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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, 1996
Commission file number 0-7916
HARMON INDUSTRIES, INC.
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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
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None
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------------------------- ----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
- --------------------------------------------------------------------------------
Title of each class
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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
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As of March 17, 1997, 6,836,208 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 $112,841,000.
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 16 and 17 of the
Financial Data. Annual Report to Shareholders for
the year ended December 31,1996.
Item 7: Management's Discussion Pages 18 through 23 of
and Analysis of Financial the Annual Report to
Condition and Results of Shareholders for the year
Operations. ended December 31, 1996.
Item 8: Financial Statements Page 24 through 39 of
and Supplementary Data. the Annual Report to
Shareholders for the year
ended December 31, 1996.
PART III
Item 10: Directors and Executive Pages 3 through 5 of the
Officers of the Registrant. Company's Proxy Statement, dated
April 1, 1997
Item 11: Executive Compensation Pages 6 through 14 of the
and Other Information. Company's Proxy Statement
dated April 1, 1997.
Item 12: Security Ownership of Pages 2 and 3 of the
Certain Beneficial Owners Company's Proxy Statement
and Management. dated April 1, 1997.
Item 13: Certain Relationships and Page 5 (last paragraph
Related Transactions of Election of Directors)
and page 5 ("Certain
Transactions") of the
Company's Proxy Statement
dated April 1, 1997.
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HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
PART I
ITEM 1. BUSINESS
The Company is a leading supplier of signal and train control systems,
products and services to rail systems throughout North America and the world.
The Company sells its products to Class I and short line freight railroads and
to 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 11 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 23% decrease in Class I employment levels from 1986 to 1995
required the Class I railroads to look to products like those manufactured by
Harmon to monitor the condition of moving trains, help ensure
___________________
(1) This fact and the other statistical information about the Class I railroads
in this Annual Report come from RAILROAD FACTS, 1996 EDITION, a recognized
industry source for information on Class I railroads.
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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 27% reduction from 1986 to 1995 in the number
of Class I railroad freight cars in service required the Class I railroads to
look to products like those manufactured by Harmon which permit the railroads to
track more closely the location and performance of a particular train. This
improved utilization of cars and the reduction in employment levels have caused
the freight revenue ton miles per employee hour for Class I railroads to
increase by 111% from 1986 to 1995. The Class I railroads have become more
profitable despite a 38% reduction (in constant 1986 dollars) from 1986 to 1995
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 61% from 1986 to 1995. 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 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, 1996, the total volume of intermodal shipments is estimated
to have increased approximately 2% to 3% from 1995. 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 1986 to 1995, the Class I railroads have reduced their track miles
by 23%, to approximately 180,000 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 1986 to 1995, total capital expenditures by
Class I railroads per mile of track owned has increased from approximately
$15,400 to $33,200 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 530, with 30 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, have locally focussed management, generally
operate at lower speeds and are typically not burdened with the more restrictive
collective bargaining agreements as the Class I railroads.
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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
legislation. For many years this funding has been dedicated solely to railroad
crossing warning systems. There has been discussion in Washington in recent
years to convert future 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.
RAIL TRANSIT RAILROADS
The 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 1997 rail transit project
funding will equal or exceed the 1996 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
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 rail transit projects expected to be expanded or
originated in the next several years, Harmon has targeted existing 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
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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 cab signalling market.
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 additional
sub-contracts.
Harmon's first major contract for new construction in the 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 first prime contract,
with construction under its direction, 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.
In November, 1996, the Company was awarded a $17.6 million contract for the
design and manufacture of the train control system for a new light-rail system
for the New Jersey Transit Authority. This contract award, the largest in the
Company's history, further establishes Harmon as a significant supplier in the
rail transit market.
It is difficult to estimate the potential size of this market,
particularly since railroad track used extensively by a 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 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
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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 July, 1996, Harmon acquired Vaughan Systems Ltd., subsequently renamed
Vaughan Harmon Systems Ltd., located in the United Kingdom. The Vaughan Harmon
Systems Ltd. acquisition established the first international manufacturing
operations for the Company. Vaughan Harmon Systems Ltd. manufactures train
control products which are complementary to the Company's domestic product lines
and should provide a base for introducing the Company's products into the
European market. Also, 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, which should enable the Harmon products to
become more widely represented in these markets.
BUSINESS STRATEGY
Harmon's business strategy is to utilize its technological expertise,
ability to install turnkey systems, broad product lines, extensive sales network
and customer service orientation to provide high quality products and services
to its customers. Harmon plans to continue to expand and improve its product
lines and services to meet its customers' needs. Harmon expects that the
continued development of its product lines may be accomplished, in part, by
strategic acquisitions of product lines or companies that complement the
Company's current product lines. The Company actively pursues potential
acquisitions as part of this strategy. Internal development of new products
will continue, consistent with Harmon's desire to expand its product base.
The Company intends to improve its leadership position as a vendor to the
freight railroad industry by continuing to expand its long-standing
relationships with Class I railroads, continuing to explore opportunities with
short line railroads, developing new technologies to meet customer needs, and by
adding value through its engineering, installation and asset management services
capabilities. The Company has seen and expects to continue to see a shift in
its revenue mix from revenues generated strictly from the sale of its individual
products to revenues resulting from the sale of complete systems that are
designed, installed and, potentially, maintained by the Company. Systems sales
now represent over half of total sales. The Company plans to utilize its
extensive experience and expertise in the freight railroad industry to expand
its presence in the rail transit market. The Company has successfully adapted
several of its products to the needs of the rail transit industry and plans to
add to the products and services that it can offer to the 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. Growth in this market may also be aided by active
pursuit of additional acquisitions, continued development of distributor
relationships and increased direct presence in international
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markets. 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 Grain Valley manufacturing and
engineering, the Riverside Hot Box Detector manufacturing, the Warrensburg
systems and the Long Island engineering facilities became ISO 9000 certified in
1996. In January 1997, the circuit board manufacturing plant attained its ISO
certification. Substantially all of the Company's facilities are now ISO 9000
certified, with the final two facilities planned for certification in 1997.
The Company underwent a realignment at the end of 1996 to provide a
management structure organized along functional lines instead of separate
operating subsidiaries. Effective December 31, 1996, the Company's domestic
operating subsidiaries Harmon Electronics, Inc.; Electro Pneumatic Corporation;
and Consolidated Asset Management Company, Inc., were merged into the parent
company Harmon Industries, Inc. This realignment should allow the Company to
better serve its customers and streamline its operations.
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); computer-based traffic control systems (TTM);
and train describers and other train control systems manuafactured by Vaughan
Harmon Systems Ltd. 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
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boards for use by other electronics manufacturers. OTHER sales include products
that do not readily fit into the other five categories.
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)
Years Ended December 31,
1994 1995 1996
---- ---- ----
(dollars in thousands)
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
Train Control
Systems $45,711 38.4% $55,437 40.7% $87,080 47.4%
Signal Systems 35,448 29.8% 42,375 32.1% 48,927 26.6%
Asset Management
Services 20,894 17.5% 14,194 10.4% 22,217 12.1%
Train Inspection
Systems 5,054 4.2% 11,360 8.4% 12,906 7.1%
Printed Wiring
Boards 6,307 5.3% 6,752 5.0% 5,249 2.9%
Other 5,712 4.8% 5,999 4.4% 7,489 4.1%
-------- ------ -------- ------ -------- ------
Total $119,126 100.0% $136,117 100.0% $183,868 100.0%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
(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
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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); computer-based dispatch and traffic
control systems; train describers; and the design, wiring and installation of
packages and systems comprised of these products. 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. Computer-based dispatch systems monitor and
control train movement over designated tracks from a central location. These
systems provide important information enabling the railroads to direct the
movement of trains over large sections of track, thereby reducing the number of
control towers and related personnel otherwise required. Although the
technology is similar, each system requires individualized design and
specialized software.
Interlocking control equipment controls the track switches and train
signals at intersections or junction points (interlockings) where main tracks
cross or merge, or where trains may cross over between adjacent main tracks at
running speeds. Interlockings generally employ data telemetry to and from a
remote location (site of the computer-based dispatch system) and also frequently
interface to signal control track circuits. Interlockings use standard products
but often require extensive application engineering to define a site-specific
configuration.
