134 4,837 5,377 4,973 5,989
Amortization 133 133 144 137 33 33 11 1
Miscellaneous (income)
expense-net (25) (7) (13) (21) (4) (20) 21 (31)
Operating income 1,343 3,531 3,974 2,939 2,543 3,928 3,641 2,787
Interest expense 147 190 197 207 43 80 85 56
Investment income 17 60 4 53 14 5 1 30
Pre-tax earnings 1,213 3,401 3,781 2,785 2,514 3,853 3,557 2,761
Income taxes 507 1,343 1,501 943 1,018 1,523 1,406 1,099
Net earnings $ 706 $ 2,058 $ 2,280 $ 1,842 $ 1,496 $ 2,330 $ 2,151 $ 1,662
Earnings per common share $ 0.10 $ 0.30 $ 0.33 $ 0.27 $ 0.23 $ 0.36 $ 0.33 $ 0.25
Weighted average shares (000s) 6,815 6,824 6,837 6,834 6,551 6,559 6,563 6,594
</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.
8
<PAGE>
Harmon Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
At December 31, 1995 1994
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ -- $ 250
Trade receivables, less allowance for doubtful accounts
of $362 in 1995 and $360 in 1994 25,317 21,457
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 2) 4,053 1,321
Inventories:
Work in process 4,583 5,763
Raw materials and supplies 21,262 11,955
25,845 17,718
Income tax receivable 434 667
Deferred tax asset (note 4) 584 586
Prepaid expenses and other current assets 608 731
Total current assets 56,841 42,730
Property, plant and equipment, at cost (note 3):
Land 356 164
Buildings 5,802 4,596
Machinery and equipment 12,820 11,680
Office furniture and equipment 14,589 11,711
Transportation equipment 1,036 928
Leasehold improvements 2,288 1,600
36,891 30,679
Less accumulated depreciation and amortization 22,714 19,610
Net property, plant and equipment 14,177 11,069
Deferred tax asset (note 4) 621 500
Cost in excess of fair value of net assets acquired, net of
accumulated amortization of $1,896 in 1995 and
$1,349 in 1994 (note 11) 7,674 7,967
Deferred compensation asset (note 6) 5,575 5,146
Other assets 1,957 983
$86,845 $68,395
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1995 1994
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdraft $ 676 $ --
Current debt installments (note 3) 337 1,174
Accounts payable 11,022 8,646
Accrued payroll, bonus and employee benefit plan contributions 6,688 7,327
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 2) 1,279 1,420
Other accrued liabilities 1,825 2,493
Total current liabilities 21,827 21,060
Deferred compensation liability (note 6) 3,696 3,539
Long-term debt (note 3) 12,090 733
Total liabilities 37,613 25,332
Stockholders' equity (notes 3 and 7):
Common stock of $.25 par value; authorized 20,000,000 shares,
issued 6,805,626 shares in 1995 and 6,728,252 shares in 1994 1,702 1,682
Additional paid-in capital 23,003 22,719
Retained earnings 24,527 18,662
Total stockholders' equity 49,232 43,063
Commitments and contingencies (notes 6 and 10)
$86,845 $68,395
</TABLE>
10
<PAGE>
Harmon Industries, Inc. and Subsidiaries
Consolidated Statements of Earnings
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Net sales $136,780 $119,703 $99,295
Cost of sales 96,094 81,023 65,716
Research and development expenditures 5,218 4,561 3,442
Gross profit 35,468 34,119 30,137
Selling, general and administrative expenses 23,200 21,176 18,558
Amortization of cost in excess of fair value
of net assets acquired 547 78 134
Miscellaneous income - net (66) (34) (20)
Operating income 11,787 12,899 11,465
Interest expense (741) (264) (427)
Investment income 134 50 39
Earnings before income taxes 11,180 12,685 11,077
Income tax expense (benefit) (note 4):
Current 4,413 5,098 4,561
Deferred (119) (52) (368)
4,294 5,046 4,193
Net earnings $ 6,886 $ 7,639 $ 6,884
Earnings per common share $ 1.01 $ 1.16 $ 1.11
Weighted average shares outstanding (000s) 6,827 6,567 6,212
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
Harmon Industries, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Treasury Stockholders'
Stock Capital Earnings Stock Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $1,524 $15,591 $ 5,107 $(7,025) $15,197
Net earnings -- -- 6,884 -- 6,884
Common stock issued (note 7):
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 and 11):
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
Net earnings -- -- 6,886 -- 6,886
Cash dividends paid ($0.15 per share) -- -- (1,021) -- (1,021)
Common stock issued (note 7):
Stock options and other 20 284 -- -- 304
Balance at December 31, 1995 $1,702 $23,003 $24,527 $ -- $49,232
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
Harmon Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,886 $ 7,639 $ 6,884
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,906 2,621 2,121
Gain on sale of property, plant and equipment (34) (6) (7)
Deferred tax expense (benefit) (119) 211 (453)
Changes in assets and liabilities, net of acquisition of businesses:
Trade receivables (3,860) (3,046) (5,880)
Inventories (7,830) (1,558) (2,572)
Estimated costs, earnings and billings on contracts (2,873) (920) (850)
Prepaid expenses 131 (109) (70)
Accounts payable 2,376 2,588 1,579
Accrued payroll and benefits (651) 1,506 2,107
Other liabilities (478) (1,423) (43)
Other deferred liabilities 157 304 310
Discontinued operations -- -- 23
Total adjustments (9,275) 168 (3,735)
Net cash provided by (used in) operating activities (2,389) 7,807 3,149
Cash flows from investing activities:
Capital expenditures (5,532) (3,242) (3,189)
Acquisition of businesses (1,182) (6,661) --
Proceeds from sale of property, plant and equipment 84 30 26
Deferred compensation contributions (429) (524) (1,240)
Other investing activities (974) (37) 53
Net investing activities of discontinued operations -- -- (339)
Net cash used in investing activities (8,033) (10,434) (4,689)
Cash flows from financing activities:
Proceeds from issuance of common stock 292 300 10,817
Cash dividends (1,021) (968) --
Net borrowings under line of credit agreements 10,661 800 --
Principal payments of long-term debt (436) (320) (6,655)
Bank overdraft 676 -- --
Net cash provided by (used in) financing activities 10,172 (188) 4,162
Net increase (decrease) in cash and cash equivalents (250) (2,815) 2,622
Cash and cash equivalents at beginning of year 250 3,065 443
Cash and cash equivalents at end of year $ -- $ 250 $ 3,065
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 661 $ 265 $ 492
Income taxes $ 4,167 $ 5,939 $ 3,865
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
Harmon Industries, Inc. and Subsidiaries
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 Harmon Railway Systems International.
Significant intercompany accounts and transactions have been eliminated in
consolidation. Management of the Company has made estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of
contingent liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
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. 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.
14
<PAGE>
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. The Company assesses the
recoverability of such cost by determining whether the amortization of the
cost in excess of the fair value of net assets acquired over its remaining
life can be recovered through undiscounted future operating cash flows.
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, including common shares held by the Company's Employee
Stock Ownership Plan and Trust. Effect is given to common stock equivalents
(stock options), if dilutive.
15
<PAGE>
Note 2-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, 1995:
Costs and estimated earnings $25,234 $28,541 $53,775
Billings 21,181 29,820 51,001
$4,053 $(1,279) $2,774
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)
</TABLE>
Balances billed, but not paid by customers under retainage provisions in
contracts amounted to $1,146,000 and $342,000 at December 31, 1995 and 1994.
Unbilled amounts representing claims subject to uncertainty concerning their
ultimate realization amounted to $1,000,000 at December 31, 1995. All
receivables on contracts in progress are considered to be collectible within
twelve months.
<TABLE>
<CAPTION>
Note 3-Indebtedness
(Dollars in thousands) 1995 1994
<S> <C> <C>
Revolving credit agreements $11,461 $800
Capitalized lease obligations 966 967
Industrial revenue bonds -- 140
Total indebtedness 12,427 1,907
Less current installments 337 1,174
Long-term debt $12,090 $733
</TABLE>
Revolving credit agreements.
The Company has an unsecured $15,000,000 revolving credit. At December 31,
1995, outstanding borrowings totaled $8,461,000 and $6,539,000 was available.
Outstanding borrowings come due on June 28, 1997 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 ($7,461,000 at 8.5% and
$1,000,000 at 7.5% at December 31, 1995).
The Company has a reducing revolving credit agreement with original total
credit availability of $6,000,000 reducing by $300,000 each quarter after
June 30, 1993 ($3,000,000 at December 31, 1995). The Company has outstanding
borrowings of $3,000,000 at December 31, 1995. Outstanding borrowings are 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 (7.75% at December 31, 1995). Borrowings under this
agreement are collateralized by liens against substantially all of the
Company's equipment and machinery.
The Company pays commitment fees of 3/8 of 1% annually on the unused
portion of the revolving credit agreements.
16
<PAGE>
Capitalized lease obligations.
The Company entered into various computer hardware and software capital lease
agreements totaling $295,000 and $783,000 in 1995 and 1994, respectively.
Monthly installments are due through October 1998. The average implied
interest rate in the lease agreements is 7.0%.
Industrial revenue bonds.
The industrial revenue bonds were issued to provide funds to construct and
equip manufacturing and research and development facilities. The bonds were
repaid in 1995.
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, 1995, the Company is in
compliance with all covenants under its indebtedness agreements.
Maturities.
At December 31, 1995, long-term debt maturities for 1996 and thereafter are:
<TABLE>
<CAPTION>
Years ended December 31 (Dollars in thousands)
<S> <C>
1996 $ 337
1997 8,821
1998 3,269
$12,427
</TABLE>
Note 4-Income Taxes
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $3,664 $4,193 $4,029
State 749 905 532
Total current 4,413 5,098 4,561
Deferred:
Federal (99) (14) (332)
State (20) (38) (36)
Total deferred (119) (52) (368)
Total income tax expense $4,294 $5,046 $4,193
</TABLE>
17
<PAGE>
Income tax expense for the years ended December 31, 1995, 1994, and 1993,
respectively, differed from the amounts computed by applying the U.S. federal
income tax rate of 35 percent for 1995 and 1994 and 34 percent for 1993 to
pretax income as a result of the following:
<TABLE>
<S> <C> <C> <C>
(Dollars in thousands) 1995 1994 1993
Computed "expected" tax expense $3,913 $4,440 $3,766
Increase (reduction) in income taxes
resulting from:
State and local income taxes,
net of federal income tax benefit 473 564 327
Other, net (92) 42 100
$4,294 $5,046 $4,193
</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,
1995 and 1994 are presented below:
<TABLE>
<S> <C> <C>
(Dollars in thousands) 1995 1994
Deferred tax assets:
Deferred compensation $1,442 $1,327
Compensated absences 356 256
Inventories 329 186
Allowance for doubtful accounts 141 135
Various other reserves 127 378
Total gross deferred tax assets 2,395 2,282
Less valuation allowance 369 369
2,026 1,913
Deferred tax liabilities:
Plant and equipment (821) (827)
Net deferred tax assets $1,205 $1,086
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1994 was
approximately $351,000. The net changes in the total valuation allowance for the
years ended December 31, 1995 and 1994 were $0 and $18,000, 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.
During 1995, the Internal Revenue Service completed examinations of the
Company's federal income tax returns for the years ended December 31, 1992, 1993
and 1994. The results of the examinations did not have a material effect on the
Company's financial statements.
18
<PAGE>
Note 5-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 $19,091,000 and
$15,532,000 for the year ended December 31, 1995, net sales of approximately
$25,735,000 and $11,015,000 for the year ended December 31, 1994 and net sales
of approximately $14,168,000 and $10,136,000 for the year ended December 31,
1993. At December 31, 1995, the Company had significant receivable balances from
five customers totaling approximately $11,078,000. The Company has no other
unusual credit risks or concentrations.
Note 6-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 $1,581,000,
$1,398,000 and $1,268,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
A summary of non-cancellable long-term operating lease commitments follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
Real Total
Years ended December 31, Equipment property commitments
<S> <C> <C> <C>
1996 $82 $1,042 $1,124
1997 67 564 631
1998 21 547 568
1999 5 411 416
2000 - 72 72
</TABLE>
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 1996.
Employee Benefits. In 1985, the Company formed an Employee Stock Ownership Plan
and Trust (ESOP), which includes all employees. At December 31, 1995 and 1994
the ESOP held 490,428 shares of Company common stock which had been allocated to
plan participants. Company contributions to the ESOP are normally based on a
percentage of pretax earnings. Dividends on common shares held by the ESOP are
reflected as a reduction in retained earnings.
ESOP contributions charged to operating expense were $2,785,000, $3,045,000 and
$2,540,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company and its subsidiaries have various bonus plans based primarily on
Company performance. Accrued and unpaid bonuses at December 31, 1995 and 1994
were $757,000 and $1,467,000, respectively.
The Company has a nonqualified, unfunded deferred compensation plan for certain
key executives providing for payments upon retirement, death or disability.
19
<PAGE>
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 $491,000,
$522,000 and $426,000 for the years ended December 31, 1995, 1994 and 1993,
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 Company does not provide other post-retirement benefits.
Note 7-Stockholders' Equity
A summary of stock options granted, exercised and expired follows:
<TABLE>
<CAPTION>
Shares Price Per Share
<S> <C> <C> <C>
Balance at January 1, 1993 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
Granted 28,000 14.00-17.75
Exercised (83,150) 3.88-13.38
Expired (10,000) 13.38
Balance at December 31, 1995 124,500 $15.20 Average Price
</TABLE>
The Company has exercisable outstanding stock options for 113,290 shares of
common stock at prices ranging from $5.50 to $21.50 a share ($14.46 average per
share) as of December 31, 1995. In May 1995, and 1994 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, 1997 and May 31,
1996, respectively. In May 1993, the Company granted stock options for up to
2,000 common shares to each of the Company's eleven directors as of that date.
The options expired on May 28, 1995.
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.
The Company issued 260,000 shares of unregistered common stock to Servo
Corporation of America in December 1994 (See Note 11).
Note 8-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, 1995, 1994
20
<PAGE>
and 1993. The Company had sales to these related entities totaling $1,477,000,
$272,000 and $398,000 for 1995, 1994 and 1993, respectively. The Company had
receivables due from these entities of $434,000 and $60,000 as of December 31,
1995 and 1994.
Note 9-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
$215,000, $164,000 and $465,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
Note 10-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 proposed 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 $1,950,000 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 liability has been accrued 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.
21
<PAGE>
Note 11-Acquisition
On February 24, 1995, the Company acquired certain assets of Serrmi Services,
Inc. (Serrmi) for approximately $1,182,000 in cash. The acquisition has been
accounted for by the purchase method of accounting and, accordingly the
operating results have been included in the Company's consolidated results of
operations from the date of acquisition. The excess of the cash paid over the
fair value of net assets acquired has been recorded as goodwill of $139,000. The
pro forma effects of the Serrmi acquisition on the consolidated financial
statements are not significant.
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 and accordingly, 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 totaled $697,000. Goodwill of
$7,967,000 is being 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) for 1994 assume the acquisition occurred
at the beginning of that year.
<TABLE>
(Dollars in thousands, except per share data)
<S> <C>
Net sales $131,024
Operating income 13,730
Net earnings 8,152
Earnings per common share 1.19
</TABLE>
Note 12-Disclosures About Fair Value of Financial Instruments
Estimates of fair values are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could affect the estimates. Except as follows,
the fair market value of the Company's financial instruments approximates the
carrying value:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
(Dollars in thousands)
Financial Liabilities:
Long-term debt:
Capital lease obligations $966 $943 $967 $938
The fair value of the Company's long-term debt is estimated using discounted
cash flow analyses, based on the Company's current incremental borrowing rate.
</TABLE>
22
<PAGE>
Harmon Industries, Inc. and Subsidiaries
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 2, 1996
23
<PAGE>
Harmon Industries, Inc. and Subsidiaries
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, 1995 and 1994, 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, 1995.
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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
February 2, 1996
24
<PAGE>
Harmon Industries, Inc. and Subsidiaries
Investor Information
Form 10-K
Shareholders may receive a copy of the Corporation's 1995 Annual
Report to the Securities and Exchange Commission on Form 10-K free of charge
by writing: Mr. Charles M. Foudree, Executive Vice President-Finance, at the
Corporation's headquarters.
Annual Meeting
Shareholders are cordially invited to attend the 1995 Annual
Meeting of Shareholders, which will be held at 2:00 p.m. on Tuesday, May 14,
1996, at the Country Club of Blue Springs, Blue Springs, Missouri.
Management urges all shareholders to vote their proxies and thus participate in
the decisions that will be made at this meeting.
Registrar & Transfer Agent
UMB Bank, n.a., P.O. Box 419226, Kansas City, Missouri 64141-6226,
816/860-7000 For change of name, address, or to replace lost stock
certificates, write or call the Securities Transfer Division.
Securities Analyst Contact
Securities analyst inquiries are welcome. Please direct them to: Mr. Charles
M. Foudree, Executive Vice President-Finance, 816/229-3345
Independent Auditors
KPMG Peat Marwick LLP, 1600 Commerce Bank Building, Kansas City, Missouri 64106
Outside Counsel
Morrison & Hecker, 2600 Grand Avenue, Kansas City, Missouri 64108-4606,
816/691-2600
Corporate Headquarters
1300 Jefferson Court, Blue Springs, Missouri 64015, 816/229-3345, Telefax:
816/229-0556
Common Stock Price Range and Dividend Information
At December 31, 1995, there were 6,805,626 shares outstanding and
approximately 675 shareholders of record. Cash dividends were resumed in 1994
at the rate of 15 cents per share per year, paid semi-annually at 7.5 cents
per share.
The range of high and low prices for the past eight quarters ended December 31,
1995 is shown below. Per share prices have been adjusted for all stock splits
and stock dividends, if any.
<TABLE>
<CAPTION>
1995
Calendar Quarter Ended Price Range
<S> <C>
March 31 $19 1/2 - $13 1/2
June 30 18 - 13 1/2
September 30 20 1/2 - 13 3/8
December 31 18 1/4 - 14
1994
Calendar Quarter Ended Price Range
<S> <C>
March 31 $24 1/4 - $19 5/8
June 30 21 7/8 - 19 1/8
September 30 22 1/2 - 19 5/8
December 31 23 1/4 - 16 1/2
</TABLE>
Stock Trading
The Company's common stock trades on The Nasdaq Stock Market under the symbol:
HRMN. Stock price quotations can be found in major daily newspapers and in The
Wall Street Journal.
At February 1, 1996, the following securities firms were making a dual auction
market in the Company's common stock: George K. Baum & Company; Piper Jaffray
Companies Inc.; and PaineWebber Inc.
25
<PAGE>
Harmon Industries, Inc. and Subsidiaries
Officers, Directors and Corporate Data
Board of Directors
Robert E. Harmon (56)
Chairman of the Board
Thomas F. Eagleton (66)
Attorney-at-Law
Thompson & Mitchell
St. Louis, Missouri
Bruce M. Flohr (57)
Chairman, President & CEO
RailTex, Inc.
San Antonio, Texas
Charles M. Foudree (51)
Executive Vice President-
Finance, Treasurer and Secretary
Rodney L. Gray (43)
Chairman & CEO
Enron International, Inc.
Houston, Texas
Herbert M. Kohn (57)
Attorney-at-Law
Bryan Cave
Kansas City, Missouri
Stephen L. Schmitz* (42)
Vice President - Controller
Harmon Industries, Inc.
Douglass Wm. List (40)
Management Consultant
Baltimore, Maryland
Gerald E. Myers (54)
Management Consultant
Tempe, Arizona
Bjorn E. Olsson (50)
President and
Chief Executive Officer
26
<PAGE>
Donald V. Rentz (57)
President
Graham Wholesale Floral
Graham, Texas
Judith C. Whittaker (57)
Vice President-Legal
Hallmark Cards, Inc.
Kansas City, Missouri
( ) Indicates age of director
*Denotes Advisory Director
Corporate Officers
Bjorn E. Olsson
President and Chief Executive Officer
Robert E. Harmon
Chairman of the Board
Charles M. Foudree
Executive Vice President-
Finance, Treasurer and Secretary
Gary E. Ryker
Executive Vice President-
Marketing, Sales and Service
Ronald G. Breshears
Vice President-
Human Resources
Richard A. Daniels
Vice President-Transit Sales
Robert E. Heggestad
Vice President-Technology
John W. Johnson
Vice President-Domestic Sales
William J. Scheerer
Vice President--Business Development
Stephen L. Schmitz
Vice President-Controller
27
<PAGE>
Subsidiaries
Consolidated Asset Management Company, Inc. (CAMCO)
Lee's Summit, Missouri
Riverside, California (2)^
J. Randall John, President
Electro Pneumatic Corporation
Riverside, California
Hauppauge, New York
Raymond A. Rosewall, President
Harmon Electronics, Inc.
Grain Valley, Missouri (3)^
Atlanta, Georgia
Jacksonville, Florida
Louisville, Kentucky
Omaha, Nebraska
Warrensburg, Missouri (2)^
Lloyd T. Kaiser, President
^ Denotes number of plants and locations
International
Harmon Industries
Lausanne, Switzerland
Henkes-Harmon Industries, Pty. Ltd.
Mooroolbark, Victoria, Australia
Vale-Harmon Enterprises, Ltd.
Saint-Laurent, Quebec, Canada
28
<PAGE>
EXHIBIT 21
HARMON INDUSTRIES INC.
FILE #0-7916
DECEMBER 31, 1995
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
Harmon Railway Systems Same Virgin Islands
International Corporation
1
<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
HARMON INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<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 14, 1996
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 approve the Company's 1996 Long-Term Incentive Plan.
4. 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 18, 1996, 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
April 1, 1996
<PAGE>
[LOGO]
1300 JEFFERSON COURT
BLUE SPRINGS, MISSOURI 64015
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 14, 1996
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 April 1,
1996. 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 14, 1996 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 18, 1996, 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 6,805,262 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 a 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 will be treated as present at the meeting for purposes of determining
a quorum but are tabulated as if no vote was cast on the matter indicated.
Directors are elected by a plurality of the votes cast. Shareholders do not have
the right to accumulate votes in the election of directors. 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 18, 1996 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 Neuberger & Berman 638,900 9%
605 Third Avenue
New York, New York 10158-3658
Common Stock ROPARBAN, Designee for MidAmerican Bank & Trust, 502,744 7%
as Trustee for the Company's ESOP
P.O. Box 1677
Lawrence, Kansas 66044
Common Stock Oppenheimer Group, Inc. 498,900(4) 7%
Oppenheimer Tower, World Financial Center
New York, New York 10281
Common Stock Wellington Management Company 346,500(5) 5%
75 State Street
Boston, Massachusetts 02109
Common Stock Charles M. Foudree 44,800(6) 1%
Common Stock Robert E. Heggestad 31,290(7) --%
Common Stock Lloyd T. Kaiser 25,415(8) --%
Common Stock Bjorn E. Olsson 42,500(9) 1%
Common Stock Gary E. Ryker 30,430(10) --%
Common Stock Beneficial ownership of all officers and 672,242 10%
directors as a group (22 in group)
</TABLE>
(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. Shares in the ESOP allocated to Messrs. Foudree, Heggestad,
Kaiser, Olsson and Ryker and all officers and directors as a group were
4,614; 3,795; 1,373; 1,356; 333 and 29,186 shares, respectively.
(2) Rounded to the nearest whole percentage. Percentages are calculated on
6,977,416 shares representing the total of 6,805,626 outstanding shares and
171,790 shares for unexercised director and ISOP options.
(3) Neuberger & Berman has sole voting power over 392,400 shares, shared voting
power over 120,000 shares and shared dispositive power over 638,900 shares.
(4) Oppenheimer Group, Inc. has shared voting power and shared dispositive power
over 498,900 shares.
2
<PAGE>
(5) Wellington Management Company has shared voting power over 162,500 shares
and shared dispositive power over 346,500 shares.
(6) 25,500 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 option shares.
(7) 27,790 shares are held by Robert E. Heggestad with sole voting and
dispositive power. The remainder represent unexercised ISOP options.
(8) 15,415 shares are held by Lloyd T. Kaiser with sole voting and dispositive
power. The remainder represent unexercised ISOP options.
(9) 32,500 shares are held by Bjorn E. Olsson with sole voting and dispositive
power. The remainder represent unexercised options.
(10) 1,650 shares are owned by Gary E. Ryker, 1,000 shares are held in an IRA
account and 2,200 shares are held in a trust with sole voting and
dispositive power. 565 shares are held by his daughter for whom he disclaims
beneficial ownership. The remainder represent unexercised ISOP options.
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 one late filing of such
forms for an insignificant transaction by a person 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 1995,
the Board of Directors held nine 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 (Chair), Bruce M. Flohr and Judith C. Whittaker. The Committee
met two times during 1995. The Committee will consider proposed director
candidates submitted by shareholders. Proposals for the 1997 election must be
received in writing by the Company not later than 90 days prior to the next
shareholders' meeting.
The Audit Committee of the Board of Directors is composed of Judith C.
Whittaker (Chair), Thomas F. Eagleton, Herbert M. Kohn and Gerald E. Myers. 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 three times in 1995.
The Compensation Committee was composed of Rodney L. Gray (Chair), Donald V.
Rentz, Bruce M. Flohr and Douglass Wm. List during 1995. 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 1995, the Compensation Committee met three
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 66 Since 1987, University Professor of 05/03/88 --% 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 57 Since 1977, Chairman of RailTex, Inc. 05/11/93 -- % 6,000
Charles M. Foudree 51 Executive Vice President-Finance of 07/27/72 1 % 44,800 (3)
the Company since Sept. 1986.
Treasurer of the Company since 1974.
Secretary of the Company since 1982.
Rodney L. Gray 43 Since June 1993, Chairman and Chief 05/11/93 -- % 7,000
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 57 Chairman of the Board of the Company 10/02/61 4 % 257,739 (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 57 From June 1991, a partner in the law 09/01/85 -- % 33,100
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 40 Since January 1988, President, List & 05/08/90 -- % 16,500
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)
- ------------------------ ----------- -------------------------------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Gerald E. Myers 54 Self-employed management consultant 05/03/88 1% 36,918(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 Execu-
tive Officer of General Semiconductor
Industries, Inc. (a wholly-owned
subsidiary of Square D) from July
1985.
Bjorn E. Olsson 50 President and Chief Executive Officer 05/06/86 1% 42,500(6)
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 57 President of Graham Wholesale Floral 09/09/70 --% 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 57 Since 1992, Vice-President-Legal, of 05/11/93 --% 6,000
Hallmark Cards, Incorporated; prior to
that, Associate General Counsel of
Hallmark Cards, Inc. since 1978; from
1988 to 1992, also Vice-President/Gen-
eral Counsel of Univision Holdings,
Incorporated, a subsidiary of Hallmark
Cards, Incorporated.
</TABLE>
(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 shared voting
rights. Shares in the ESOP allocated to Messrs. Foudree and Olsson were
4,614; and 1,356 shares, respectively.
5
<PAGE>
(2) Percentages shown are rounded to the nearest whole percentage. Percentages
are calculated on 6,977,416 shares representing the total of 6,805,626
outstanding shares and 171,790 shares for unexercised director and ISOP
options.
(3) 25,500 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.
(4) Does not include 5,500 shares owned by his wife for which Robert E. Harmon
disclaims beneficial ownership.
(5) Includes 32,743 shares which are held in a living trust.
(6) 32,500 shares are held by Bjorn E. Olsson with sole voting and dispositive
power. The remainder represent unexercised options.
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 publicly-held 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.
6
<PAGE>
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 (together hereafter referred to as
the "named executive officers") for the fiscal years ended December 31, 1995,
1994 and 1993:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
---------------------------------------
OTHER ANNUAL
FISCAL SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(2) ($)(3) ($)
- ----------------------------------- ------ ------- ------- ------------
<S> <C> <C> <C> <C>
Bjorn E. Olsson 1995 264,747 -0- --
President & CEO 1994 219,285 112,914 --
1993 191,487 89,400 --
Charles M. Foudree 1995 163,281 -0- --
Executive V.P. - Finance, 1994 157,505 77,514 --
Secretary and Treasurer 1993 145,736 69,100 --
Lloyd T. Kaiser 1995 151,821 -0- --
President, Harmon 1994 132,931 52,914 --
Electronics, Inc. 1993 109,309 63,600 --
Gary E. Ryker 1995 148,258 -0- --
V.P. - Marketing and Sales 1994 140,989 73,714 --
1993 133,824 69,100 --
Robert E. Heggestad 1995 129,352 -0- --
V.P. - Technology 1994 122,661 61,014 --
1993 108,503 52,500 --
<CAPTION>
LONG TERM COMPENSATION
----------------------------------
AWARDS
------------------------ PAYOUTS
RESTRICTED -------
STOCK OPTIONS (# LTIP ALL OTHER
AWARD(S) OF SHS.) PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION ($)(4) (5) ($) ($)(6)
- ----------------------------------- ---------- ----------- ------- ------------
<S> <C> <C> <C> <C>
Bjorn E. Olsson -- 3,500 -0- 44,339
President & CEO -- 2,000 -0- 47,091
-- 3,000 -0- 36,547
Charles M. Foudree -- 3,500 -0- 70,470
Executive V.P. - Finance, -- 2,000 -0- 71,379
Secretary and Treasurer -- 2,000 -0- 60,815
Lloyd T. Kaiser -- -0- -0- 22,317
President, Harmon -- -0- -0- 22,510
Electronics, Inc. -- -0- -0- 14,150
Gary E. Ryker -- -0- -0- 23,712
V.P. - Marketing and Sales -- -0- -0- 25,342
-- -0- -0- 8,922
Robert E. Heggestad -- -0- -0- 85,652
V.P. - Technology -- -0- -0- 89,984
-- -0- -0- 75,422
</TABLE>
(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.
(2) Salary includes amounts deferred under the Company's 401(k) at the election
of the named executive officer.
(3) Bonus may include 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. These amounts represent stock bonus awards for the prior year.
At year end 1995, the aggregate restricted stock holdings and values based
on year-end price of $15.75 per share of Messrs. Heggestad, Kaiser and Ryker
were 550 shares ($8,663); 550 shares ($8,663); and 550 shares ($8,663),
respectively.