Ultra Cab communicates speed commands directly to moving locomotives
through electrical currents in the rails, displays the resulting speed
requirements to the engine crew using colored light signals in the cab, and
enforces compliance with the speed commands by initiating an automatic brake
application if the engineer fails to stay within prescribed limits. 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 packages and systems comprised of
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
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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 superior technology 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 former 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 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, and the design, wiring and installation of packages and systems
comprised of these products. The Company's acquisition of the transportation
division of SERVO Corporation of America in December 1994 has 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.
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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, and (iii) 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
rail transit market.
Consistent with its objective of protecting its position as a leading
developer of technologically advanced products, the Company spent approximately
$4,561,000, $5,218,000 and $6,331,000 in the years ended December 31, 1994,
1995 and 1996, 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 Vaughan Systems
Ltd., the Company obtained their existing complementary product lines,
technology and R&D projects along with a significant research and development
workforce that was 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
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markets. The addition of Vaughan Harmon Systems, Ltd. in England and 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.
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 $59.4 Million at December
31, 1996. Approximately, $12.8 million of these orders have delivery dates in
1998 and 1999. Management believes the remaining $46.6 million in orders are
firm and will be filled in 1997. The backlog of orders was approximately $49.1
million at December 31, 1995, the majority of which were filled during 1996.
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
13
<PAGE>
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
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, 1996, the Company had 1,202 full-time employees. There
were 1,059 employees in manufacturing, 32 in marketing and sales and 111 in
general and administrative services. Some of the 1,059 manufacturing employees
are engaged in research and development. The Company estimates that the time
expended on research and development equals approximately 77 full-time
employees. In addition, the Company estimates that approximately 103 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.
14
<PAGE>
Floor Space Annual Lease Expiration
Location Principal Use (square feet) Payment (1) Date of Lease
- -------- ------------- ------------ ------------ -------------
Grain Valley, Design and 77,750 Owned Owned
Missouri manufacture of
(2 facilities) electronic
products and
railroad signal
systems
Warrensburg, Manufacture of 48,000 Owned Owned
Missouri railroad
crossing warning
systems and
hardware
Warrensburg, Manufacture of 30,400 Owned Owned
Missouri printed wiring
boards
Jacksonville, Design and 94,300 $351,004 12-31-2001
Florida manufacture of
railroad
crossing warning
systems and
hardware
Omaha, Design of 2,000 $ 20,100 3-02-98
Nebraska railroad
crossing warning
systems
Louisville, Design of 9,765 $ 57,500 8-31-99
Kentucky railroad
crossing warning
systems
Atlanta, Design and 35,364 Owned Owned
Georgia assembly
of railroad
crossing warning
systems
Riverside, Administration 88,027 $ 344,949 9-30-2001(2)
California and product
(3 facilities) design,
management
information
service
operations and
manufacture of
electronic
products
15
<PAGE>
Floor Space Annual Lease Expiration
Location Principal Use (square feet) Payment (1) Date of Lease
- -------- ------------- ------------ ------------ -------------
Hauppauge, Design of 10,000 $103,612 5-1-2000(3)
New York electronic
products for the
railroad industry
Riverside, Assembly, 47,000 $107,128 2-01-98
California storage and
distribution
of products for
the railroad
industry
Blue Springs, Assembly, 38,500 $ 32,083 6-30-97
Missouri storage and
distribution
of products for
the railroad
industry
Lee's Summit, Assembly, storage 20,000 $ 68,000 7-01-99(4)
Missouri and distribution
of products for
the railroad
industry
Lee's Summit, Assembly, 10,000 $ 34,050 7-01-98(5)
Missouri storage and
distribution
of products for
the railroad
industry
Blue Springs, Corporate 14,166 $135,930 11-01-99(6)
Missouri Headquarters
Ware, Design and 18,145 Owned Owned
England manufacture of
(2 facilities) electronic
products and
control systems
(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) 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.
16
<PAGE>
(3) Lease payments are as follows:
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
(4) The annual lease payment increases to $73,000 and $77,000 effective July 1,
1997 and 1998, respectively. The Company may terminate this lease in June
1997 upon payment of a predetermined early termination fee.
(5) The Company has the option to extend and renew this lease for three
successive one year terms after June 30, 1997.
(6) 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. The Company is at
near-capacity in several areas of its business and anticipates spending
significant amounts of money over the next several years to expand its
manufacturing and engineering facilities.
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 1994. Any remediation requirements are set forth in the post-closure
permit. 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. A post closure permit was
issued to the Company by the MDNR in June, 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 million 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, 1994, EPA
amended its Complaint to decrease the amount of proposed
17
<PAGE>
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, 1995, 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,
1995, 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, 1996, the Company filed a Notice of Appeal of the Initial Decision with the
Environmental Appeals Board. On appeal, the Company will argue that the
complaint is barred by the federal statute of limitations, that EPA lacks
jurisdiction to bring the Complaint and that the penalties assessed against the
Company are excessive in light of the Company's discovery during an internal
audit and subsequent voluntary disclosure and clean-up. The Company will also
argue that the Judge's Order for the Company to obtain liability coverage is
inconsistent with the State Consent Decree and violates the spirit of the RCRA
state authorization provisions. EPA did not appeal the Initial Decision, but
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, 1996.
18
<PAGE>
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, 1997 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, 1997 was 637.
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).
Principal Occupation For
Individual Office Age For The Last Five Years
- --------------------------------------------------------------------------------
Breshears, Ronald G. VP-Human Resources 50 VP-Human Resources of
the Company since
7/1/81.
Bush, William L. Director-Research 51 Director-Research &
& Development Development of the
Company since 8/8/93.
Prior to that, Manager,
Defense Business Unit
with Xetron Corporation,
a subsidiary of Northrop
Grumman.
19
<PAGE>
Principal Occupation For
Individual Office Age For The Last Five Years
- --------------------------------------------------------------------------------
Bush, William L. Director-Research & 51 Director-Research &
Development Development of the
Company since 8/8/93.
Prior to that, Manager,
Defense Business Unit
with Xetron Corporation
since 1990.
Daniels, Richard A. VP-Transit Sales 56 Appointed VP Transit
Sales 2/1/93. Prior to
that, Director Transit /
Commuter Systems of the
Company since April
1991.
Foudree, Charles M. Exec. VP-Finance, 52 Exec. VP of the Company
Secretary and since 9/9/86. Secretary
Treasurer of the Company since
2/2/82. Treasurer of the
Company since 2/5/74.
Harmon, Robert E. Chairman of the 57 Chairman of the Board
Board the Company since
2/4/75. Chief Executive
Officer of the Company
from 8/1/90 through
12/31/94.
Heggestad, Robert E. VP-Technology 58 VP-Technology of the
Company since 10/2/86.
John, James R. VP-Services 48 Appointed VP-Services of
the Company on May 1,
1996. President of
Consolidated Asset
Management Services
Company, Inc. from March
1992 to April 1996.
Prior to that VP
Manufacturing of Harmon
Electronics, Inc. since
February 1987.
Johnson, John W. VP-Domestic Sales 50 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.
20
<PAGE>
Principal Occupation For
Individual Office Age For The Last Five Years
- --------------------------------------------------------------------------------
Kaiser, Lloyd T. Exec. VP-Systems 45 Appointed Exec. VP-
Systems May 1, 1996.
President of Harmon
Electronics, Inc. from
March 1992 to April
1996. Prior to that VP-
Research & Development
of Harmon Electronics,
Inc. (HEI) since 4/1/91.
Olsson, Bjorn E. President & Chief 51 President & Chief
Executive Officer Executive Officer
Officer of the 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.
Rosewall, Raymond A. VP-Manufacturing 45 VP-Manufacturing since
12/27/95. President of
Electro Pneumatic
Corporation from
12/27/95 to 4/30/96.
Prior to that Executive
VP Worldwide Sales and
Marketing for QMS, Inc.
since 1992; prior to
that Executive VP
Operations for QMS, Inc.
since 1989.
Ryker, Gary E. Exec. VP-Marketing, 47 Appointed Exec. VP-
Sales and Service Marketing Sales and
Service Marketing 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.
21
<PAGE>
Principal Occupation For
Individual Office Age For The Last Five Years
- --------------------------------------------------------------------------------
Scheerer, William J. VP-Applications 49 Appointed VP-
Engineering Applications Engineering
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 43 VP-Controller of the
Company since 11/1/83.