(5) Includes grants of options under the Company's 1990 Incentive Stock Option
Plan, as well as annual awards to Messrs. Olsson and Foudree of options on
2,000 shares under the Company's non-qualified 1988 Director Option Plan for
each of 1993, 1994 and 1995.
(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 1995 to the Company's ESOP for Messrs. Olsson, Foudree,
Kaiser, Ryker and Heggestad were $12,379 for each participant. The balance
shown for each in the column represented allocation of contributions for
such named executive officers to the Company's Deferred Compensation Plan.
(See discussion under the heading "Pension Plan" below.)
7
<PAGE>
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.
During 1995, two of the named executive officers received a grant of stock
options under the Company's 1990 Incentive Stock Option Plan. The Company has no
outstanding Stock Appreciation Rights (SARs). The following table contains
information concerning the grant of stock options under the Company's 1990
Incentive Stock Option Plan (number shown to left of semicolon) and under the
Company's non-qualified 1988 Director Option Plan (number shown to the right of
semicolon) to the named executive officers (see discussion below under "Director
Compensation" below):
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- ---------------------------------------------------------------------------------------- VALUE AT ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK PRICE
OPTIONS APPRECIATION FOR OPTION
OPTIONS GRANTED TO EXERCISE OR TERM(3)
GRANTED (1) (# EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME OF SHARES) FISCAL YEAR ($/SH) (2) DATE(1) 5% 10%
- -------------------------- -------------- -------------- -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bjorn E. Olsson 1,500;2,000 25.0;9.1 14.00;17.75 4/3/00; $ 5,802; $ 12,821;
5/31/97 $ 3,639 $ 7,455
Charles M. Foudree 1,500;2,000 25.0;9.1 14.00;17.75 4/3/00; $ 5,802; $ 12,821;
5/31/97 $ 3,639 $ 7,455
Lloyd T. Kaiser -0- N/A N/A N/A N/A N/A
Gary E. Ryker -0- N/A N/A N/A N/A N/A
Robert E. Heggestad -0- N/A N/A N/A N/A N/A
</TABLE>
(1) In their capacities as directors of the Company, on May 31, 1995, Messrs.
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.
Messrs. Olsson and Foudree received 1,500 shares pursuant to an ISOP option
grant in 1995 in lieu of the stock bonus for 1994.
(2) The exercise price equals the fair market value of the underlying shares on
the date of grant. ISOP options are exercisable immediately upon grant
unless delays are necessary to avoid the statutory limitations on grants
established under the Internal Revenue Code. ISOP options are exercisable
anytime during a five-year period from date of grant or the date on which
the option was first exercisable. Director options are exercisable anytime
during a two-year period from date of grant.
(3) These amounts represent certain assumed rates of appreciation only and may
have no correlation to current or future actual market conditions.
8
<PAGE>
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 of the semicolon) and the Company's
non-qualified 1988 Director Option Plan (numbers to the right of the semicolon):
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE (IN $) OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SHARES OPTIONS AT
AT 12/31/95 12/31/95(2)(3)
NUMBER OF SHARES
ACQUIRED ON VALUE (IN $) ISOP; DIRECTOR ISOP; DIRECTOR
NAME EXERCISE REALIZED(1) OPTIONS OPTIONS
- ---------------------------------------- ------------------ --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Bjorn E. Olsson -0-;2,000 -0-;8,750 2,500;4,000 2,625;-0-
Charles M. Foudree -0-;-0- -0-;-0- 1,500;4,000 2,625;-0-
Lloyd T. Kaiser 9,500;N/A 98,515;N/A 6,500;N/A 66,625;N/A
Gary E. Ryker -0-;N/A -0-;N/A 22,000;N/A 165,000;N/A
Robert E. Heggestad -0-;N/A -0-;N/A -0-;N/A -0-;N/A
</TABLE>
(1) Market price at exercise less exercise price.
(2) All outstanding options shown are currently exercisable. There are no SARs.
(3) Market price at 12/31/95 ($15.75) less exercise price.
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 1995 was approximately
$491,000 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 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, 1993, 1994 and 1995 totalled $2,540,000; $3,045,000 and
$2,785,000, 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.
9
<PAGE>
CANCELLATION AND REGRANT OF OPTIONS.
During 1995, the Company did not cancel, regrant or reprice any outstanding
stock options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Mr. Rodney L. Gray (Chairman), Mr. Douglass Wm. List, Mr. Bruce M. Flohr and
Mr. Donald V. Rentz served on the Compensation Committee of the Company for the
past fiscal year. 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. Olsson, Foudree, Kaiser, Ryker and Heggestad had employment
contracts with the Company during 1995 which provide for the payment to such
officers of annual base salaries of $262,500, $158,650, $148,000, $144,758 and
$122,929, respectively. The employment contracts have a rolling 12-month term.
For the year ended December 31, 1995, these officers' contracts included an
annual cash bonus. (See description below under "Compensation Committee Report
on Bonuses".) No bonuses were paid to any of the named executive officers in
1995 under the cash bonus plan.
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 normally has been 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 1995, a bonus accrued for 1994 was paid
to each of thirteen individuals, which bonus was valued at $10,514. This bonus
consisted of either (i) $5,316 in cash and 550 shares of the Company's
restricted stock, valued at $5,198 or (ii) 1,500 option shares under the 1990
ISOP with an exercise price of $14.00 per share. During 1996, ISOP options for
3,500 shares were granted to each of eleven executive officers effective
February 27, 1996 at an exercise price of $14.25 per share in lieu of the 1995
stock bonus. (See discussion in the Compensation Committee Report under
"Bonuses" below.)
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION.
RESPONSIBILITIES AND COMPOSITION OF THE COMMITTEE
The Compensation Committee is responsible for (i) establishing compensation
programs for executive officers of the Company and its subsidiaries designed to
attract, motivate and retain key executives responsible for the success of
Company as a whole; (ii) administering and maintaining such programs in a manner
that will benefit the long-term interests of the Company and its shareholders;
and (iii) determining the compensation of the Company's executive officers and
certain key employees. The Committee serves pursuant to a charter adopted by the
Board of Directors. The Committee is composed entirely of directors who have
never served as officers of the Company.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Committee believes that the Company's executive officer compensation
should be determined according to a competitive framework and based on overall
financial results, individual contributions and teamwork that together help
build value for the Company's shareholders. Within this overall philosophy the
Committee addresses a number of specific objectives, including (i) a total
compensation program that takes into account compensation practices and
financial performance as compared to similar companies, (ii) annual bonus
programs that take into account the Company's overall performance relative to
corporate objectives established in advance by the Committee which help create
value for the Company's shareholders, (iii) alignment of the financial interests
of executive officers to those of shareholders by providing equity based
compensation through option grants and through mandatory minimum shareholding
requirements.
10
<PAGE>
The Committee believes that the top management of the Company 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.
COMPENSATION COMPONENTS AND PROCESS
There are three major components of the Company's executive officer
compensation: (i) base salary; (ii) annual bonuses and (iii) equity incentives
through ISOP option grants and minimum shareholding requirements. The Committee
currently utilizes periodic option grants under the Company's 1990 Incentive
Stock Option Plan ("ISOP"). Subject to approval by the shareholders, the
Committee anticipates replacing the current ISOP plan and the 1988 Director
Option Plan with a new 1996 Long Term Incentive Plan which will facilitate the
granting of annual incentive options vesting over five-year periods. The
Committee proposes to begin use of this plan during 1996, if approved, and the
plan would operate to cover both the executive officer group, as well as a
fairly extensive key employee group. See discussion under "Proposal to Adopt the
1996 Long-Term Incentive Plan."
The process utilized by the Committee in determining executive officer
compensation levels for all of these components is based on the Committee's
objective judgment and takes into account both qualitative and quantitative
factors. Except as specifically set forth under the "Bonus" discussion below, no
predetermined weights are assigned to such factors with respect to any
compensation component. 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 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. Among the factors
considered by the Committee are the recommendation of the Chief Executive
Officer with respect to compensation of the Company's other key executive
officers. However, the Committee makes the final compensation decisions
concerning such officers.
Comparative information utilized by the Company relates to Peer Group (as
set forth below under the section herein dealing with the "Performance Graph").
In addition, the Committee reviews at least two other surveys of industry trade
groups with similarity to the Company's operations. The trade group survey data
sources are standard general indices constructed and provided by outside
vendors. The surveys consist of many more data points than the limited number of
companies in the peer performance stock group. In making compensation decisions,
the Committee also from time to time receives assessments and advice regarding
the compensation practices of the Company and others from independent
compensation consultants. During 1995, 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, the electronic equipment manufacturing
industry and the greater Kansas City area.
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 base salaries for similar
positions at companies with similar levels of sales and overall financial
performance. Annual cash bonus and equity awards, 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.
11
<PAGE>
BASE SALARY.
On August 10, 1995, the Committee conducted a review of the performance and
compensation of the Company's executive officer group, including Bjorn E. Olsson
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
performance. Based on this review and its assessment of competitive compensation
practices, the Committee recommended an increase in base salaries of 5% for the
executive officers and key employees (including the other named executive
officers). The new base salary levels for all executives were established by the
Committee and presented to the Board of Directors at its August 1995 meeting and
were effective September 1, 1995.
BONUSES.
On December 7, 1994, the Committee approved a modification of the prior
executive cash bonus plan of the Company effective for fiscal 1995. The
Committee referred to the Mercer Executive Compensation Review of 1994 and
recommendations contained in that report. This new format was created to include
not only the traditional ROCE measurement standard, but also earnings growth as
a critical indicator of financial health of the Company. The prior plan had been
based solely on ROCE performance. 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. The Committee
believes that the cash bonus plan encourages the creation of shareholder wealth
by creating incentives both to maximize operating profit for the Company and
minimize capital employed. Additionally, the cash bonus plan rewards
efficiencies in production and innovation in quality-based productivity
techniques. The new executive cash bonus plan is based on 70% weighting for ROCE
and 30% weighting for earnings growth. The formula for ROCE (Return on Capital
Employed) is the sum of pretax earnings plus interest expense divided by the sum
of average total assets minus non-interest bearing liabilities. 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. For 1995, the base bonus levels
established for Messrs. Olsson, Foudree, Kaiser, Ryker and Heggestad were
$112,500; $52,883; $49,350; $48,252; and $35,122, respectively. 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 was 20%. The growth target for fiscal 1996 is 10%.
For 1995, budgeted ROCE was 33.4% and actual ROCE was 21.7%. Targeted
earnings growth was 20% and actual primary earnings growth was -12.9%. Hence, no
amounts were payable under the cash bonus plan for 1995 to any participants,
including the named executive officers.
All of the executive officers of the Company, including the named executive
officers, have historically participated in a stock bonus plan. The bonus was
based on a percentage of pre-tax consolidated profits set by the plan at 1%. The
percentage has not been significantly changed since the plan was established in
1987. The plan included a fixed percentage but no range of minimum or maximum
levels were set in the plan. A portion of the stock bonus was normally paid in
shares of Harmon stock which were subject to a two-year trading restriction and
were valued at fair market value at time of issuance. The remainder of the bonus
was normally paid in cash to help offset the individual's income tax expense
associated with the bonus. The stock bonus for 1994 (paid in 1995) was
$10,514.00 for
12
<PAGE>
each of thirteen officers. The stock bonus was paid as either (i) $5,316 in cash
and $5,198 represented by 550 restricted shares of common stock of the Company,
or (ii) ISOP options for 1,500 shares. The decision of payment of the stock
bonus in the form of an option was believed to be consistent with the goal of
increasing the common stock ownership of the Company's executive officers. To
the extent that an officer received ISOP options, there was no current cost to
fund the grant and there was no tax deduction for the Company at the time of the
grant of the option. During 1995, the Committee decided to recommend replacement
of the stock bonus plan incorporating the value of this plan into a new
long-term incentive plan tied to stock ownership requirements. See discussion
under the "Proposal to Adopt the 1996 Long-Term Incentive Plan" below. See
discussion below under "Incentive Stock Option Plan" for ISOP grants in 1996 in
lieu of the stock bonus for 1995.
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 1995 except for 1,500 shares to each of Messrs.
Olsson and Foudree in lieu of their annual stock bonus for 1994. See above
"Bonuses." 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.
On February 27, 1996, ISOP options of 3,500 shares were granted to each of
11 executive officers of the Company (including the named executive officers) in
lieu of the stock bonus for 1995. The exercise price was $14.25 per share. The
February 1996 ISOP grants were made under the 1990 ISOP Plan in a manner
consistent with the new 1996 Plan which shareholders are being asked to approve
at this meeting.
MINIMUM STOCKHOLDING REQUIREMENT.
During 1995, the Compensation Committee, with the Board of Director's
approval, established a minimum stockholding requirements for Company stock
(exclusive of ISOP and unexercised option shares) in amounts equal to two times
base salary for the CEO, one-time base salary for the Executive Vice Presidents
and the President of the Company's subsidiary, Harmon Electronics, Inc. and
one-half of base salary for all other members of the Executive Officer Group,
including Presidents of the other subsidiaries. For any person subject to the
minimum stockholding requirements who holds less than the minimum stockholding
requirement, the delinquency will result in up to one-third of that person's
annual cash bonus being utilized to purchase shares of the Company's stock in
the name of such individual. New officers will be given five years in which to
satisfy their minimum shareholding requirement before application of the bonus
withholding procedure.
Rodney L. Gray (Chair) Douglass Wm. List
Bruce M. Flohr Donald V. Rentz
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 $128.6
Million to $2,473.7 Million, as compared to $132.5 Million for the Company.
Total Assets for these companies range from $82.2 Million to $1,955.2 Million,
as compared to $82.2 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;
13
<PAGE>
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, 1991.
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, INC. PEER GROUP S&P 500
<S> <C> <C> <C>
1990 100.00 100.00 100.00
1991 141.38 123.89 130.34
1992 331.03 149.29 140.25
1993 634.48 200.68 154.32
1994 542.20 187.27 156.42
1995 441.69 185.98 214.99
</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. Effective May
14, 1996, only non-employee directors will receive annual directors fees. 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 chair of the
respective committees of the Board of Directors receives an annual payment of
$500 for acting as chair 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. 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
14
<PAGE>
1994, other 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 May 31, 1995, options for 2,000 shares were granted to each of the
directors, which options expire May 31, 1997 and have an exercise price of
$17.75 per share. During 1995, other outstanding director options for 1,000
shares were exercised by Ms. Whittaker and director options for 2,000 shares
each were exercised by Messrs. Olsson, List, Flohr, Myers and Gray. See
discussion below under "Proposal to Adopt the 1996 Long-Term Incentive Plan" for
a description of a proposed replacement of the 1988 Directors Option Plan
subject to shareholders approval of the new 1996 LTIP.
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 Chairman of the Board is treated as a Non-Employee Director
for annual and director meeting fees. The defined 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 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 fee, subject to review each year, was
approximately $147,000 for fiscal 1995 and will be $74,000 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 1996 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.
PROPOSAL TO ADOPT THE 1996 LONG-TERM INCENTIVE PLAN
GENERAL.
The Board of Directors is proposing the Harmon Industries, Inc. 1996
Long-Term Incentive Plan (the "1996 Plan") for stockholder approval. The
purposes of the 1996 Plan are (i) to align the interests of the Company's
shareholders and recipients of awards under the 1996 Plan by increasing the
proprietary interests of such recipients in the Company's growth and success and
(ii) to advance the interests of the Company by attracting and retaining
officers, other employees and non-employee directors. If adopted, the 1996 Plan
will supplant and replace both the Company's 1988 Non-Qualified Director Option
Plan and the Company's 1990 Qualified Incentive Stock Option Plan. The 1988 Non-
Qualified Director Option Plan ("1988 Director Plan") provides for annual grant
of options on 2,000 shares of stock to each director and that plan has 69,000
shares remaining for exercise. The 1990 Qualified Incentive Stock Option Plan
("1990 ISOP") has 178,375 shares available for grant. If the 1996 Plan is
approved, existing outstanding options under both the 1988 Director Plan and the
1990 ISOP will remain effective, but both plans will be frozen so that no new
options may be granted under either plan. Under the 1996 Plan, the Company may
grant to officers and other employees non-qualified stock options, incentive
stock options (within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code")), stock appreciation rights ("SARs"), restricted
stock, bonus stock and performance shares. On the last business day of May
following each annual meeting of stockholders of the Company, commencing with
the 1996 Annual Meeting of Stockholders, 1,000 shares of Common Stock will be
granted automatically to the non-employee directors of the Company immediately
following such annual meeting. All employees of the Company and its subsidiaries
(approximately 1,075 persons) and non-employee directors (currently 9) are
eligible to participate in the 1996 Plan. Reference is made to Exhibit A of this
Proxy Statement for the complete text of the 1996 Plan which is summarized
below.
15
<PAGE>
STOCKHOLDER VOTE REQUIRED AND BOARD OF DIRECTORS RECOMMENDATION.
Unless otherwise instructed, the proxy holders will vote the proxies
received by them FOR approval of the 1996 Plan. Approval of the 1996 Plan
requires the affirmative vote of the majority of the shares of common stock
present or represented by Proxy at the annual meeting. Abstentions and broker
non-votes will not be counted as votes cast. The Board of Directors recommends a
vote FOR approval of the Harmon Industries Inc. 1996 Long-Term Incentive Plan.
DESCRIPTION OF THE 1996 PLAN
ADMINISTRATION.
The 1995 Plan will be administered by the Compensation Committee (the
"Committee") of the Board of Directors consisting of not less than three
directors who are not eligible to receive discretionary awards under the 1996
Plan or any other plan of the Company.
Subject to the express provisions of the 1996 Plan, and except for shares
awarded to non-employee directors, the Committee will have the authority to
select eligible officers and other employees who will receive awards and
determine all of the terms and conditions of each award. Each award will be
evidenced by a written agreement containing such provisions not inconsistent
with the 1996 Plan as the Committee shall approve. The Committee will also have
authority to prescribe rules and regulations for administering the 1996 Plan and
to decide questions of interpretation or application of any provision of the
1996 Plan. Except with respect to grants to officers of the Company, the
Committee may delegate some or all of its power and authority to administer the
1996 Plan to the Chief Executive Officer or other executive officer of the
Company.
AVAILABLE SHARES.
Under the 1996 Plan, the number of shares of Common Stock available for
grants of awards, other than incentive stock options, to officers, other
employees and non-employee directors in any calendar year will be 1.15% of the
outstanding Common Stock as of January 1 of such year beginning January 1, 1996,
plus the number of shares which shall have become available for grants of
awards, other than incentive stock options, under the 1996 Plan in prior years
but which shall not have become subject to such an award in any prior year. The
number of shares of Common Stock available for grants of incentive stock options
under the 1996 Plan in any calendar year, beginning with calendar year 1996 is
approximately 80,000 shares. Up to 80,000 shares of the Common Stock of the
Company in the aggregate may be purchased for allocation under the 1996 Plan
during the term of the 1996 Plan. The purchase of shares under this provision
must be approved by the Committee after consultation with counsel and notice to
the Board of Directors prior to the purchase. This use of such purchased shares
is intended to be essentially non-dilutive. The number of shares available under
the 1996 Plan is subject to adjustment in the event of a stock split, stock
dividend, recapitalization, reorganization, merger or other similar event or
change in capitalization. In general, shares covered by an option, SAR or other
award that expires or terminates unexercised or is cancelled or forfeited would
again be available for awards under the 1996 Plan. The maximum number of shares
of Common Stock with respect to which options and SARs may be granted during any
calendar year to any individual participant in the 1996 Plan is 50,000, subject
to adjustment as described above.
CHANGE IN CONTROL.
In the event of certain acquisitions of 20% or more of the then outstanding
shares of Common Stock, a change in the Board of Directors resulting in the
incumbent directors ceasing to constitute at least two-thirds of the Board of
Directors, the approval by stockholders of a reorganization, merger or
consolidation (unless the Company's stockholders receive 60% or more of the
stock of the resulting company) or the approval by stockholders of a
liquidation, dissolution or sale of all or substantially all of the Company's
assets, all awards will be cashed-out by the Company except, in the case of a
merger
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<PAGE>
or similar transaction in which the stockholders receive publicly traded common
stock, all outstanding options and SARs will become exercisable in full, all
other awards will vest, and each option, SAR and other award will represent a
right to acquire the appropriate number of shares of common stock received in
the merger or similar transaction.
EFFECTIVE DATE, TERMINATION AND AMENDMENT.
If approved by stockholders, the 1996 Plan will become effective as of May
31, 1996, following the date of approval by the shareholders and will terminate
5 years thereafter, unless terminated earlier by the Board of Directors. The
Board of Directors may amend the 1996 Plan at any time except that, without the
approval of the stockholders of the Company, no amendment may, among other
things (i) increase the number of shares of Common Stock available under the
1996 Plan, (ii) reduce the minimum purchase price of a share of Common Stock
subject to an option or the base price of an SAR or (iii) extend the term of the
1996 Plan. The 1996 Plan provides that the Committee has discretionary authority
each year to select participants and to elect the amount of and form of
compensation within limits established by the 1996 Plan.
NON-QUALIFIED STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.
The period for the exercise of a non-qualified stock option or SAR, the
exercise price of an option and the base price of an SAR will be determined by
the Committee, provided that, in either case, the price may not be less than the
fair market value of the Common Stock on the date of grant. The exercise of an
SAR entitles the holder thereof to receive (subject to withholding taxes) shares
of Common Stock (which may be restricted stock), cash or a combination thereof
with a value equal to the difference between the fair market value of the Common
Stock on the exercise date and the base price of the SAR.
In the event of termination of employment of a holder of a non-qualified
stock option or SAR for any reason other than for retirement on or after age 55,
disability, death, voluntary termination by such holder or termination by the
Company for cause, each non-qualified stock option and SAR will be exercisable
only to the extent that such option or SAR is exercisable on the effective date
of such termination and may thereafter be exercised after the date of such
termination until the earlier of the date set forth in the agreement relating to
such option or SAR and the expiration of such option or SAR. In the event of
termination of employment by reason of retirement on or after age 55, disability
or death, each nonqualified stock option and SAR will become fully exercisable
and may thereafter be exercised by such holder or such holder's executor,
administrator or similar person until the earlier of the date set forth in the
agreement relating to such option or SAR and the expiration of such option or
SAR. In the event of voluntary termination of employment by the holder of a
non-qualified stock option or SAR or the involuntary termination of employment
of such holder by the Company for cause, each non-qualified stock option and SAR
will terminate on the date of such termination of employment. If the holder of a
non-qualified stock option or SAR dies during the period of exercisability of
such option or SAR following termination of employment for any reason other than
voluntary termination or termination for cause, each non-qualified stock option
or SAR will be exercisable only to the extent that such option or SAR was
exercisable on the date of such holder's death and may thereafter be exercised
until the earlier of the dat set forth in the agreement relating to such option
or SAR and the expiration of such option or SAR.
INCENTIVE STOCK OPTIONS.
No incentive stock option will be exercisable more than 10 years after its
date of grant, and in the case of a recipient of an incentive stock option who
owns more than 10 percent of the voting power of all shares of capital stock of
the Company (a "ten percent holder"), the option must be exercised within five
years of its date of grant. The option exercise price of an incentive stock
option will not be less than the fair market value of the Common Stock on the
date of grant of such option, and, in the case of a recipient of an incentive
stock option who is a ten percent holder, the option exercise price will be the
price required by the Code, currently 110% of fair market value. To the extent
that the aggregate fair market value of Common Stock with respect to which an
incentive stock option is
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<PAGE>
exercisable for the first time by any individual during a calendar year exceeds
$100,000, such option is treated as a non-qualified stock option. In the event
of termination of employment of a holder of an incentive stock option by reason
of retirement on or after age 55, such option (including any related, in tandem
SAR) will become fully exercisable and may thereafter be exercised until the
earlier of three months after such retirement and the expiration of such
incentive stock option or SAR. In the event of termination of employment of a
holder of an incentive stock option by reason of permanent and total disability
(as defined in section 22(e)(3) of the Code), such option (including any related
tandem SAR) will become fully exercisable and may thereafter be exercised until
the earlier of one year (or such shorter period set forth in the agreement
relating to such option or SAR) after such termination and the expiration of
such incentive stock option or SAR. In the event of termination of employment by
reason of death, each incentive stock option, (including any related tandem SAR)
will become fully exercisable and may thereafter be exercised by such holder's
executor, administrator or similar person until the earlier of the date set
forth in the agreement relating to such option or SAR and the expiration of such
option or SAR. In the event of voluntary termination of employment by the holder
of an incentive stock option or the involuntary termination of employment of
such holder by the Company for cause, each incentive stock option (including any
related tandem SAR) will terminate on the date of such termination of
employment. In the event of a termination of employment for any reason other
than retirement on or after age 55, permanent and total disability, death, cause
or voluntary termination, each incentive stock option (including any related
tandem SAR) will be exercisable only to the extent such option or SAR is
exercisable on the effective date of such termination and may thereafter be
exercised until the earlier of three months after such termination and.the
expiration of such incentive stock option or SAR. If the holder of an incentive
stock option dies during the one-year period following termination of employment
and such termination was by reason of permanent and total disability, or during
the three-month period following,termination of employment for any reason, other
than permanent and total disability, death, cause or voluntary termination, each
incentive stock option (including any related tandem SAR) will be exercisable
only to the extent such option or SAR is exercisable on the date of the holder's
death and may thereafter be exercised until the earlier of the date set forth in
the agreement relating to such option or SAR and the expiration of such option
or SAR.
BONUS STOCK AND RESTRICTED STOCK AWARDS.
The 1996 Plan provides for the grant of (i) bonus stock awards, which are
vested upon grant, and (ii) stock awards which may be subject to a restriction
period ("restricted stock"). An award of restricted stock may be conditioned
upon or subject to, attainment of preestablished performance measures, If a
restricted stock award is tied to performance measures, the fair market value of
the Common Stock subject to such an award granted to a "covered employee" within
the meaning of Section 162(m) of the Code will not exceed $2,000,000 at the time
the performance measures are satisfied, if such a limitation is necessary to
ensure the deductibility of the award. Shares of restricted stock will be
non-transferable and subject to forfeiture it,the holder does not remain
continuously in the employment of the Company during the restriction period or,
if the restricted stock is subject to performance measures, if such performance
measures are not attained during the restriction period; provided, however, that
in the event of termination of employment, any cancellation or forfeiture of the
portion of a restricted stock award which is then subject to a restriction
period will be subject to the terms set forth in the agreement relating to such
award. Unless otherwise determined by the Committee, the holder of a restricted
stock award will have rights as a stockholder of the Company, including the
right to vote and receive dividends with respect to shares of restricted stock.
PERFORMANCE SHARE AWARDS.
The 1996 Plan also provides for the grant of performance shares. Each
performance share is a right, contingent upon the attainment of performance
measures within a specified performance period, to receive one share of Common
Stock, which may be restricted stock, or the fair market value of such
performance share in cash. Prior to the settlement of a performance share award
in shares of Common Stock, the holder of such award will have no rights as a
stockholder of the Company with
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<PAGE>
respect to the shares of Common Stock subject to the award. Performance shares
will be nontransferable and subject to forfeiture if the specified performance
measures are not attained during the applicable performance period; provided,
however, that in the event of termination of employment, any cancellation or
forfeiture of the portion of a performance share award which is then subject to
a performance period will be subject to the terms set forth in the agreement
relating to such award. If an employee who has been granted a Performance Share
Award is a "covered employee" within the meaning of Section 162(m) of the Code
at the time of settlement of such award, (the maximum amount payable under such
award shall be $2,000,000.)
PERFORMANCE MEASURES.
Under the 1996 Plan, the vesting or payment of performance share awards and
the vesting of certain awards of restricted stock may be subject to the
satisfaction of certain performance measures. All officers and other employees
are eligible to be selected by the Committee to receive such awards. The
performance measures applicable to a particular award will be determined by the
Committee. No such awards are currently outstanding and, no performance measures
have been designated by the Committee. Under the 1996 Plan, such performance
measures may include criteria selected by the Committee including, but not
limited to, one or more of the following: Common Stock value, earnings per
share, return on capital employed, return to stockholders (including,
dividends), return on equity, earnings of the Company, revenues, market share,
cash flow, cost reduction measures or any combination of the foregoing. If the
performance measure or measures applicable to a performance share award is
satisfied, the holder of the award would receive the number of shares of Common
Stock equal to the performance shares subject to the award.
VESTING.
Under the 1996 Plan, the Committee may establish vesting criteria for the
grant of options. The Committee currently anticipates that the initial grants
under the Plan will consist of non-qualified options with vesting over a
five-yer period from the date of grant so that 20% of the grant amount will vest
each year. The Committee currently anticipates that grants to officers will be
in the amount of 3,500 per year so that 700 shares of each grant will vest over
the following five years from the date of grant. For participants within the Key
Employee Group, the Committee currently anticipates grants of 500 shares with
100 shares vesting for each of five years following the date of grant. Options
granted to Non-Employee Directors pursuant to the 1996 Plan will immediately
vest and have a term of seven years for exercise.
NON-EMPLOYEE DIRECTOR SHARES.
Under the 1996 Plan, the last business day of May commencing May 31, 1996
(or if later on the date on which a person is first elected or begins to serve
as a non-employee director, other than by reason of termination of employment),
and, thereafter, on the date of each annual meeting of stockholders of the
Company, each person who is a non-employee director after such meeting of
stockholders shall be granted 1,000 shares of Common Stock (which amount shall
be pro-rated if such non-employee director is first elected or begins to serve
as a non-employee director on a date other than the date of an annual meeting of
stockholders). The annual amount of shares awarded shall be subject to
adjustment in the event of a stock split, stock dividend, recapitalization,
reorganization, merger or other similar event or change in capitalization,
FEDERAL INCOME TAX CONSEQUENCES.
The following is a brief summary of the U.S. federal income tax consequences
of awards made under the 1996 Plan.