Utterback, Jeffery J. Director-Quality Director-Quality Assurance
Assurance of the Company since 1993.
Prior to that, Manager of
Product Assurance of the
Company since 1990.
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.
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 & Coburn
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 Grant Leighton Associates of Texas, Inc.
Plano, Texas
Judith C. Whittaker Vice President,General Counsel / Secretary
Hallmark Cards, Incorporated
Kansas City, Missouri
22
<PAGE>
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
1996 Annual Report to Shareholders at the following pages:
Page
-----
Independent Auditors' Report 37
Consolidated Balance Sheets -
December 31, 1996 and 1995 24-25
Consolidated Statements of Earnings -
Years ended December 31, 1996, 1995 and 1994 26
Consolidated Statements of Stockholders'
Equity - Years ended
December 31, 1996, 1995 and 1994 27
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995, and 1994 28
Notes to Consolidated Financial
Statements 29-35
(a)(2) Financial Statement Schedules
Selected Financial Data - for the years ended December 31, 1996, 1995
and 1994, are attached hereto at the following pages:
Independent Auditors' Report on Financial
Statement Schedule 27
Schedule VIII - Valuation and Qualifying
Accounts 28
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.
23
<PAGE>
(a)(3) Exhibits:
Exhibit No. Page
----------------------------------------------------------------------
11 Computation of Weighted Average
Shares Outstanding 29 thru 30
13 Sections of the 1996 Annual Report to
Shareholders 31 thru 72
20 Notice of Annual Meeting and
Proxy Statement dated April 1, 1997.
Incorporated by reference N/A
21 Listing of Subsidiaries 73
99-1 Articles of Merger 75 thru 81
99-2 Forward Looking Information Incorporated by
reference from
Page 36 of
Exhibit 13
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended December 31,
1996.
24
<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, 1997 By: /s/ Bjorn E. Olsson
-----------------------
Bjorn E. Olsson
President
Date: March 25, 1997 By: /s/ Charles M. Foudree
------------------------
Charles M. Foudree
Executive Vice President-
Finance
Date: March 25, 1997 By: /s/ Stephen L. Schmitz
------------------------
Stephen L. Schmitz
Vice President-Controller
25
<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, 1997
---------------------------
Thomas F. Eagleton, Director
By: /s/ Bruce M. Flohr Date March 25, 1997
---------------------------
Bruce M. Flohr, Director
By: /s/ Charles M. Foudree Date: March 25, 1997
---------------------------
Charles M. Foudree, Director
By: Date: March 25, 1997
---------------------------
Rodney L. Gray, Director
By: /s/ Robert E. Harmon Date: March 25, 1997
---------------------------
Robert E. Harmon, Director
By: /s/ Herbert M. Kohn Date: March 25, 1997
---------------------------
Herbert M. Kohn, Director
By: /s/ Douglass Wm. List Date: March 25, 1997
---------------------------
Douglass Wm. List, Director
By: /s/ Gerald E. Myers Date: March 25, 1997
---------------------------
Gerald E. Myers, Director
By: /s/ Bjorn E. Olsson Date: March 25, 1997
---------------------------
Bjorn E. Olsson, Director
By: Date: March 25, 1997
---------------------------
Donald V. Rentz, Director
By: /s/ Judith C. Whittaker Date: March 25, 1997
---------------------------
Judith C. Whittaker, Director
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Harmon Industries, Inc.:
Under date of February 4, 1997, we reported on the consolidated balance sheets
of Harmon Industries, Inc. and subsidiaries as of December 31, 1996 and 1995,
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,
1996, as contained in the 1996 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 1996. 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.
Kansas City, Missouri
February 4, 1997
27
<PAGE>
Schedule VIII
HARMON INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
Charged to
Beginning costs and Recoveries Ending
Description balance expenses (deductions) balance
----------- --------- --------- ------------ -------
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
------ ------ ------ ------
------ ------ ------ ------
Year ended December 31, 1996:
Allowance for doubtful trade
accounts receivable $ 362 $ 32 $ (87) $ 307
------ ------ ------ ------
------ ------ ------ ------
Warranty reserve $ - $2,938 $ - $2,938
------ ------ ------ ------
------ ------ ------ ------
28
<PAGE>
HARMON INDUSTRIES, INC. EXHIBIT 11A
FORM 10-K -----------
DECEMBER 31, 1996
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, 1996 and 1995.
<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>
1996
October 1 - December 31 6,823,273 92 627,741,116
Options exercised 1,000 8 8,000
5,000 7 35,000
Equivalent shares under the
Company's option plans 39,897 92 3,670,524
------------
631,454,640 6,863,637
------------ ---------
------------ ---------
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
------------ ---------
------------ ---------
</TABLE>
29
<PAGE>
Computation of the average number of shares of Common Stock outstanding for
the twelve months ended December 31, 1996 and 1995.
1996
Quarter 1 weighted average 6,828,883
Quarter 2 weighted average 6,834,674
Quarter 3 weighted average 6,837,743
Quarter 4 weighted average 6,844,216
Divided by
27,345,516 4 quarters = 6,836,379
---------
---------
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
---------
---------
30
<PAGE>
Harmon Industries, Inc.
1996 Annual Report
Signal and Train Control Systems for Railroads Worldwide
[COVER PHOTO]
Photograph of a passenger rail station, rail transit cars and track.\
31
<PAGE>
Corporate Profile
Harmon is a leading supplier of sophisticated signal and train control
products and systems. It serves three railroad markets: domestic freight,
domestic rail transit, and international, which includes both freight and
rail transit.
Harmon's design focus is microprocessor based and aimed toward systems and
products that improve the operating efficiency and safety performance of its
customers. Products include railroad signal and train control equipment,
train inspection systems, rail/highway grade crossing hardware and related
components.
Harmon emphasizes engineering innovation and rapid response to customer
needs. Many of its products provide sophisticated and timely solutions to
signal and control problems that impact the railroad industry.
Harmon is headquartered in Blue Springs, Missouri, a suburb of Kansas City.
It operates from numerous facilities in the U.S., Canada, England,
Switzerland, and Australia.
Harmon common stock trades on The Nasdaq Stock Market under the symbol: hrmn.
Its current annual dividend is 15 cents per share.
Table of Contents
Financial Highlights 1
Report to Shareholders 2
Harmon Markets 4
Corporate Progress 14
Selected Financial Data 16
Financial Review 18
Consolidated Financial
Statements 24
Notes to Consolidated
Financial Statements 29
Investor Information 38
Management, Directors
and Corporate Data 39
Locations 39
32
<PAGE>
FINANCIAL HIGHLIGHTS
(in thousands except per share data, where applicable)
OPERATING DATA
Year ended December 31, 1996 1995 Percent Change
- -------------------------------------------------------------------------------
Net sales $175,440 $136,780 + 28.3%
Pre-tax income 15,105 11,180 + 35.1
Income taxes 5,775 4,294 + 34.5
Net earnings 9,330 6,886 + 35.5
Earnings per share 1.36 1.01 + 34.7
Dividends per share .15 .15 -0-
PERFORMANCE DATA
Year ended December 31, 1996 1995 Percent Change
- -------------------------------------------------------------------------------
Return on sales (pre-tax) 8.6% 8.2% + 4.9%
Return on year-end equity 16.1% 14.0% + 15.0
Return on capital employed 1 25.9% 21.7% + 19.4
YEAR-END DATA
December 31, 1996 1995 Percent Change
- -------------------------------------------------------------------------------
Working capital $33,629 $35,014 - 4.6%
Interest-bearing long-term debt 3,412 12,090 -71.8
Approximate number of shareholders 2 637 675 - 5.6
Number of employees 1,200 1,075 +11.6
Outstanding shares (000s) 6,829 6,806 + 0.3
1 Return on capital employed is a measurement that encourages management to
operate as efficiently as possible. It promotes reduced asset values relative
to sales, and measures how effective it is (for example) to borrow money to
purchase capital goods to reduce manufacturing costs. The formula is: the sum
of pre-tax earnings plus interest expense divided by the sum of average total
assets minus non-interest bearing liabilities.
2 Includes only registered shareholders. Since many shareholders hold their
shares in "street name," the number of individual shareholders is larger than
the number shown.
1
33
<PAGE>
REPORT TO SHAREHOLDERS
In 1996, we celebrated our 50th anniversary by delivering the best year ever
for Harmon. Incoming orders increased 35% to $187.5 million. Shipments rose
28% to $175.4 million. Earnings before taxes were $15.1 million, and net
earnings increased 35% to a record $9.3 million, or $1.36 per share. Our
order backlog grew to $59 million from $49 million at 1995 year-end. This
performance was especially noteworthy because it was achieved in a year when
the rail supply industry as a whole was experiencing weak sales and earnings.
Our record breaking performance in 1996 was due largely to a combination
of leading-edge technology, a partnership-service concept that we introduced
four years ago, a marketing strategy that commits us to grow simultaneously
in three markets: domestic freight, rail transit, and international, and
superb performances by our dedicated and talented employees who enabled us to
reach our 1996 objectives.
GROWTH STRATEGY
As Harmon continuously develops smarter, smaller and less expensive products,
it needs to grow its markets correspondingly. Consequently, we are working on
a growth strategy that dictates that we maintain our strong position with our
domestic freight railroad customers in our traditional product areas while
adding new products and services. It also requires us to enhance our
established position in the North American rail transit market, and seek
meaningful expansion within international markets with basically similar
products and technology that we provide to our domestic markets. This latter
focus is particularly important as the international markets are roughly
eight times as large as our domestic markets .
- - DOMESTIC FREIGHT. We received record orders of $151 million in 1996. These
were 34% above 1995's intake and 94% ahead of our 1992 level. Part of that
five-year growth is the result of our having increased the number of our
service offerings over the past several years to include asset management and
on-time deliveries. Among our order gains for 1996 was our first turnkey
signal system installation. It entailed the design, manufacture and
installation of microprocessor interlockings, track circuits, hot box
detectors and rail/highway crossing systems for 150 miles of track at
Stampede Pass in Washington. We completed the job in just six months. The
speed of our performance was appreciated by the customer and confirmed Harmon
as a major force in time-sensitive turnkey installations.
In 1996 we saw a continuing change from product business to systems
business, which, because of the size of systems, intensifies the need for
close, partnership relations. We intend to expand our services gradually by
expanding the partnership concept to include repair shops, installation
services, spare parts pools, proactive maintenance and other services.
- - RAIL TRANSIT. We booked orders aggregating $22.5 million in 1996, a 19%
increase from 1995 and a ninefold gain over the past five years. This year's
orders included a $17.6 million contract to design and build a train control
system for New Jersey Transit's new light rail line. This was the largest
single contract ever awarded to Harmon. Other highlights included our
completion of the CTA Green Line rehabilitation project in Chicago in which
we acted as its main transit signal and systems supplier, an invitation from
the New York City Transit Authority to participate with other signal
suppliers in its planning process for future train control systems, and the
Florida Department of Transportation's agreement to award a consortium, of
which Harmon is a member, a franchise to build a 200 mph passenger train
system to link Miami to Orlando and Tampa.
- - INTERNATIONAL. We booked orders amounting to $14.3 million in 1996, more
than twice what we received in 1995 and 14 times what we got in 1992. The
gain last year was sparked by our acquisition of Vaughan Harmon Systems Ltd.,
which produced orders in excess of $10 million. Vaughan Harmon is an industry
leader in Europe for software and systems, which gives us a strong entry into
the European market. Moreover, we expect our technology and products will be
a major factor in growing Vaughan Harmon's business. The market in the UK is
presently very strong as, after 2 1/2 years of little capital spending,
Railtrack is now planning
2
34
<PAGE>
a major upgrade of its track systems, which presents a strong opportunity for
us.
STRATEGY VALIDATION
Our growth over the past five years is strong evidence that our strategy is
working, and we were very pleased with our performance in 1996.
STRATEGIC GOALS
Within our strategic plan, we have identified six areas where we need to be
better than our competition: customer service, quality/reliability, fast
cycle times, cost effectiveness, technology and systems integration.
In order to further improve our CUSTOMER SERVICE, we merged our three
domestic operating subsidiaries into the parent company. We took this step to
improve operations internally by assigning total responsibility along
functional lines rather than through corporate subsidiaries. We also acquired
two contract engineering companies in Florida, and they will enhance our
industry position as a signal and engineering design company.
To improve our QUALITY/RELIABILITY we focussed close attention on various
manufacturing and other processes. We now have two of our facilities TickIT
certified, and all but two ISO-9000 certified.
To improve on our CYCLE TIMES, we reinforced our project management
resources. This was instrumental in our getting the CTA rehab contract in
Chicago and the 150 mile signal system turnkey installation contract at
Stampede Pass last year, as both were extremely time sensitive. This focus
has enabled us also to reduce our system delivery time from 90 to 60 days.
We are approaching COST EFFECTIVENESS as it relates to the total cost
incurred by customers. This includes the cost of the product, its
installation cost, its subsequent maintenance cost, and the time involved to
complete a project. As a result of this focus, we find that our on-time
complete delivery service for signal installations has reduced installation
costs by 30-40%, resulting in material savings for the customer.
To maintain our TECHNOLOGY leadership, we spend an average of four percent
of each sales dollar on research and development, which is yielding exciting
technology. Last October, we demonstrated our ITCS high speed train control
system in Michigan. Amtrak ran a passenger train at speeds up to 101 mph over
a distance of 20 miles. Amtrak's goal is to reduce the trip time between
Detroit and Chicago from 5 3/4 hours to 3 1/2 hours or less, a major advance
in enroute speed, which has already triggered some international interest.
Our system provides a cost effective means of improving safety and reducing
travel times because it can be integrated into other control systems
currently in place. In addition, our advanced technology and patented method
of applying cab signalling on board AC traction locomotives generated
substantial business for us in 1996.
The trend towards INCREASED SYSTEMS INTEGRATION is continuing. In this
respect, Harmon is building up capabilities not only to integrate its
products into a system, but also to provide an interface for other existing
systems. This will enable us to supply our products to the replacement
market, regardless whether Harmon or another company made the original system.
GROWTH OUTLOOK
We strongly believe that we will be able to maintain our growth through the
remainder of the 20th Century. Most of the growth should come through
additional services for the freight railroads in North America and from
increased business both in the transit and international markets.
The near-term perspective is more difficult to predict because of the
ongoing merger activities among the North American railroads. We are
presently experiencing a slowdown in our business as some railroads are
deferring certain capital expenditures, pending the outcome of ongoing
negotiations.
But as we saw in 1996, once the mergers are completed, there is much work
to be done to consolidate track systems, which should give us many sales
opportunities. On balance, 1997 is expected to be another strong year for
Harmon.
/s/ Bjorn E. Olsson
Bjorn E. Olsson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Blue Springs, Missouri, March 21, 1997
[GRAPHS:]
ORDERS BOOKED ($ - Millions)
92 93.4
93 121.5
94 127.9
95 138.6
96 187.5
NET EARNINGS ($ - Millions)
92 5.0
93 6.9
94 7.6
95 6.9
96 9.3
RETURN ON CAPITAL EMPLOYED
92 35%
93 39%
94 34%
95 22%
96 26%
[INSET PHOTO]
Photograph of Bjorn E. Olsson, President and Chief Executive Officer of
Harmon Industries, Inc.
GROSS SALES ($ - Millions)
92 82.5
93 98.8
94 119.1
95 136.1
96 183.9
3
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<PAGE>
HARMON MARKETS
Harmon's Potential and Performance
Harmon supplies signal and train control systems, products and services to three
rail markets: domestic freight, domestic rail transit, and international, which
is comprised of both freight and rail transit customers. Our strategy is to
develop lasting relationships with customers by providing safe, efficient and
technologically advanced products and services that enable them to enhance their
productivity.
An analysis of each market and the validity of our business strategies for each
of our three major markets follow.
DOMESTIC FREIGHT AND SERVICE
Domestic freight carriers purchase several hundred million dollars in signal
and train control systems and products annually. We derive the majority of
our revenues from this market. Our market share is roughly 30 percent. Our
sales volume increased in each of the last five years, concrete evidence of
how well our business strategy is working.
- - GROWTH POTENTIAL
We have both a technological lead in products and systems, and a complete
service operation. Our near-term growth potential lies principally in
increasing the amount of services we provide. Over the longer term, we see an
increase in the size of this market.