1. STOCK OPTIONS. A participant will not recognize any income upon the
grant of a stock option. A participant will recognize compensation taxable as
ordinary income (and subject to income tax withholding) upon exercise of a
non-qualified stock option equal to the excess of the fair, market value of the
shares purchased over their exercise price, and the Company will be entitled to
a corresponding deduction. A participant will not recognize income (except for
purposes of the alternative minimum tax) upon exercise of an Incentive Stock
Option. If the shares acquired by exercise of an
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<PAGE>
Incentive Stock Option are held for the longer of two years from the date the
option was granted and one year from the date it was exercised, any gain or loss
arising from a subsequent disposition of such shares will be taxed as long-term
capital gain or loss, and the Company will not be entitled to any deduction. If,
however, such shares are disposed of within the above-described period, then in
the year of such disposition the participant will recognize compensation taxable
as ordinary income equal to the excess of the lesser of (i) the amount realized
upon such disposition and (ii) the fair market value of such shares on the date
of exercise over the exercise price, and the Company will be entitled to a
corresponding deduction.
2. SARS. A participant will not recognize any taxable income upon the
grant of an SAR. A participant will recognize compensation taxable as ordinary
income (and subject to income tax withholding) upon exercise of a SAR equal to
the fair market value of any shares delivered and the amount of cash paid by the
Company upon such. exercise, and the Company will be entitled to a corresponding
deduction.
3. RESTRICTED STOCK. A participant will not recognize taxable income at
the time of the grant of shares of restricted stock, and the Company will not be
entitled to a tax deduction at such time, unless the participant makes an
election to be taxed at the time restricted stock is granted. If such election
is not made, the participant will recognize taxable income at the time the
restrictions lapse in an amount equal to the excess of the fair market value of
the shares at such time over the amount, if any, paid for such shares. The
amount of ordinary income recognized by a participant by making the
above-described election or upon the lapse of the restrictions is deductible by
the Company as compensation expense, except to the extent the limit of section
162(m) of the Code applies. In addition, a participant receiving dividends with
respect to restricted stock for which the above-described election has not been
made and prior to the time the restrictions lapse will recognize compensation
taxable as ordinary,income (subject to income tax withholding), rather than
dividend income, in an amount equal to the dividends paid and the Company will
be entitled to a corresponding deduction, except to the extent the limit of
section 162(m) of the Code applies.
4. BONUS STOCK. A participant will recognize compensation taxable as
ordinary income,(and subject to income tax withholding) in respect of awards of
shares of bonus stock at the time such shares are transferred in an amount equal
to the then fair market value of such shares and the Company will be entitled to
a corresponding deduction, except to the extent the limit of section 162(m) of
the Code applies,
5. PERFORMANCE SHARES. A participant will not recognize taxable income
upon the grant of performance shares and the Company will not be entitled to a
tax deduction for such performance shares, the participant will recognize
compensation taxable subject to income tax withholding) in an amount equal to
the fair market value and any cash paid by the Company, and the Company will be
entitled,to a corresponding deduction, except to the extent the limit of section
162(m) of the Code applies.
6. NON-EMPLOYEE DIRECTOR SHARES. Each non-employee director will recognize
compensation taxable as ordinary income in respect of shares of Common Stock
awarded at the time such shares are transferred in an amount equal to the then
fair market value of such shares, and the Company will be entitled to a
corresponding deduction.
7. SECTION 162(M) OF THE CODE. Section 162(m) of the Code generally limits
to $1 million the amount that a publicly held corporation is allowed each year
to deduct for the company's chief executive officer and the Company's four most
highly compensated officers. However, certain types of compensation paid to such
executives are not subject to the $1 million deduction limit. One such type is
"qualified performance-based" compensation. Qualified performance-based
compensation must satisfy all the following requirements (i) compensation must
be payable solely on account of the attainment of preestablished objective
performance measures, (ii) the performance measures must be determined by a
committee consisting solely of two or more "outside directors," (iii) the
material terms under which the compensation is to be paid, including the
performance measures, must be approved by a majority of the corporation's
stockholders and, (iv) the committee administering the plan must certify, that
the applicable performance measures were satisfied before payment of any
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<PAGE>
performance-based compensation is made. The Committee will consist solely of
"outside directors" as defined for purposes of section 162(m) of the Code. As a
result, and based on certain proposed regulations published by the Internal
Revenue Service, certain compensation under the 1996 Plan, such as that payable
with respect to options and certain SARs, is not expected to be subject to the
$1 million deduction limit under section 162(m) of the Code, but other
compensation payable under the 1996 Plan, such as grants of Bonus Stock with
Restricted Stock with restrictions not based upon attainment of performance
measures, is expected to be subject to such limit.
IMPLEMENTATION PROPOSAL.
If approved by the shareholders, as soon as practicable, the Company intends
to file a registration statement under The Securities Act of 1933, as amended,
and applicable rules and regulations thereunder to register the 1996 Plan and
shares of stock related thereto.
Subject to approval by the shareholders, the Compensation Committee intends
to implement the 1996 Plan with the following parameters:
(a) Non-Employee Director Options--Option grants to each of the nine
non-employee directors of 1,000 shares with a 7-year term in the form of
non-qualified stock options, based on market price at the date of
issuance. The grants will occur each of the five years that the 1996 Plan
is in effect.
(b) Officer Group (currently 12 persons, including the named executive
officers)--Option grants in the form of non-qualified option grants for
3,500 shares each, vesting 20% over five years, with an exercise price
based on fair market value at date of grant with exercisability over five
years from date of vesting. It is contemplated that similar grants would
be made for each of the five years of the existence of the 1996 Plan.
(c) Key Employee Group--This group consists of key employees other than
those included in the officer group, approved annually by the
Compensation Committee to receive a grant of non-qualified stock options
for 500 option shares vesting 20% each year for five years. The pricing
and exercisability provisions would be similar to those for the officer
group above. The selection for participation in any year would not assure
inclusion in any subsequent year although there may well be key employees
who participate all or part of the years covered by the 1996 Plan.
The following table sets forth the number of shares of Common Stock which
would be granted to the indicated persons or groups if the 1996 Plan is approved
by stockholders.
1996 LONG-TERM INCENTIVE PLAN BENEFITS
<TABLE>
<CAPTION>
NAME AND POSITION DOLLAR VALUE* NUMBER OF SHARES
- ------------------------------------------------------------ -------------- -------------------
<S> <C> <C>
Bjorn E. Olsson $ 13,296 3,500
Charles M. Foudree 13,296 3,500
Lloyd T. Kaiser 13,296 3,500
Gary E. Ryker 13,296 3,500
Robert E. Heggestad 13,296 3,500
Officer Group (currently 12 persons)** 159,553 42,000
Key Employee Group (not to exceed 60 persons)*** 102,570 27,000
All Non-Employee Directors as a Group (9 persons) 34,190 9,000
</TABLE>
*Based on the closing price ($13.75) of Common Stock on March 18, 1996, as
reported in THE WALL STREET JOURNAL and calculated on appreciation of the
initial grant at 5% per annum over five years. These assumptions are for
illustration purposes only and actual results may vary from the assumptions
shown.
**Includes the individuals shown above as named executive officers.
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***Initially grants of 500 non-qualified option shares to each of up to 54
individuals.
SHAREHOLDER PROPOSALS-1996 MEETING
In the event any shareholder intends to present a proposal at the Annual
Meeting of Shareholders to be held in 1997, such proposal must be received by
the Company, in writing, on or before November 12, 1996, to be considered for
inclusion in the Company's next Proxy Statement. Shareholder proposals for
suggested nominees for director should be submitted to the Company or its
Director Nomination and Compensation Committee not later than 90 days prior to
the next shareholders' meeting.
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
April 1, 1996
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EXHIBIT A
HARMON INDUSTRIES, INC.
1996 LONG-TERM INCENTIVE PLAN
<PAGE>
HARMON INDUSTRIES, INC.
1996 LONG-TERM INCENTIVE PLAN
I. INTRODUCTION
1.1 PURPOSES. The purposes of the 1996 Long-Term Incentive Plan (the
"Plan") of Harmon Industries, Inc. (the "Company") and its subsidiaries from
time to time (individually a "Subsidiary" and collectively the "Subsidiaries")
are to align the interests of the Company's stockholders and the recipients of
awards under this Plan by increasing the proprietary interest of such recipients
in the Company's growth and success and to advance the interests of the Company
by attracting and retaining officers and other key employees and other persons
who are not officers or employees of the Company for services as directors of
the Company. For purposes of this Plan, references to employment by the Company
shall also mean employment by a Subsidiary.
1.2 CERTAIN DEFINITIONS.
"Agreement" shall mean the written agreement evidencing an award hereunder
between the Company and the recipient of such award.
"Board" shall mean the Board of Directors of the Company.
"Bonus Stock" shall mean shares of Common Stock which are not subject to a
Restriction Period or Performance Measures.
"Bonus Stock Award" shall mean an award of Bonus Stock under this Plan.
"Cause" shall have the meaning set forth in Section 2.3(d).
"Change in Control" shall have the meaning set forth in Section 6.8(b).
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Compensation Committee designated by the Board,
consisting of three or more members of the Board, each of whom shall be (i) a
"disinterested person" within the meaning of Rule 16b-3 under the Exchange Act
and (ii) an "outside director" within the meaning of Section 162(m) of the Code,
subject to any transaction rules applicable to the definition of outside
director.
"Common Stock" shall mean the common stock, $.25 par value, of the Company.
"Company" shall mean Harmon Industries, Inc., a Missouri corporation, and
any successor thereto.
"Disability" shall mean the inability of the holder of an award to perform
substantially such holder's duties and responsibilities for a continuous period
of at least six months, as determined solely by the Committee.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean the closing sale price of a share of Common
Stock as reported in the New York Stock Exchange Composite Transactions on the
date as of which such value is being determined, or, if the Common Stock is not
listed on the New York Stock Exchange, the closing sale price of a share of
Common Stock on the principal national stock exchange on which the Common Stock
is traded on the date as of which such value is being determined, or, if there
shall be no reported sale for such date, on the next preceding date for which a
sale was reported; provided that if Fair Market Value for any date cannot be so
determined, Fair Market Value shall be determined by the Committee by whatever
means or method as the Committee, in the good faith exercise of its discretion,
shall at such time deem appropriate.
A-1
<PAGE>
"Free-Standing SAR" shall mean an SAR which is not issued in tandem with, or
by reference to, an option, which entitles the holder thereof to receive, upon
exercise, shares of Common Stock (which may be Restricted Stock), cash or a
combination thereof with an aggregate value equal to the excess of the Fair
Market Value of one share of Common Stock on the date of exercise over the base
price of such SAR, multiplied by the number of shares of Common Stock with
respect to which such SARs are exercised.
"Incentive Stock Option" shall mean an option to purchase shares of Common
Stock that meets the requirements of Section 422 of the Code, or any successor
provision, which is intended by the Committee to constitute an Incentive Stock
Option.
"Incumbent Board" shall have the meaning set forth in Section 6.8(b)(2).
"Mature Shares" shall mean shares of Common Stock for which the holder
thereof has good title, free and clear of all liens and encumbrances and which
such holder either (i) has held for at least six months or (ii) has purchased on
the open market.
"Non-Employee Director" shall mean any director of the Company who is not an
officer or employee of the Company or any Subsidiary.
"Non-Qualified Stock Option" shall mean a stock option which is not an
Incentive Stock Option.
"Performance Measures" shall mean the criteria and objectives, established
by the Committee, which shall be satisfied or met (i) as a condition to the
exercisability of all or a portion of an option or SAR, or (ii) as a condition
to the grant of a Restricted Stock Award, or (iii) during the applicable
Restriction Period or Performance Period as a condition to the holder's receipt,
in the case of a Restricted Stock Award, of the shares of Common Stock subject
to such award. Such criteria and objectives may include criteria selected by the
Committee including, but not limited to, one or more of the following: the
attainment by a share of Common Stock of a specified Fair Market Value for a
specified period of time, earnings per share, return on capital employed, return
to stockholders (including dividends), return on equity, earnings of the
Company, revenues, market share, cash flow or cost reduction goals, or any
combination of the foregoing. If the Committee desires that compensation payable
pursuant to any award subject to Performance Measures be "qualified
performance-based compensation" within the meaning of Section 162(m) of the
Code, the Performance Measures shall be established by the Committee no later
than the end of the first quarter of the Performance Period (or such other time
designated by the Internal Revenue Service).
"Performance Period" shall mean a period designated by the Committee during
which the Performance Measures applicable to a Performance Share Award shall be
measured.
"Performance Share" shall mean a right, contingent upon the attainment of
specified Performance Measures within a specified Performance Period, to receive
one share of Common Stock, which may be Restricted Stock, or in lieu thereof,
the Fair Market Value of such Performance Share in cash.
"Performance Share Award" shall mean an award of Performance Shares under
the Plan.
"Permanent and Total Disability" shall have the meaning set forth in Section
22(e)(3) of the Code or any successor thereto.
"Restricted Stock" shall mean shares of Common Stock which are subject to a
Restriction Period.
"Restricted Stock Award" shall mean an award of Restricted Stock under this
Plan.
"Restriction Period" shall mean a period designated by the Committee during
which the Common Stock subject to a Restricted Stock Award may not be sold,
transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed
of, except as provided in this Plan or the Agreement relating to such award.
A-2
<PAGE>
"SAR" shall mean a stock appreciation right which may be a Free-Standing SAR
or a Tandem SAR.
"Stock Award" shall mean a Restricted Stock Award or a Bonus Stock Award.
"Tandem SAR" shall mean a SAR which is granted in tandem with, or by
reference to, an option (including a Non-Qualified Stock Option granted prior to
the date of grant of the SAR), which entitles the holder thereof to receive,
upon exercise of such SAR and surrender for cancellation of all or a portion of
such option, shares of Common Stock (which may be Restricted Stock), cash or a
combination thereof with an aggregate value equal to the excess of the Fair
Market Value of one share of Common Stock on the date of exercise over the base
price of such SAR, multiplied by the number of shares of Common Stock subject to
such option, or portion thereof, which is surrendered.
"Tax Date" shall have the meaning set forth in Section 6.5.
"Ten Percent Holder" shall have the meaning set forth in Section 2.1(a).
1.3 ADMINISTRATION. This plan shall be administered by the Committee. Any
one or a combination of the following awards may be made under this Plan to
eligible officers and other employees of the Company and its Subsidiaries: (i)
options to purchase shares of Common Stock in the form of Incentive Stock
Options or Non-Qualified Stock Options, (ii) SARs in the form of Tandem SARs or
Free-Standing SARS, (iii) Stock Awards in the form of Restricted Stock or Bonus
Stock and (iv) Performance Shares. The Committee shall, subject to the terms of
this Plan, select eligible officers and other employees for participation in
this Plan and determine the form, amount and timing of each award and, if
applicable, the number of shares of Common Stock, the number of SARs and the
number of Performance Shares subject to an award, the exercise price or base
price associated with the award, the time and conditions of exercise or
settlement of the award, the ability to defer any payment of an award and all
other terms and conditions of the award, including, without limitation, the form
of the Agreement evidencing the award. The Committee shall, subject to the terms
of this Plan, interpret this Plan and the application thereof, establish rules
and regulations for the administration of this Plan and may impose, incidental
to the grant of an award, conditions with respect to the award, such as limiting
competitive employment or other activities. All such interpretations, rules,
regulations and conditions shall be conclusive and binding on all parties.
The Committee may delegate some or all of its power and authority hereunder
to the Chief Executive Officer or other executive officer of the Company as the
Committee deems appropriate; provided, however, that the Committee may not
delegate its power and authority with regard to (i) the grant of an award under
this Plan, or the terms of such award, to any person who is a "covered employee"
within the meaning of Section 162(m) of the Code or who, in the Committee's
judgment, is likely to be a covered employee at any time during the period an
award hereunder to such employee would be outstanding or (ii) the selection for
participation in this Plan of an officer or other person subject to Section 16
of the Exchange Act or decisions concerning the timing, pricing or amount of an
award to such an officer or other person.
No member of the Board of Directors or Committee, and neither the Chief
Executive Officer nor any other executive officer to whom the Committee
delegates any of its power and authority hereunder, shall be liable for any act,
omission, interpretation, construction or determination made in connection with
this Plan in good faith, and the members of the Board of Directors and the
Committee and the Chief Executive Officer or other executive officer shall be
entitled to indemnification and reimbursement by the Company in respect of any
claim, loss, damage or expense (including attorneys' fees) arising therefrom to
the full extent permitted by law, except as otherwise may be provided in the
Company's Certificate of Incorporation or By-laws, and under any directors' and
officers' liability insurance that may be in effect from time to time.
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A majority of the Committee shall constitute a quorum. The acts of the
Committee shall be either (i) acts of a majority of the members of the Committee
present at any meeting at which a quorum is present or (ii) acts approved in
writing by a majority of the members of the Committee without a meeting.
1.4 ELIGIBILITY. All employees, including officers of the Company and its
Subsidiaries are eligible to participate in this Plan. Participants in this Plan
shall consist of such officers or other employees of the Company and its
Subsidiaries as the Committee in its sole discretion may select from time to
time or as may be selected pursuant to delegated authority in accordance with
Section 1.3. The Committee's selection of a person to participate in this Plan
at any time shall not require the Committee to select such person to participate
in this Plan at any other time. Non-Employee Directors shall only be eligible to
participate in this plan in accordance with Article V.
1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.7,
the total number of shares of Common Stock available for grants of all awards
under this Plan in any calendar year shall be one and fifteen hundredths percent
(1.15%) of the outstanding Common Stock as of January 1 of such year beginning
January 1, 1996, plus the number of shares of Common Stock which shall have
become available for grants of awards under this Plan in any and all prior
calendar years, but which shall not have become subject to the grant of such
awards in any prior year. In addition, up to 80,000 shares of the Common Stock
of the Corporation may be purchased at market for allocation under this Plan,
such amount shall be the aggregate limit of purchase shares during the term of
this Plan. The purchase of shares for this purpose must be approved by the
Compensation Committee after consultation with counsel and notice to the Board
of Directors prior to the purchase. This use of purchased shares is intended to
be essentially non-dilutive. Subject to adjustment as provided in Section 6.7,
the total number of shares of Common Stock available for grants of Incentive
Stock Options in any calendar year, beginning with calendar year 1996, shall be
80,000 shares, plus the number of shares of Common Stock which shall have become
available for grants of Incentive Stock Options under this Plan in any and all
prior calendar years, but which shall not have become subject to the grant of
Incentive Stock Options in any prior year.
Except as described above, shares of Common Stock to be delivered under this
Plan shall be made available from authorized and unissued shares of Common
Stock, or authorized and issued shares of Common Stock reacquired and held as
treasury shares or otherwise or a combination thereof.
To the extent required by Section 162(m) of the Code and the rules and
regulations thereunder, the maximum number of shares of Common Stock with
respect to which options or SARs or a combination thereof may be granted during
any calendar year to any person shall be 50,000, subject to adjustment as
provided in Section 6.7.
II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
2.1 STOCK OPTIONS. The Committee may, in its discretion, grant options to
purchase shares of Common Stock to such eligible persons as may be selected by
the Committee, provided that Non-Employee Directors shall only be eligible for
option grants as provided in Article V hereof. Each option, or portion thereof,
that is not an Incentive Stock Option, shall be a Non-Qualified Stock Option.
Each option shall be granted within ten years of the effective date of this
Plan. To the extent that the aggregate Fair Market Value (determined as of the
date of grant) of shares of Common Stock with respect to which options
designated as Incentive Stock Options are exercisable for the first time by a
participant during any calendar year (under this Plan or any other plan of the
Company, or any parent or Subsidiary) exceeds the amount (currently $100,000)
set forth in the Code, such options shall constitute Non-Qualified Stock
Options. The terms of each option granted by the Committee shall be embodied in
an Agreement.
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Options shall be subject to the following terms and conditions and shall
contain such additional terms and conditions, not inconsistent with the terms of
this Plan, as the Committee shall deem advisable:
(a) NUMBER OF SHARES AND PURCHASE PRICE. The number of shares of
Common Stock subject to an option and the purchase price per share of Common
Stock purchasable upon exercise of the option shall be determined by the
Committee; provided, however, that the purchase price per share of Common
Stock purchasable upon exercise of an option shall not be less than 100% of
the Fair Market Value of a share of Common Stock on the date of grant of
such option; provided further, that if an Incentive Stock Option shall be
granted to any person who, at the time such option is granted, owns capital
stock possessing more than ten percent of the total combined voting power of
all classes of capital stock of the Company (or of any parent or Subsidiary)
(a "Ten Percent Holder"), the purchase price per share of Common Stock shall
be the price (currently 110% of Fair Market Value) required by the Code in
order to constitute an Incentive Stock Option.
(b) OPTION PERIOD AND EXERCISABILITY. The period during which an
option may be exercised shall be determined by the Committee; provided,
however, that no Incentive Stock Option shall be exercised later than ten
years after its date of grant; provided further, that if an Incentive Stock
Option shall be granted to a Ten Percent Holder, such option shall not be
exercised later than five years after its date of grant. The Committee may,
in its discretion, establish Performance Measures which shall be satisfied
or met as a condition to the grant of an option or to the exercisability of
all or a portion of an option. The Committee shall determine whether an
option shall become exercisable in cumulative or non-cumulative installments
and in part or in full at any time. An exercisable option, or portion
thereof, may be exercised only with respect to whole shares of Common Stock.
(c) METHOD OF EXERCISE. An option may be exercised (i) by giving
written notice to the Company specifying the number of whole shares of
Common Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (A)
in cash, (B) in Mature Shares having a Fair Market Value, determined as of
the date of exercise, equal to the aggregate purchase price payable by
reason of such exercise, (C) by authorizing the Company to withhold whole
shares of Common Stock which would otherwise be delivered upon exercise of
the option having a Fair Market Value, determined as of the date of
exercise, equal to the aggregate purchase price payable by reason of such
exercise, (D) in cash by a broker-dealer acceptable to the Company to whom
the optionee has submitted an irrevocable notice of exercise or (E) a
combination of (A), (B) and (C), in each case to the extent set forth in the
Agreement relating to the option, (ii) if applicable, by surrendering to the
Company any Tandem SARs which are cancelled by reason of the exercise of the
option and (iii) by executing such documents as the Company may reasonably
request. The Committee shall have sole discretion to disapprove of an
election pursuant to any of clauses (B)-(E) and in the case of an optionee
who is subject to Section 16 of the Exchange Act, the Company may require
that the method of making such payment be in compliance with Section 16 and
the rules and regulations thereunder. Any fraction of a share of Common
Stock which would be required to pay such purchase price shall be
disregarded and the remaining amount due shall be paid in cash by the
holder. No certificate representing Common Stock shall be delivered until
the full purchase price therefor has been paid.
2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant
SARs to such eligible persons (other than Non-Employee Directors) as may be
selected by the Committee. The Agreement relating to an SAR shall specify
whether the SAR is a Tandem SAR or a Free-Standing SAR.
SARs shall be subject to the following terms and conditions and shall
contain such additional terms and conditions, not inconsistent with the terms of
this Plan, as the Committee shall deem advisable:
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(a) NUMBER OF SARS AND BASE PRICE. The number of SARs subject to an
award shall be determined by the Committee. Any Tandem SAR related to an
Incentive Stock Option shall be granted at the same time that such Incentive
Stock Option is granted and the base price thereof shall be the purchase
price per share of Common Stock of the related option. The base price of a
Free-Standing SAR or an SAR granted in tandem with, or by reference to, a
Non-Qualified Stock Option shall be determined by the Committee; provided,
however, that such base price shall not be less than 100% of the Fair Market
Value of a share of Common Stock on the date of grant of such SAR.
(b) EXERCISE PERIOD AND EXERCISABILITY. The Agreement relating to an
award of SARs shall specify whether such award may be settled in shares of
Common Stock (including shares of Restricted Stock) or cash or a combination
thereof. The period for the exercise of an SAR shall be determined by the
Committee; provided, however, that no Tandem SAR shall be exercised later
than the expiration, cancellation, forfeiture or other termination of the
related option. The Committee may, in its discretion, establish Performance
Measures which shall be satisfied or met as a condition to the
exercisability of an SAR. The Committee shall determine whether an SAR may
be exercised in cumulative or non-cumulative installments and in part or in
full at any time. An exercisable SAR, or portion thereof, may be exercised,
in the case of a Tandem SAR, only with respect to whole shares of Common
Stock and, in the case of a Free-Standing SAR, only with respect to a whole
number of SARs. If an SAR is exercised for shares of Restricted Stock, a
certificate or certificates representing such Restricted Stock shall be
issued in accordance with Section 3.2(c) and the holder of such Restricted
Stock shall have such rights of a stockholder of the Company as determined
pursuant to Section 3.2(d). Prior to the exercise of an SAR for shares of
Common Stock, including Restricted Stock, the holder of such SAR shall have
no rights as a stockholder of the Company with respect to the shares of
Common Stock subject to such SAR and shall have rights as a stockholder of
the Company in accordance with Section 6.10.
(c) METHOD OF EXERCISE. A Tandem SAR may be exercised (i) by giving
written notice to the Company specifying the number of whole SARs which are
being exercised, (ii) by surrendering to the Company any options which are
cancelled by reason of the exercise of the Tandem SAR and (iii) by executing
such documents as the Company may reasonably request. A Free-Standing SAR
may be exercised (i) by giving written notice to the Company specifying the
whole number of SARs which are being exercised and (ii) by executing such
documents as the Company may reasonably request.
2.3 TERMINATION OF EMPLOYMENT.
(a) DISABILITY. Subject to paragraph (f) below and Section 6.8 and
unless otherwise specified in the Agreement relating to an option or SAR, as
the case may be, if the employment with the Company of the holder of an
option or SAR terminates by reason of Disability, each option and SAR held
by such holder shall be fully exercisable on the effective date of such
holder's termination of employment and may thereafter be exercised by such
holder (or such holder's legal representative or similar person) until the
earlier to occur of (i) the date set forth in the Agreement relating to such
option or SAR after the effective date of such holder's termination of
employment and (ii) the expiration date of the term of such option or SAR.
(b) RETIREMENT. Subject to paragraph (f) below and Section 6.8 and
unless otherwise specified in the Agreement relating to an option or SAR, as
the case may be, if the employment with the Company of the holder of an
option or SAR terminates by reason of retirement on or after age 55, each
option and SAR held by such holder shall be fully exercisable and may
thereafter be exercised on the effective date of such holder's termination
of employment and may thereafter be exercised by such holder (or such
holder's legal representative or similar person) until the earlier to occur
of (i) the date set forth in the Agreement relating to such option or SAR
after the effective date of such holder's termination of employment and (ii)
the expiration date of the term of such option or SAR.
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(c) DEATH. Subject to paragraph below and unless otherwise specified
in the Agreement relating to an option or SAR, as the case may be, if the
employment with the Company of the holder of an option or SAR terminates by
reason of death, each option and SAR held by such holder shall be fully
exercisable and may thereafter be exercised by such holder's executor,
administrator, legal representative, beneficiary or similar person, as the
case may be, until the earlier to occur of (i) the date set forth in the
Agreement relating to such option or SAR after the date of death and (ii)
the expiration date of the term of such option or SAR.
(d) OTHER TERMINATION. If the employment with the Company of the
holder of an option or SAR is terminated by the Company for Cause or is
voluntarily terminated by such holder, each option and SAR held by such
holder shall terminate automatically on the effective date of such holder's
termination of employment. "Cause" shall mean any act of dishonesty,
commission of a felony, significant activities harmful to the reputation of
the Company or any of its Subsidiaries, refusal to perform or substantial
disregard of duties properly assigned or significant violation of any
statutory or common law duty of loyalty to the Company or any of its
Subsidiaries.
Subject to paragraph (f) below and Section 6.8 and unless specified in
the Agreement relating to an option or SAR, as the case may be, if the
employment with the Company of the holder of an option or SAR terminates for
any reason other than Disability, retirement on or after age 55, death,
Cause or voluntary termination, each option and SAR held by such holder
shall be exercisable only to the extent that such option or SAR is
exercisable on the effective date of such holder's termination of employment
and may thereafter be exercised by such holder (or such holder's legal
representative or similar person) until the earlier to occur of (i) the date
set forth in the Agreement relating to such option or SAR after the
effective date of such holder's termination of employment and (ii) the
expiration date of the term of such option or SAR.
(e) DEATH FOLLOWING TERMINATION OF EMPLOYMENT. Subject to paragraph
(f) below and Section 6.8 and unless otherwise specified in the Agreement
relating to an option or SAR, as the case may be, if the holder of an option
or SAR dies during the period of exercisability of such option or SAR
following termination of employment for any reason other than death,
disability or retirement after age 55, Cause or voluntary termination, each
option and SAR held by such holder shall be exercisable only to the extent
that such option or SAR, as the case may be, is exercisable on the date of
such holder's death and may thereafter be exercised by the holder's
executor, administrator, legal representative, beneficiary or similar
person, as the case may be, until the earlier to occur of (i) the date set
forth in the Agreement relating to such option or SAR after the date of
death and (ii) the expiration date of the term of such option or SAR.
(f) TERMINATION OF EMPLOYMENT -- INCENTIVE STOCK OPTIONS. Subject to
Section 6.8, if the employment with the Company of a holder of an Incentive
Stock Option terminates by reason of Permanent and Total Disability, each
Incentive Stock Option (including any related Tandem SAR) held by such
holder shall be fully exercisable on the effective date of such holder's
termination of employment and may thereafter be exercised by such holder (or
such holder's legal representative or similar person) until the earlier to
occur of (i) the date which is one year (or such shorter period as set forth
in the Agreement relating to such option or SAR) after the effective date of
such holder's termination of employment and (ii) the expiration date of the
term of such Incentive Stock Option.
Subject to Section 6.8, if the employment with the Company of a holder
of an Incentive Stock Option terminates by reason of retirement on or after
age 55, each Incentive Stock Option (including any related Tandem SAR) held
by such holder shall be fully exercisable on the effective date of such
holder's termination of employment and may thereafter be exercised by such
holder (or holder's legal representative or similar person) until the
earlier to occur of (i) the date which is three months after the effective
date of such holder's termination of employment and (ii) the expiration date
of the term of the Incentive Stock Option.