One of the railroads' ongoing requirements is to reduce costs and increase
the utility of their rolling stock and infrastructure. These needs play to
our strengths.
Our product focus, in addition to providing safety, has always been to
develop products that provided direct cost savings or enhanced our customers'
efficiency, or both. Our advanced signal and control systems, for example,
enable railroads to achieve substantial cost savings quickly because Harmon
systems provide a rapid payback. Thus the opportunity to reduce operating
costs has become a strong incentive for the railroads to make cost-saving
equipment and system purchases, regardless of market conditions.
- - EFFECT OF RAILROAD MERGERS
Railroad mergers are a fact of life. While merger negotiations are in
progress, an uncertainty sometimes surrounds the involved railroads'
intentions regarding their near-term capital goods purchases. In general, the
more ambitious and expansive projects are put on hold until the merger
negotiations run their course.
Once the merger is completed, our sales often increase for a period while the
new railroad seeks to modernize and consolidate its operations with more cost
effective equipment.
Mergers also tend to foster the sale of marginal operations to short line
railroads. This often means that these "feeder" railroads will also require
some revamping of their signals and controls. Further, short line railroads
often lack the staff to assemble the components and install them, a situation
that is tailor-made for our service organization.
Thus it can be fairly said that anticipated sales often shrink while merger
talks are in progress and then for a time grow to above average levels once
the merger is either completed or abandoned.
[CHART]
GROSS SALES - 1996
($- Millions)
Domestic $142.1
Domestic Service $22.2
Domestic Rail Transit $14.4
International $5.2
DURING THE PAST FIVE YEARS HARMON INCREASED ITS BUSINESS SUBSTANTIALLY BY
ENTERING THE SERVICE BUSINESS AS WELL AS THE NEW PROJECT MARKET FOR DOMESTIC
RAIL TRANSIT AND THE INTERNATIONAL MARKET.
DOMESTIC FREIGHT RAIL IS INDISPENSABLE. IT IS THE ONLY TRANSPORTATION
SYSTEM CAPABLE OF CARRYING MASSIVE LOADS. THIS MARKET IS HARMON'S LARGEST
SOURCE OF REVENUE, PROVIDING 77% OF ITS SHIPMENTS IN 1996.
4
36
<PAGE>
[PHOTO]
Photograph of rail cars on tracks at an industrial site.
37
<PAGE>
[PHOTO]
Photograph of Chicago Transit Authority rail transit cars on tracks with a
Chicago background.
38
<PAGE>
- - COMPETITIVE POSITION
We occupy a dominant position in the signal and train control sector of the
domestic freight market.
- - TECHNOLOGY
Our product development continues to capitalize on advances in technology.
Communications-based signalling, a subject of intense interest in both the
freight and rail transit markets, is a major focus of our R&D efforts. This
concept uses radio data communications to convey operating instructions
between computers on the ground and computers on trains, rather than relying
on human operators to correctly interpret trackside signal lights. Combined
with a means such as Global Positioning Satellites (GPS) to let the on-board
computer know its exact location on the track, these innovations can greatly
improve the efficiency of train operations while simultaneously enhancing
their safety.
Our Incremental Train Control System (ITCS), which is being installed on a
portion of Amtrak's high-speed rail line between Detroit and Chicago, is a
form of communications-based signalling. It enables trains to operate safely
at higher speeds than previously, making them more competitive with air
travel in many instances. A short segment of the system was demonstrated
successfully last October. It is now being expanded to complete a 71 mile
corridor, which will be operational in late 1997.
We also have a strong lead in on-board cab signal systems. Our Ultra Cab II,
combined with a unique patented antenna, is the only such product that can
operate successfully in the face of intense electrical interference generated
by new, high-power AC traction locomotives.
For many years, our Electro Code products have been in wide use by domestic
railroads. These products carry information through the rails between
trackside block signals and eliminate the need for wayside pole line.
Thousands of miles of pole line have been replaced with Electro Code, with a
resulting major increase in operating reliability and safety.
Our Vital Harmon Logic Controller (VHLC) is the product of choice of most
freight railroads for control of signals and switches at interlockings. Its
outstanding performance record and cost effectiveness have led to
installations of nearly 900 units, more than any other competitor's product
worldwide.
- - SERVICE ADVANTAGE
Service has evolved into a major line of business for us, adding $22 million
to our revenues in 1996, up 57 percent from that of the previous year. Our
service arm warehouses commonly-used signal components (regardless of which
supplier manufactured them); manages customers' off-premise signal and
control inventories; and performs assembly of component parts. These
functions give us the ability to manage even complex projects from beginning
to end, which provides us with a powerful competitive advantage.
Adding project management to our expanding list of services proved timely.
Last year we completed a $13 million contract to modernize a freight
railroad's signal system at Stampede Pass in the Cascade Mountains. Time to
completion was a crucial element. Upon completion, it would enable our
customer to materially increase its freight traffic, thereby enhancing its
revenues.
AMTRAK'S HIGH SPEED
TEST RUN
[INSET PHOTO]
Photograph of an AMTRAK train on tracks in the countryside.
HARMON'S INCREMENTAL TRAIN CONTROL SYSTEM (ITCS) SUCCESSFULLY PASSED ITS INITIAL
TEST PHASE LAST OCTOBER ON A 20-MILE TRACK SECTION OF AMTRAK'S LINE IN
SOUTHWESTERN MICHIGAN. THIS IS THE FIRST STEP TOWARD AMTRAK'S REALIZATION OF
RAIL SERVICE BETWEEN DETROIT AND CHICAGO AT SPEEDS IN EXCESS OF 100 MPH.
IN KEEPING WITH ITS PHILOSOPHY OF DESIGNING COST EFFECTIVE PRODUCTS, THE HARMON
ITCS WAS MADE TO OPERATE WITH EXISTING SIGNALS AND CONTROLS, THUS MAKING IT
HIGHLY AFFORDABLE.
We furnished and installed all the signal equipment on 150 miles of main line,
plus six passing sidings and numerous rail/highway crossings. The project used a
broad spectrum of our products: HXP-3 for crossings, Electro Code for track
circuits, VHLC controllers for interlockings, plus the signals themselves and
HARMON'S TECHNOLOGICAL LEAD OVER ITS DOMESTIC COMPETITORS IS DUE LARGELY TO ITS
R&D FOCUS, WHICH AVERAGES FOUR PERCENT OF EVERY SALES DOLLAR.
7
39
<PAGE>
[PHOTO]
Photograph of a Harmon Industries, Inc. engineer testing train control
equipment.
40
<PAGE>
other accessories. To maximize our installation productivity, our service
warehouse assembled complete installation kits and shipped them directly to
the site. Despite unfavorable weather and other obstacles, we finished the
project on schedule--a feat considered impossible by many.
- - 1996 RESULTS
During 1996, our incoming orders from the domestic freight market were $151
million, an increase of 34 percent over the previous year. Our 1996 shipments to
freight railroad customers were $164 million, up 51 percent from those of 1995.
Our year-end backlog for domestic freight was $25 million.
- - SUMMARY--DOMESTIC FREIGHT AND SERVICE
We have steadily increased our sales to the domestic freight railroad market
year after year. We are also helping to enlarge this market by providing
contract services in addition to our manufacture of products and systems.
Contract services have enormous potential. They come at a time when the
domestic freight railroads are heavily focussed on their primary
mission--moving freight economically. Consequently, many are downsizing their
ancillary roles to reduce operating costs, outsourcing many service and
purchasing functions they formerly did for themselves. We believe contract
services may well grow in size to rival our product and systems sales. It has
certainly given Harmon an additional sales opportunity that most of its
principal competitors do not possess. Consequently, we find our business is
growing at a time when some of our competitors' volumes are shrinking.
DOMESTIC RAIL TRANSIT
The size of the domestic transit market for our products is roughly the same
as that of the domestic freight market -- in excess of $300 million annually.
We have long served the repair and renovation side of this market, but the
new project side is relatively recent for us. We entered it in 1991. That
year the St. Louis Metro Link rail transit system accepted our electronic
signal solutions, and awarded us a contract to supply its signal and control
systems. Their acceptance of our electronic innovations became a defining
moment in Harmon history. Shortly thereafter, microprocessor-based systems
became widely accepted for domestic rail transit signal products and systems.