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Subject to Section 6.8, if the employment with the Company of the holder
of an Incentive Stock Option terminates by reason of death, each Incentive
Stock Option (including any related Tandem SAR) held by such holder shall be
fully exercisable and may thereafter be exercised by such holder's executor,
administrator, legal representative, beneficiary or similar person, as the
case may be, until the earlier to occur of (i) the date set forth in the
Agreement relating to such option or SAR after the date of death and (ii)
the expiration date of the term of such Incentive Stock Option.
If the employment with the Company of the holder of an Incentive Stock
Option is terminated by the Company for Cause or is voluntarily terminated
by such holder, each Incentive Stock Option held by such holder shall
terminate automatically on the effective date of such holder's termination
of employment. If the employment with the Company of a holder of an
Incentive Stock Option terminates for any reason other than Permanent and
Total Disability, retirement on or after age 55, death, Cause or voluntary
termination, each Incentive Stock Option (including any related Tandem SAR)
held by such holder shall be exercisable only to the extent such option is
exercisable on the effective date of such holder's termination of employment
and may thereafter be exercised by such holder (or such holder's legal
representative or similar person) until the earlier to occur of (i) the date
which is three months after the effective date of such holder's termination
of employment and (ii) the expiration date of the term of the Incentive
Stock Option.
If the holder of an Incentive Stock Option dies during the one-year
period following termination of employment by reason of Permanent and Total
Disability, or if the holder of an Incentive Stock Option dies during the
three-month period following termination of employment for any reason other
than Permanent and Total Disability, Cause or voluntary termination, each
Incentive Stock Option (including any related Tandem SAR) held by such
holder shall be exercisable only to the extent such option is exercisable on
the date of the holder's death and may thereafter be exercised by the
holder's executor, administrator, legal representative, beneficiary or
similar person until the earlier to occur of (i) the date which is one year
(or such shorter period as set forth in the Agreement relating to such
option or SAR) after the date of death and (ii) the expiration date of the
term of such Incentive Stock Option.
III. STOCK AWARDS
3.1 STOCK AWARDS. The Committee may, in its discretion, grant Stock Awards
to such eligible persons (other than Non-Employee Directors) as may be selected
by the Committee. Grants of Restricted Stock Awards may be conditioned upon the
attainment of Performance Measures. The Agreement relating to a Stock Award
shall specify whether the Stock Award is a Restricted Stock Award or Bonus Stock
Award.
3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Committee shall deem advisable.
(a) NUMBER OF SHARES AND OTHER TERMS. The number of shares of Common
Stock subject to a Restricted Stock Award or Bonus Stock Award and the
Performance Measures (if any) and Restriction Period applicable to a
Restricted Stock Award shall be determined by the Committee.
(b) VESTING AND FORFEITURE. The Agreement relating to a Restricted
Stock Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of
the shares of Common Stock subject to such award (i) if specified
Performance Measures are satisfied or met during the specified Restriction
Period or (ii) if the holder of such award remains continuously in the
employment of the Company during the specified Restricted Period and for the
forfeiture of the shares of Common Stock subject to
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such award (x) if specified Performance Measures are not satisfied or met
during the specified Restriction Period or (y) if the holder of such award
does not remain continuously in the employment of the Company during the
specified Restriction Period.
Bonus Stock Awards shall not be subject to any Performance Measures or
Restriction Periods.
(c) SHARE CERTIFICATES. During the Restriction Period, a certificate
or certificates representing a Restricted Stock Award shall be registered in
the holder's name and may bear a legend, in addition to any legend which may
be required pursuant to Section 6.6, indicating that the ownership of the
shares of Common Stock represented by such certificate is subject to the
restrictions, terms and conditions of this Plan and the Agreement relating
to the Restricted Stock Award. All such certificates shall be deposited with
the Company, together with stock powers or other instruments of assignment
(including a power of attorney), each endorsed in blank with a guarantee of
signature if deemed necessary or appropriate, which would permit transfer to
the Company of all or a portion of the shares of Common Stock subject to the
Restricted Stock Award in the event such award is forfeited in whole or in
part. Upon termination of any applicable Restriction Period (and the
satisfaction or attainment of applicable Performance Measures), or upon the
grant of a Bonus Stock Award, in each case subject to the Company's right to
require payment of any taxes in accordance with Section 6.5, a certificate
or certificates evidencing ownership of the requisite number of shares of
Common Stock shall be delivered to the holder of such award.
(d) RIGHTS WITH RESPECT TO RESTRICTED STOCK AWARDS. Unless otherwise
set forth in the Agreement relating to a Restricted Stock Award, and subject
to the terms and conditions of a Restricted Stock Award, the holder of such
award shall have all rights as a stockholder of the Company, including, but
not limited to, voting rights, the right to receive dividends and the right
to participate in any capital adjustment applicable to all holders of Common
Stock; provided, however, that a distribution with respect to shares of
Common Stock, other than a distribution in cash, shall be deposited with the
Company and shall be subject to the same restrictions as the shares of
Common Stock with respect to which such distribution was made.
(e) AWARDS TO CERTAIN EXECUTIVE OFFICERS. Notwithstanding any other
provision of this Article III, and only to the extent necessary to ensure
the deductibility of the award to the Company, the Fair Market Value of the
number of shares of Common Stock subject to a Restricted Stock Award granted
to a "covered employee" within the meaning of Section 162(m) of the Code
shall not exceed $2,000,000 (i) at the time of grant in the case of an award
granted upon the attainment of Performance Measures and (ii) the earlier of
(x) the date on which restrictions lapse in the case of a Restricted Stock
Award with restrictions which lapse upon the attainment of Performance
Measures, and (y) the date the holder makes an election under Section 83(b)
of the Code.
3.3 TERMINATION OF EMPLOYMENT. Subject to Section 6.8, all of the terms
relating to the satisfaction of Performance Measures and the termination of the
Restriction Period relating to a Restricted Stock Award, or any cancellation or
forfeiture of such Restricted Stock Award upon a termination of employment with
the Company of the holder of such Restricted Stock Award, whether by reason of
Disability, retirement, death or other termination, shall be set forth in the
Agreement relating to such Restricted Stock Award.
IV. PERFORMANCE SHARE AWARDS
4.1 PERFORMANCE SHARE AWARDS. The Committee may in its discretion grant
Performance Share Awards to such eligible persons (other than Non-Employee
Directors) as may be selected by the Committee.
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4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share Awards shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of this Plan, as the
Committee shall deem advisable.
(a) NUMBER OF PERFORMANCE SHARES AND PERFORMANCE MEASURES. The number
of Performance Shares subject to any award and the Performance Measures and
Performance Period applicable to such award shall be determined by the
Committee.
(b) VESTING AND FORFEITURE. The Agreement relating to a Performance
Share Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of
such award, if specified Performance Measures are satisfied or met during
the specified Performance Period, and for the forfeiture of such award, if
specified Performance Measures are not satisfied or met during the specified
Performance Period.
(c) SETTLEMENT OF VESTED PERFORMANCE SHARE AWARDS. The Agreement
relating to a Performance Share Award (i) shall specify whether such award
may be settled in shares of Common Stock (including shares of Restricted
Stock) or cash or a combination thereof and (ii) may specify whether the
holder thereof shall be entitled to receive, on a current or deferred basis,
dividend equivalents, and, if determined by the Committee, interest on any
deferred dividend equivalents, with respect to the number of shares of
Common Stock subject to such award. If a Performance Share Award is settled
in shares of Restricted Stock, a certificate or certificates representing
such Restricted Stock shall be issued in accordance with Section 3.2(c) and
the holder of such Restricted Stock shall have such rights of a stockholder
of the Company as determined pursuant to Section 3.2(d). Prior to the
settlement of a Performance Share Award in shares of Common Stock, including
Restricted Stock, the holder of such award shall have no rights as a
stockholder of the Company with respect to the shares of Common Stock
subject to such award.
(d) AWARDS TO CERTAIN EXECUTIVE OFFICERS. Notwithstanding any other
provision of this Article IV, and only to the extent necessary to ensure
deductibility of any payment under an award made by the Company, the maximum
amount payable upon the attainment of the Performance Measures applicable to
an award granted to any employee who is a "covered employee" within the
meaning of Section 162(m) of the Code at the time of such payment shall be
$2,000,000.
4.3 TERMINATION OF EMPLOYMENT. Subject to Section 6.8, all of the terms
relating to the satisfaction of Performance Measures and the termination of the
Performance Period relating to a Performance Share Award, or any cancellation or
forfeiture of such Performance Share Award upon a termination of employment with
the Company of the holder of such Performance Share Award, whether by reason of
Disability, retirement, death or other termination, shall be set forth in the
Agreement relating to such Performance Share Award.
V. NON-EMPLOYEE DIRECTOR OPTIONS
5.1 ELIGIBILITY. Each Non-Employee Director shall be granted shares of
Common Stock annually in accordance with this Article V.
5.2 AWARDS OF NON-QUALIFIED STOCK OPTIONS. Subject to Section 6.7, on the
last Business day of May following each annual meeting of shareholders (or if
later on the date on which a person is first elected or begins to serve as a
Non-Employee Director other than by reason of termination of employment)
commencing May 31, 1996, and, thereafter, on the date of each annual meeting of
stockholders of the Company, each person who is a Non-Employee Director after
such meeting of stockholders shall be granted a Non-Qualified Stock Option for
1,000 shares of Common Stock (which amount shall be prorated if such
Non-Employee Director is first elected or begins to serve as a Non-Employee
Director on a date other than the date of an annual meeting of stockholders).
The term of any option granted to Non-Employee Directors hereunder shall be
seven (7) years, there shall be no Agreement evidencing such option, and the
provisions of Section 2.1 shall otherwise apply to options granted hereunder.
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VI. GENERAL
6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to the
stockholders of the Company for approval and, if approved by the affirmative
vote of a majority of the shares of Common Stock present in person or
represented by proxy at the 1996 annual meeting of stockholders, shall become
effective on May 31, 1996. This Plan shall terminate approximately 5 years after
its effective date (on May 31, 2001) unless terminated earlier by the Board.
Termination of this Plan shall not affect the terms or conditions of any award
granted prior to termination.
Awards hereunder may be made at any time on or after the effective date, and
prior to the termination, of this Plan, provided that no award may be made later
than 5 years after the effective date of this Plan. In the event that this Plan
is not approved by the stockholders of the Company, this Plan and any awards
hereunder shall be void and of no force or effect.
6.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable,
subject to any requirement of stockholder approval required by applicable law,
rule or regulation including Rule 16b-3 under the Exchange Act and Section
162(m) of the Code; provided, however, that no amendment shall be made without
stockholder approval if such amendment would (a) increase the maximum number of
shares of Common Stock available for issuance under this Plan (subject to
Section 6.7), (b) reduce the minimum purchase price in the case of an option or
the base price in the case of an SAR, (c) effect any change inconsistent with
Section 422 of the Code or (d) extend the term of this Plan; provided further
that, subject to Section 6.7, the number of shares of Common Stock to be awarded
to Non-Employee Directors pursuant to Article V, the date of the award of such
shares and the category of persons eligible to be awarded such shares shall not
be amended more than once every six months, other than to comply with changes in
the Code or ERISA, or the rules and regulations thereunder. No amendment may
impair the rights of a holder of an outstanding award without the consent of
such holder.
6.3 AGREEMENT. Each award under this Plan (other than Non-Qualified Stock
Options granted to Non-Employee Directors pursuant to Article V hereof) shall be
evidenced by an Agreement setting forth the terms and conditions applicable to
such award. No award shall be valid until an Agreement is executed by the
Company and the recipient of such award and, upon execution by each party and
delivery of the Agreement to the Company, such award shall be effective as of
the effective date set forth in the Agreement.
6.4 NON-TRANSFERABILITY OF STOCK OPTIONS, SARS AND PERFORMANCE SHARES. No
option, SAR or Performance Share shall be transferable other than (i) by will,
the laws of descent and distribution or pursuant to beneficiary designation
procedures approved by the Company or (ii) as otherwise permitted under Rule
16b-3 under the Exchange Act as set forth in the Agreement relating to such
award. Each option, SAR or Performance Share may be exercised or settled during
the participant's lifetime only by the holder or the holder's guardian, legal
representative or similar person. Except as permitted by the second preceding
sentence, no option, SAR or Performance Share may be sold, transferred,
assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by
operation of law or otherwise) or be subject to execution, attachment or similar
process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate,
encumber or otherwise dispose of any option, SAR or Performance Share, such
award and all rights thereunder shall immediately become null and void.
6.5 TAX WITHHOLDING. The Company shall have the right to require, prior to
the issuance or delivery of any shares of Common Stock or the payment of any
cash pursuant to an award made hereunder, payment by the holder of such award of
any federal, state, local or other taxes which may be required to be withheld or
paid in connection with such award. An Agreement may provide that (i) the
Company shall withhold whole shares of Common Stock which would otherwise be
delivered to a holder, having an aggregate Fair Market Value determined as of
the date the obligation to withhold or pay taxes arises in connection with an
award (the "Tax Date"), or withhold an amount of cash
A-11
<PAGE>
which would otherwise be payable to a holder, in the amount necessary to satisfy
any such obligation or (ii) the holder may satisfy any such obligation by any of
the following means: (A) a cash payment to the Company, (B) delivery to the
Company of Mature Shares having an aggregate Fair Market Value, determined as of
the Tax Date, equal to the amount necessary to satisfy any such obligation, (C)
authorizing the Company to withhold whole shares of Common Stock which would
otherwise be delivered having an aggregate Fair Market Value, determined as of
the Tax Date, or withhold an amount of cash which would otherwise be payable to
a holder, equal to the amount necessary to satisfy any such obligation, (D) in
the case of the exercise of an option, a cash payment by a broker-dealer
acceptable to the Company to whom the optionee has submitted an irrevocable
notice of exercise or (E) any combination of (A), (B) and (C), in each case to
the extent set forth in the Agreement relating to the award; provided, however,
that the Committee shall have sole discretion to disapprove of an election
pursuant to any of clauses (B)-(E) and that in the case of a holder who is
subject to Section 16 of the Exchange Act, the Company may require that the
method of satisfying such an obligation be in compliance with Section 16 and the
rules and regulations thereunder. An Agreement may provide for shares of Common
Stock to be delivered or withheld having an aggregate Fair Market Value in
excess of the minimum amount required to be withheld, but not in excess of the
amount determined by applying the holder's maximum marginal tax rate. Any
fraction of a share of Common Stock which would be required to satisfy such an
obligation shall be disregarded and the remaining amount due shall be paid in
cash by the holder.
6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject to
the requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
award upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the delivery of shares
thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company may require that certificates evidencing shares of Common Stock
delivered pursuant to any award made hereunder bear a legend indicating that the
sale, transfer or other disposition thereof by the holder is prohibited except
in compliance with the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
6.7 ADJUSTMENT. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities available under this Plan, the
number and class of securities subject to each outstanding option and the
purchase price per security, the number of Non-Qualified Options to be awarded
to Non-Employee Directors pursuant to Article V, the terms of each outstanding
SAR, the number and class of securities subject to each outstanding Stock Award,
and the terms of each outstanding Performance Share shall be appropriately
adjusted by the Committee, such adjustments to be made in the case of
outstanding options and SARs without an increase in the aggregate purchase price
or base price, other than an increase resulting from rounding. The decision of
the Committee regarding any such adjustment shall be final, binding and
conclusive. If any such adjustment would result in a fractional security being
(i) available under this Plan, such fractional security shall be disregarded, or
(ii) subject to an award under this Plan, the Company shall pay the holder of
such award, in connection with the first vesting, exercise or settlement of such
award, in whole or in part, occurring after such adjustment, an amount in cash
determined by multiplying (i) the fraction of such security (rounded to the
nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on
the vesting, exercise or settlement date over (B) the exercise or base price, if
any, of such award.