- - FUNDAMENTAL DIFFERENCES
There are major differences between freight and rapid transit customers and
how business is done in the rail transit market.
- The transit market involves moving people, not freight. Thus, in addition
to safety and efficiency, other considerations such as train frequency and
comfort are extremely important issues.
- Unlike the freight railroads, which are generally focused on improving or
extending existing facilities, the transit market is involved in major new
starts as well as upgrades to its current signals and controls.
- In some instances, new "turnkey" construction projects are so large that
only huge corporations or consortiums can function as the general
contractor. In these situations, Harmon takes on a subcontractor role for
its portion of the project. For other projects, Harmon's increasing size
and proven track record are enabling it to act as a prime contractor.
- In many cases, the buyer is a municipal authority, not a private company.
Since municipal authorities often lack the technical expertise to design
a system, they
[CHART]
SERVICE REVENUES - 1995-96
$ - Millions
96 $22 million
95 $14 million
THE ADDITION OF A PROJECT MANAGEMENT FUNCTION TO HARMON'S SERVICE ORGANIZATION
AND A SIZABLE INCREASE IN SHIPMENTS TO EXISTING CUSTOMERS HELPED SERVICE
REVENUES INCREASE 57% IN THE PAST YEAR.
HARMON'S ENGINEERING DEPARTMENT WAS EXPANDED LAST YEAR TO ENABLE THE COMPANY TO
MAINTAIN ITS HIGH LEVEL OF PRODUCT INNOVATIONS.
9
41
<PAGE>
[PHOTO]
Photograph of a rail transit passenger station with rail transit cars.
42
<PAGE>
frequently rely on consultants to draw up the detailed specifications. As a
result, consulting firms are the gate keepers to projects. Initially, rail
transit consultants often ignored our microprocessor technology, preferring
to support older mechanical relay systems. Our initial success in St. Louis,
followed by subsequent installations in Chicago, Denver, New York,
Philadelphia, and San Diego, established the superiority of our systems. Many
rail transit consultants are now among our most enthusiastic supporters.
Winning them over was a critically important milestone in our sales strategy.
- - In general, sizable fluctuations in orders received in any given year are
to be expected simply because the market consists of a relatively small
number of immense projects rather than a great volume of smaller orders,
which are typical in the freight markets. In addition, many projects are
spread out over several construction phases, which may extend from two to
five years, or more. Thus, winning the signal and control portion of a rail
transit project often translates into large order backlogs that may take
several years to complete. We expect to build such a backlog over the next
several years, which will tend to balance out year-to-year fluctuations in
shipments.
- - For the most part, rail transit projects are funded by federal, state and
local governments. The funding is being driven, at least in part, by public
pressure to relieve congestion on already crowded highways and to reduce the
air pollution that accompanies automobile use. Rail transit has strong
support in Washington, which suggests that a reasonable level of federal
funding will be in place for at least several years.
- - MARKET POTENTIAL
Domestic rail transit continues to expand. We expect to bid on signal and
control system contracts approximating several hundred million dollars for
rail transit projects in 1997 - both new and upgrade projects. Sources within
the industry indicate that projects of similar magnitude are likely to be put
out for bid each year through the year 2000.
- - 1996 RESULTS
At year-end 1996, our rail transit backlog was $24 million, 74 percent in new
construction and the balance in repair and upgrade work. The new installation
backlog consisted principally of a $17.6 million contract awarded in
November, 1996, for us to design and build a microprocessor-based train
control system for a 9.5-mile light-rail system that will connect the New
Jersey cities of Bayonne and Hoboken. This project includes equipping 43
transit cabs with Ultra Cab units.
Total contracts received in 1996 were $22 million, up 19 percent over 1995
awards. Shipments for 1996 were off 32 percent at $14 million, which
reflected a drought in rail transit contracts awarded in 1995 and early 1996.
- - SUMMARY - RAIL TRANSIT
The outlook is quite positive. Our products and systems are gaining greater
acceptance each year, largely because of their exemplary performance on jobs
undertaken during the past five years.
We have learned how to do business in this environment. We have been able to
join forces with some of the largest railroad builders in the world to assure
our participation in the multimillion dollar projects that are now in various
stages of planning. In addition, we have increased our service and project
management staffs so that we can be the prime contractor on installations
such as the $13 million Green Line project in Chicago. Finally, the amount of
planned new projects and repair and upgrades to existing systems is larger
than at any time in recent memory.
[INSET PHOTO]
Photograph of a rail passenger station with rail transit cars.
RAIL TRANSIT IS OFTEN SEEN AS THE BEST SOLUTION FOR RELIEVING TRAFFIC AND
ATTENDANT AIR POLLUTION IN MAJOR CITIES IN THE U.S.
HARMON MICROPROCESSOR TECHNOLOGY IS BEING EMBRACED BY RAIL TRANSIT AUTHORITIES.
LAST YEAR, ORDERS FOR HARMON RAIL TRANSIT EQUIPMENT REACHED $22 MILLION.
11
43
<PAGE>
[PHOTO]
Photograph of Vaughan Harmon Systems Ltd. train describer equipment
[INSET PHOTO]
Photograph of a rail transit station in London, England.
44
<PAGE>
INTERNATIONAL
The international market dwarfs the domestic market. It is estimated at $4-$5
billion annually, roughly eight times that of the North American freight and
rail transit markets, combined.
The international market holds enormous potential for Harmon. In many parts
of the world, notably China, India, Southeast Asia, Africa, Latin America,
and the former Soviet-bloc countries, significant investment in the railway
infrastructure is under way or being planned, with the addition of new lines,
modernization of existing lines and expansion of passenger services.
Railroads in the UK, South America and the European Continent are presently
undergoing a wave of privatization. Declining government subsidies to the
former state-run railways are creating greater demand for products that
deliver improved efficiency while assuring safe and reliable operations. This
new attention to economics opens the door for our products, as cost
effectiveness with safety has been a major product development focus of
Harmon for 50 years.
Our products and technologies continue to attract growing attention on the
international front. We anticipate an opportunity to demonstrate our
interlocking controls and crossing warning systems in the UK in 1997. Greater
acceptance of our products in Australia is providing Harmon with expanding
business opportunities there. In China, our established hot box detector
business is expanding, and several railroads have shown interest in testing
other Harmon products. In 1996, we were awarded a contract to resignal the
first 39 km of a 900 km mining railroad in Brazil, with potential for the
remainder to follow over the next several years. Other areas in South
America, along with major markets in Europe and Southeast Asia, are fertile
markets for Harmon's products.
- - 1996 RESULTS
In 1996 we booked orders aggregating $14.3 million, up 107 percent from $6.9
million in 1995. Shipments rose 30 percent to $5.2 million from $4.0 million
in 1995. The considerable growth in 1996 included enhanced sales of our hot
box detectors, completion of a major cab signalling system in Australia, and
the introduction of software and several hardware products, which we obtained
when we acquired UK-based Vaughan Harmon Systems Ltd. last July.
Vaughan Harmon is a premier railroad software developer with a market leading
position in the UK specializing in train describer systems, passenger
information systems and modular railway control systems. In the first six
months after the acquisition, Vaughan Harmon produced $10 million in new
orders.
A key benefit that Vaughan Harmon brings is being a recognized and respected
rail systems supplier within the European Community. Thus, in addition to
having a strong local presence in the UK, Vaughan Harmon will serve as the
platform for Harmon's growth into the broader European signalling market.
- - SUMMARY - INTERNATIONAL
Long-term, the international market affords us great promise because of its
enormous size. Numerous rail projects are either already underway or in
planning stages. In addition, the benefits of more cost-effective signal and
control systems are now gaining increased attention overseas.
Although our market penetration is growing each year, it remains small
relative to the overall market potential. Our growth strategy is threefold:
to foster additional partnership relations with multinational railroad supply
companies; to gain additional market inroads and rapid acceptance through
acquisitions of established, local rail suppliers, and to increase our direct
physical presence in overseas market areas.
[INSET PHOTO]
Photograph of a train crossing a bridge in the countryside.
COMPARED TO THE DOMESTIC RAILROAD MARKET, THE INTERNATIONAL MARKET IS ROUGHLY
EIGHT TIMES LARGER. AN EMPHASIS ON PRODUCTS THAT DELIVER COST SAVINGS AS WELL AS
SAFETY HAS INCREASED HARMON'S POTENTIAL FOR INTERNATIONAL SALES.
VAUGHAN HARMON SYSTEMS LTD., WHICH WE ACQUIRED LAST JULY, IS A PREMIER RAILROAD
SOFTWARE DEVELOPER IN THE UK AND A MARKET LEADER IN THE MANUFACTURE OF TRAIN
DESCRIBERS (SHOWN AT LEFT), PASSENGER INFORMATION AND MODULAR RAILWAY CONTROL
SYSTEMS, WHICH CONTROL MANY PASSENGER AND COMMUTER TRAINS IN THE UK. IT PRODUCED
$10 MILLION IN NEW ORDERS IN THE FIRST SIX MONTHS WE OWNED THEM.
13
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<PAGE>
CORPORATE PROGRESS
During the past several years, we have been reshaping Harmon so that it could
achieve our expanded growth objectives here and abroad. That effort was
intensified last year.
Some of the major issues were: adding staff to service our rail transit and
international markets; expanding our research and development efforts;
accelerating product development; introducing modular construction so that
our products could be readily modified to function equally well for freight
rail or rail transit --both at home and overseas; reshaping the corporate
structure along functional lines for better customer service; and finally,
managing our cash flow so we could accomplish what we set out to do.
In the space of five years, we:
- Entered the new project segment of rail transit, which generated over $53
million in shipments, and produced a $24 million backlog at year-end 1996;
- Effectively expanded into the international market, which has since
provided shipments of more than $12 million, including $5 million last year
and a year-end backlog of $11 million;
- Increased the size of our design and engineering staff by 164 percent. We
expanded our engineering facilities at two locations and purchased two
engineering companies last year;
- Created a separate service organization that developed aggregate shipments
of more than $70 million since 1991, and $22 million in 1996. It has been
instrumental in our ability to take a complex project from beginning to
end.
- This capability enabled us to complete the Stampede Pass project last year
in record time;
- Established partnership relations with several major builders of rail
transit systems, domestic as well as international;
- Increased our bonding power to a point where we can bid on any project that
fits our capabilities;
- Obtained ISO 9000 certifications for nearly all our operations, including
three last year; and finally,
- Materially streamlined our organizational structure in 1996. The new
structure enables us to be more productive and simultaneously more
responsive to our customers' needs.
These accomplishments, which often involved substantial expenditures, were
made during a five-year period which saw Harmon revenues increase 147 percent
from $71 million to $175 million and net profits grow from less than $1
million to more than $9 million.
We believe our past record is evidence that our overall strategy is working
and that it is possible to build for the future internally and expand revenue
and earnings at the same time. These accomplishments are the bases for our
confidence in the future.
PRODUCT DEVELOPMENT
[PHOTO]
Photograph of a railroad highway grade crossing warning system.
UNRELENTING DEVELOPMENT OF SIGNAL AND TRAIN CONTROL SYSTEMS HAS ENABLED HARMON
TO WIDEN ITS POSITION AS A TOP SUPPLIER OF SUCH SYSTEMS TO FREIGHT RAILROADS IN
NORTH AMERICA.
STAMPEDE PASS, WASHINGTON. HERE HARMON MODERNIZED A FREIGHT RAILROAD'S SIGNAL
SYSTEM IN RECORD TIME. WITHOUT HAVING BUILT UP OUR SERVICE STAFF LAST YEAR, WE
COULD NOT HAVE UNDERTAKEN THE PROJECT.
14
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<PAGE>
[PHOTO]
Photograph of track installation at Stampede Pass in the State of Washington.
[INSET PHOTO]
Photograph of a work crew installing equipment along a railroad track.
47
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales $175,440 $136,780 $119,703 $ 99,295 $ 81,899
Cost of sales 126,997 96,094 81,023 65,716 54,271
Research and development expenditures 6,331 5,218 4,561 3,442 3,541
----------------------------------------------------------
Gross profit 42,112 35,468 34,119 30,137 24,087
Selling, general and administrative expenses 25,990 23,200 21,176 18,558 15,646
Other operating expenses (income) 544 481 44 114 137
----------------------------------------------------------
Operating income 15,578 11,787 12,899 11,465 8,304
Other expenses 473 607 214 388 1,228
----------------------------------------------------------
Pre-tax earnings (continuing operations) 15,105 11,180 12,685 11,077 7,076
Income taxes 5,775 4,294 5,046 4,193 2,498
----------------------------------------------------------
Earnings from continuing operations 9,330 6,886 7,639 6,884 4,578
Gain (loss) from discontinued operations - - - - 165
Use of net operating loss carryforward - - - - 273
----------------------------------------------------------
Net earnings (loss) $ 9,330 $ 6,886 $ 7,639 $ 6,884 $ 5,016
----------------------------------------------------------
----------------------------------------------------------
Effective tax rate - continuing operations 38.2% 38.4% 39.8% 37.9% 35.3
Return on sales - continuing operations 5.3% 5.0% 6.4% 6.9% 5.6
Return on equity - continuing operations 16.1% 14.0% 17.7% 20.8% 30.1%
Return on equity - total 16.1% 14.0 17.7% 20.8% 33.0%
Weighted average shares 6,844 6,827 6,567 6,212 5,275
PER SHARE DATA
Earnings from continuing operations $ 1.36 $ 1.01 $ 1.16 $ 1.11 $ .87
Net earnings (loss) 1.36 1.01 1.16 1.11 .95
Cash dividends .15 .15 .15 - -
Book value 8.48 7.23 6.40 5.23 2.82
Price/earnings ratio range 8.8-14.3 13.2-20.3 14.2-20.9 10.5-20.9 3.6-13.4
OTHER DATA AT YEAR-END
Working capital $ 33,629 $ 35,014 $ 21,670 $ 20,790 $ 10,740
Total assets 104,677 86,845 68,395 53,000 38,488
Long-term debt 3,412 12,090 733 439 4,898
Stockholders' equity 57,939 49,232 43,063 33,086 15,197
Current ratio 1.85:1 2.60:1 2.03:1 2.28:1 1.72:1
Quick assets ratio 1.01:1 1.16:1 1.03:1 1.32:1 .87:1
Liabilities to equity ratio .81:1 .76:1 .59:1 .60:1 1.53:1
Capital additions (continuing operations) 6,371 5,532 3,242 3,189 2,154
Capital additions (total) 6,371 5,532 3,242 3,189 2,154
Depreciation & amortization (continuing operations) 5,004 3,906 2,621 2,121 1,936
Depreciation & amortization (total) 5,004 3,906 2,621 2,121 1,936
Outstanding shares (000s) 6,829 6,806 6,728 6,328 5,383
</TABLE>
16
48
<PAGE>
<TABLE>
<CAPTION>
Five-Year Ten-Year
Compound Compound
1991 1990 1989 1988 1987 1986 Growth Growth
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 70,934 $ 72,707 $ 70,154 $ 64,558 $ 57,068 $ 47,223 + 19.85% + 14.02%
45,536 47,478 46,377 42,044 37,995 30,333
4,000 3,414 3,200 3,669 3,318 2,360
- ------------------------------------------------------------------------------
21,398 21,815 20,577 18,845 15,755 14,530 + 14.50% + 11.23%
13,550 14,427 13,186 11,965 10,671 9,362
1,122 762 (263) (27) 43 145
- ------------------------------------------------------------------------------
6,726 6,626 7,654 6,907 5,041 5,023 + 18.29% + 11.98%
2,118 1,504 1,244 1,301 1,519 885
- ------------------------------------------------------------------------------
4,608 5,122 6,410 5,606 3,522 4,138 + 26.80% + 13.82%
1,688 2,022 2,506 2,100 1,613 2,039
- ------------------------------------------------------------------------------
2,920 3,100 3,904 3,506 1,909 2,099 + 26.15% + 16.09%
(2,492) (12,306) (2,744) (1,020) (217) -
395 - - - - -
- ------------------------------------------------------------------------------
$ 823 $ (9,206) $ 1,160 $ 2,486 $ 1,692 $ 2,099 + 62.52% + 16.09%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
36.6% 39.5% 39.1% 37.5% 45.8% 49.3%
4.1% 4.3% 5.6% 5.4% 3.3% 4.4
39.6% 53.9% 26.5% 25.9% 16.5% 20.0%
11.2% (160.2%) 7.9% 18.3% 14.6% 20.0%
5,066 4,723 4,633 4,479 4,472 4,854
$ .58 $ .66 $ .84 $ .78 $ .43 $ .43 + 18.58% + 12.20%
.16 (1.95) .25 .56 .38 .43 + 53.42% + 12.20%
- .0625 .125 .125 .125 .125
1.48 1.20 3.19 3.03 2.59 2.34 + 41.88% + 13.74%
21.9-45.3 N/A 23.0-35.0 9.5-14.8 13.2-22.4 15.4-27.3
$ 9,660 $ 7,955 $ 14,444 $ 7,037 $ 11,870 $ 11,599 + 28.34% + 11.23%
36,575 41,408 48,082 42,948 37,984 34,045 + 23.41% + 11.89%
11,915 17,220 17,688 12,139 14,621 13,793
7,377 5,747 14,756 13,557 11,604 10,470 + 51.01% + 18.66%
1.71:1 1.49:1 2.08:1 1.45:1 2.17:1 2.36:1
.76:1 .66:1 .84:1 .60:1 1.09:1 .96:1
3.96:1 6.21:1 2.26:1 2.17:1 2.27:1 2.25:1
1,098 2,187 2,236 1,830 1,504 2,212
1,098 4,521 4,589 9,886 3,552 2,212
2,022 2,410 2,373 2,541 2,481 2,074
2,022 3,511 3,185 2,834 2,531 2,074
4,998 4,790 4,628 4,478 4,472 4,472
</TABLE>
17
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Harmon's overall business has been on an upward trend for the past several
years. It continues to increase its sales with its principal customers, the
Class I and Short-Line Railroads, and it now occupies a strong, competitive
position within the new construction portion of the rail transit market,
principally because of its advanced technology and service. Its international
business is also beginning to assume a meaningful role in Harmon's overall
sales, increasing 29% to over $5 million in 1996. Additionally, demand for
its purchasing, materials management and pre-assembly services supplied by
its asset management services business is growing rapidly as these services
fill an increasing need in the railroad industry, which continues to downsize
and outsource functions the industry previously did internally.