A-12
<PAGE>
6.8 CHANGE IN CONTROL.
(a) (1) Notwithstanding any provision in this Plan or any Agreement, in the
event of a Change in Control pursuant to Section (b)(3) or (4) below in
connection with which the holders of Common Stock receive shares of common
stock that are registered under Section 12 of the Exchange Act, (i) all
outstanding options and SARS shall immediately become exercisable in full,
(ii) the Restriction Period applicable to any outstanding Restricted Stock
Award shall lapse, (iii) the Performance Period applicable to any
outstanding Performance Share shall lapse, (iv) the Performance Measures
applicable to any outstanding Restricted Stock Award (if any) and to any
outstanding Performance Share shall be deemed to be satisfied at the maximum
level and (v) there shall be substituted for each share of Common Stock
available under this Plan, whether or not then subject to an outstanding
award, the number and class of shares into which each outstanding share of
Common Stock shall be converted pursuant to such Change in Control. In the
event of any such substitution, the purchase price per share in the case of
an option and the base price in the case of an SAR shall be appropriately
adjusted by the Committee, such adjustments to be made in the case of
outstanding options and SARs without a change in the aggregate purchase
price or base price.
(2) Notwithstanding any provision in this Plan or any Agreement, in the
event of a Change in Control pursuant to Section (b)(1) or (2) below, or in
the event of a Change in Control pursuant to Section (b)(3) or (4) below in
connection with which the holders of Common Stock receive consideration
other than shares of common stock that are registered under Section 12 of
the Exchange Act, each outstanding award shall be surrendered to the Company
by the holder thereof, and each such award shall immediately be cancelled by
the Company, and the holder shall receive, within ten days of the occurrence
of a Change in Control pursuant to Section (b)(1) or (2) below or within ten
days of the approval of the stockholders of the Company contemplated by
Section(b)(3) or (4) below, a cash payment from the Company in an amount
equal to (i) in the case of an option, the number of shares of Common Stock
then subject to such option, multiplied by the excess, if any, of the
greater of (A) the highest per share price offered to stockholders of the
Company in any transaction whereby the Change in Control takes place or (B)
the Fair Market Value of a share of Common Stock on the date of occurrence
of the Change in Control, over the purchase price per share of Common Stock
subject to the option, (ii) in the case of a Free-Standing SAR, the number
of shares of Common Stock then subject to such SAR, multiplied by the
excess, if any, of the greater of (A) the highest per share price offered to
stockholders of the Company in any transaction whereby the Change in Control
takes place or (B) the Fair Market Value of a share of Common Stock on the
date of occurrence of the Change in Control, over the base price of the SAR,
(iii) in the case of a Restricted Stock Award or Performance Share Award,
the number of shares of Common Stock or the number of Performance Shares, as
the case may be, then subject to such award, multiplied by the greater of
(A) the highest per share price offered to stockholders of the Company in
any transaction whereby the Change in Control takes place or (B) the Fair
Market Value of a share of Common Stock on the date of occurrence of the
Change in Control. In the event of a Change in Control, each Tandem SAR
shall be surrendered by the holder thereof and shall be cancelled
simultaneously with the cancellation of the related option. The Company may,
but is not required to, cooperate with any person who is subject to Section
16 of the Exchange Act to assure that any cash payment in accordance with
the foregoing to such person is made in compliance with Section 16 and the
rules and regulations thereunder.
(b) "Change in Control" shall mean:
(1) the acquisition by any individual, entity or group (a "Person"),
including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act, of benefi-cial ownership within the meaning of Rule 13d-3
promulgated under the Exchange Act, of 20% or more of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then outstanding
securities of the
A-13
<PAGE>
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided that the following
acquisitions shall not constitute a Change in Control: (A) any acquisition
directly from the Company (excluding any acquisition resulting from the
exercise of a conversion or exchange privilege in respect of outstanding
convertible or exchangeable securities), (B) any acquisition by the Company,
(C) any acquisition by an employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the Company or
(D) any acquisition by any corporation pursuant to a reorganization, merger
or consolidation involving the Company, if, immediately after such
reor-ganization, merger or consolidation, each of the conditions described
in clauses (i), (ii) and (iii) of subsection (3) of this Section 6.8(b)
shall be satisfied; provided further, that for purposes of clause (B), if
any Person (other than the Company or any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled
by the Company) shall become the beneficial owner of 20% or more of the
Outstanding Company Common Stock or 20% or more of the Outstanding Company
Voting Securities by reason of an acquisition by the Company, and such
Person shall, after such acquisition by the Company, become the beneficial
owner of any additional shares of the Outstanding Company Common Stock or
any additional Outstanding Company Voting Securities and such beneficial
ownership is publicly announced, such additional beneficial ownership shall
constitute a Change in Control;
(2) individuals who, as of the date hereof, constitute the Board of
Directors (the "Incumbent Board") cease for any reason to constitute at
least two-thirds of such Board; provided that any individual who becomes a
director of the Company subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was nominated and
approved by the Director Nomination and Compensation Committee of the Board
of Directors shall be deemed to have been a member of the Incumbent Board;
and provided further, that no individual who was initially elected as a
director of the Company as a result of an actual or threatened election
contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act, or any other actual or threatened solicitation of
proxies or consents by or on behalf of any Person other than the Board shall
be deemed to have been a member of the Incumbent Board and such person shall
not thereafter become a member of the Incumbent Board unless approved by
two-thirds of the members of the then Incumbent Board;
(3) approval by the stockholders of the Company of a reorganization,
merger or consolidation unless, in any such case, immediately after such
reorganization, merger or consolidation, (i) more than 60% of the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and more than 60% of the combined
voting power of the then outstanding securities of such corporation entitled
to vote generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals or
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and the Outstanding Company Voting Securities
immediately prior to such reorganization, merger or consolidation and in
substantially the same proportions relative to each other as their
ownership, immediately prior to such reorganization, merger or consoli-
dation, of the Outstanding Company Common Stock and the Outstanding Company
Voting Securities, as the case may be, (ii) no Person (other than the
Company, any employee benefit plan (or related trust) sponsored or
maintained by the Company or the corporation resulting from such
reorganization, merger or consolidation (or any corporation controlled by
the Company) and any Person which beneficially owned, immediately prior to
such reorganization, merger or consolidation, directly or indirectly, 20% or
more of the Outstanding Company Common Stock or the Outstanding Company
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 20% or more of the then outstanding shares of common stock of
such corporation or 20% or more of the combined voting power of the then
outstanding securities of such corporation entitled to vote generally in the
election of directors and (iii) at least a majority of the members of
A-14
<PAGE>
the Board of Directors of the corporation resulting from such
reorganization, merger or consolidation were members of the Incumbent Board
at the time of the execution of the initial agreement or action of the Board
of Directors providing for such reorganization, merger or consolidation; or
(4) approval by the stockholders of the Company of (i) a plan of
complete liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all of the assets of the Company other
than to a corporation with respect to which, immediately after such sale or
other disposition, (A) more than 60% of the then outstanding shares of
common stock thereof and more than 60% of the combined voting power of the
then outstanding securities thereof entitled to vote generally in the
election of directors is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common Stock and
the Outstanding Company Voting Securities immediately prior to such sale or
other disposition and in substantially the same proportions relative to each
other as their ownership, immediately prior to such sale or other
disposition, of the Outstanding Company Common Stock and the Outstanding
Company Voting Securities, as the case may be, (B) no Person (other than the
Company, an Exempt Person, any employee benefit plan (or related trust)
sponsored or maintained by the Company or such corporation (or any
corporation controlled by the Company) and any Person which beneficially
owned, immediately prior to such sale or other disposition, directly or
indirectly, 20% or more of the Outstanding Company Common Stock or the
Outstanding Company Voting Securities, as the case may be) beneficially
owns, directly or indirectly, 20% or more of the then outstanding shares of
common stock thereof or 20% or more of the combined voting power of the then
outstanding securities thereof entitled to vote generally in the election of
directors and (C) at least a majority of the members of the Board of
Directors thereof were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board providing for such
sale or other disposition.
6.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any
right to participate in this Plan. Neither this Plan nor any award made
hereunder shall confer upon any person any right to continued employment by the
Company, any Subsidiary or any affiliate of the Company or affect in any manner
the right of the Company, any Subsidiary or any affiliate of the Company to
terminate the employment of any person at any time without liability hereunder.
6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a
stockholder of the Company with respect to any shares of Common Stock or other
equity security of the Company which is subject to an award hereunder unless and
until such person becomes a stockholder of record with respect to such shares of
Common Stock or equity security.
6.11 GOVERNING LAW. This Plan, each award hereunder and the related
Agreement, and all determinations made and actions taken pursuant thereto, to
the extent not otherwise governed by the Code or the laws of the United States,
shall be governed by the laws of the State of Missouri and construed in
accordance therewith without giving effect to principles of conflicts of laws.
6.12 APPROVAL OF PLAN. This Plan and all awards made hereunder shall be
null and void if the adoption of this Plan is not approved by the affirmative
vote of a majority of the shares of Common Stock present in person or
represented by proxy at the 1996 annual meeting of stockholders.
A-15
<PAGE>
PROXY HARMON INDUSTRIES, INC.
ANNUAL MEETING OF SHAREHOLDERS
TUESDAY, MAY 14, 1996
The undersigned holders of shares of Common Stock of Harmon Industries, Inc.
(the "Company") hereby appoint Robert E. Harmon and Charles M. Foudree, and
each of them, attorneys, agents and proxies of the undersigned with full
power of substitution and revocation to each of them, to vote all the shares
of Common Stock which the undersigned may be entitled to vote at the Annual
Meeting of Shareholders of the Company to be held at the Country Club of Blue
Springs, 1600 N. Circle Drive, Blue Springs, Missouri on Tuesday May 14,
1996, and at any adjournments of such meeting, with all powers which the
undersigned would possess if personally present.
1. Election of eleven (11) Directors - Nominees: Thomas F. Eagleton,
Bruce M. Flohr, Charles
M. Foudree, Rodney L.
Gray, Robert E. Harmon,
Herbert M. Kohn, Douglass
Wm. List, Gerald E.
Myers, Bjorn E. Olsson,
Donald V. Rentz,
Judith C. Whittaker.
/ / FOR all Nominees / / AUTHORITY WITHHELD from all Nominees
/ / FOR all Nominees, except vote(s) withheld for the following
Nominee(s):
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2. / / FOR AGAINST / / ABSTENTION Selection of KPMG Peat Marwick
LLP, as auditors for the
Company.
3. / / FOR / / AGAINST / / ABSTENTION Resolution to approve the
Company's 1996 Long-Term
Incentive Plan.
4. Upon such other business as may properly come before said meeting or any
adjournment or adjournments thereof.
(Please sign reverse side and return promptly)
(Reverse Side)
UNLESS OTHERWISE DIRECTED, THE MANAGEMENT PROXY COMMITTEE WILL VOTE FOR THE
ELECTION OF ELEVEN (11) DIRECTORS AS LISTED IN THE PROXY STATEMENT, FOR THE
SELECTION OF KPMG PEAT MARWICK LLP, AND FOR THE RESOLUTION TO APPROVE THE
COMPANY'S 1996 LONG-TERM INCENTIVE PLAN.
The undersigned hereby acknowledges receipt of the Notice of the Annual Meeting
and Proxy Statement of the Company dated April 1, 1996.
DATED , 1996
-------------------------
-------------------------------------
(Where stock is registered jointly in
the names of two or more persons, all
should sign. Signatures should
correspond exactly with the name or
names on the stock certificate.
Executing partners, trustees,
guardians, etc., should so indicate
when signing.)
THIS PROXY IS SOLICITED BY THE
BOARD OF DIRECTORS
<PAGE>
INSTRUCTION CARD
HARMON INDUSTRIES, INC.
ANNUAL MEETING OF SHAREHOLDERS
TUESDAY, MAY 14, 1996
INSTRUCTIONS TO: THE MIDAMERICAN BANK & TRUST, TRUSTEE OF THE HARMON
INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST,
FOR VOTING AT THE ANNUAL MEETING OF SHAREHOLDERS OF HARMON
INDUSTRIES, INC. ON MAY 14, 1996.
Please vote the shares held by you for my account as specified upon the
proposals listed below:
1. Election of eleven (11) Directors - Nominees: Thomas F. Eagleton,
Bruce M. Flohr, Charles
M. Foudree, Rodney L.
Gray, Robert E. Harmon,
Herbert M. Kohn, Douglass
Wm. List, Gerald E.
Myers, Bjorn E. Olsson,
Donald V. Rentz,
Judith C. Whittaker.
/ / FOR all Nominees / / AUTHORITY WITHHELD from all Nominees
/ / FOR all Nominees, except vote(s) withheld for the following
Nominee(s):
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2. / / FOR / / AGAINST / / ABSTENTION Selection of KPMG Peat Marwick
LLP, as auditors for the
Company.
3. / / FOR / / AGAINST / / ABSTENTION Resolution to approve the
Company's 1996 Long-Term
Incentive Plan.
4. Upon such other business as may properly come before said meeting or any
adjournment or adjournments thereof.
(Please sign reverse side and return promptly)
(Reverse Side)
UNLESS OTHERWISE DIRECTED, THE MANAGEMENT PROXY COMMITTEE WILL VOTE FOR THE
ELECTION OF ELEVEN (11) DIRECTORS AS LISTED IN THE PROXY STATEMENT, FOR THE
SELECTION OF KPMG PEAT MARWICK LLP, AND FOR THE RESOLUTION TO APPROVE THE
COMPANY'S 1996 LONG-TERM INCENTIVE PLAN.
The undersigned hereby acknowledges receipt of the Notice of the Annual
Meeting and Proxy Statement of the Company dated April 1, 1996.
DATED , 1996
-----------------------
-----------------------------------
Participant's Signature
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Harmon Industries, Inc. of December 31,
1995 and for the year then ended 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-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 25,679
<ALLOWANCES> (362)
<INVENTORY> 25,845
<CURRENT-ASSETS> 56,841
<PP&E> 36,891
<DEPRECIATION> (22,714)
<TOTAL-ASSETS> 86,845
<CURRENT-LIABILITIES> 21,827
<BONDS> 12,427
0
0
<COMMON> 1,702
<OTHER-SE> 47,530
<TOTAL-LIABILITY-AND-EQUITY> 86,845
<SALES> 136,780
<TOTAL-REVENUES> 136,780
<CGS> 101,312
<TOTAL-COSTS> 101,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 741
<INCOME-PRETAX> 11,180
<INCOME-TAX> 4,294
<INCOME-CONTINUING> 6,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,886
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
</TABLE>