Harmon's growth has been aided also by acquisitions of businesses and/or
product lines that fit its core business. In July, 1996 Harmon acquired
UK-based Vaughan Systems Ltd. (since renamed Vaughan Harmon Systems Ltd.). It
was a strategic acquisition to increase Harmon's sales in Europe. Vaughan
Harmon is a designer of signal and control software and a leading
manufacturer of train describers, passenger information and modular railway
control systems, which complement Harmon's existing product line. It is a
promising acquisition, producing $3 million in sales in its first six months
of ownership, and $10 million in new orders, which will be shipped in 1997.
Harmon also acquired two railroad contract-engineering firms last year, which
provided a significant gain in engineering resources. In 1995 Harmon acquired
the assets of Atlanta-based Serrmi Services, Inc. It provides signal design
engineering and wiring and highway grade crossing services to freight
railroads. In 1994 Harmon acquired the Transportation Division of Servo
Corporation of America. It makes hot box detector systems and other railroad
monitoring devices. It has an established position overseas, especially in
Europe.
PROFILE OF CURRENT OPERATIONS
The Company's sales are summarized by product category in the table on page
19. The table also breaks out gross sales and percentages of total sales for
each of the past three years. Sales of Harmon crossing and control products
by its asset management services operation are included in those separate
descriptive categories. The value-added services supplied with those products
are included in the asset management services category.
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); computer-based control systems; train describers; and
the design, wiring and installation of packages and systems comprised of
these products.
Crossing Systems include all products related to rail/highway crossing
warning systems. The products include train detection devices (the Company's
pmd and hxp, among others); flashing lights and cantilevers; and the design,
wiring and installation of packages and systems comprised of these products.
Asset Management Services is a single-source, rapid delivery service of
railroad components for railroad customers. 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 kitting 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, and the design, wiring and
installation of packages and systems comprised of these products. 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.
18
50
<PAGE>
SALES BY PRODUCT OR SERVICE FUNCTION *
Years ended December 31,
1996 1995 1994
-------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
- -------------------------------------------------------------------------------
Train Control Systems $ 87,080 47.3% $ 55,437 40.7% $ 45,711 38.4%
Crossing Systems 48,927 26.6% 42,375 31.1% 35,448 29.8%
Asset Management Services 22,217 12.1% 14,194 10.4% 20,894 17.5%
Train Inspection Systems 12,906 7.0% 11,360 8.4% 5,054 4.2%
Printed Wiring Boards 5,249 2.9% 6,752 5.0% 6,307 5.3%
Other 7,489 4.1% 5,999 4.4% 5,712 4.8%
----------------------------------------------------
Total $183,868 100.0% $136,117 100.0% $119,126 100.0%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
* Sales volumes shown above are gross totals and do not include cash
discounts or deferred contract revenue. As a result, there are differences
between the figures in this table and those presented in the Consolidated
Statements of Earnings. The differences do not affect the validity of the
discussion and analysis.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994.
Net sales increased 28% to a record $175.4 million for 1996 compared with
$136.8 million for 1995 and $119.7 million for 1994. Net earnings increased
35.5% to a record $9.3 million in 1996 ($1.36 per share) compared with $6.9
million in 1995 ($1.01 per share). The increase in earnings from 1995 to 1996
was due chiefly to substantially higher sales in 1996. Return on equity was
16.1% for 1996 compared with 14.0% for 1995. Return on capital employed was
25.9%, up from 21.7% in 1995. Net earnings for 1995 were 9.9% below the
previous record net earnings of $7.6 million ($1.16 a share) reported for
1994. The decrease in earnings between 1995 from 1994 was due to a higher
cost of sales principally occasioned by production issues related to an
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.
SALES ANALYSIS
The railroad industry has been moving toward the purchase of entire systems
and away from the purchase of individual components. This trend reflects the
railroads' desires to fix operational responsibility on one supplier and to
place orders with large suppliers, which have broad-based product lines,
meaningful research and engineering support, and strong service capabilities.
This trend has played to Harmon's strengths, which are evident in a $31.6
million increase to $87.1 million in sales of train control systems, a $6.6
million increase to $48.9 million in sales of crossing systems, and an $8.0
million increase to $22.2 million in sales of services in 1996 compared with
1995. The increase in train control system sales is a result of increased
orders from recently-merged railroad companies, greater sales of Harmon's
Ultra Cab and the initial sale of Harmon's Incremental Train Control system
to Amtrak. The increase in crossing system sales primarily reflects higher
levels of business with recently-merged railroad companies. Train inspection
sales increased 13.6% in 1996, and generally reflected increased domestic
sales. The sales gain in asset management services reflects orders that were
put on hold in 1995 and subsequently released in 1996. Sales of printed
wiring boards were down 22.3%, which is the result of a general downturn in
that industry.
Harmon's strengths in crossing and control systems and asset management
services were the principal reasons its 1996 sales reached a record $175.4
million, which was $38.7 million greater, or 28.3%, than those of 1995. Net
sales of $136.8 million in 1995 were 14.3% ahead of those of 1994. The sales
improvement over 1994 was due to gains in train control, crossing control and
train inspection system sales. Approximately half of the gain was the result
of a combination of the Serrmi acquisition and a resurgence in rail-highway
crossing system sales. The remainder reflected gains in shipments on rail
transit contracts, carborne equipment, and hot box detectors. Sales of asset
management services were down $6.7 million in 1995 when shipments were
delayed because of railroad merger activity.
19
51
<PAGE>
OPERATING SUMMARY
<TABLE>
<CAPTION>
Percentage of Net Sales Percentage of Change
-------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
over over over
1996 1995 1994 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 28.3% 14.3% 20.6%
Cost of sales 72.4% 70.3% 67.7% 32.2% 18.6% 23.3%
Research and development 3.6% 3.8% 3.8% 21.3% 14.4% 32.5%
-------------------------------------------------------------------
Gross profit 24.0% 25.9% 28.5% 18.7% 4.0% 13.2%
Selling, general and administrative
expenses 14.8% 17.0% 17.7% 12.0% 9.6% 14.1%
Other operating expenses, net 0.3% 0.4% 0.0% 13.1% 993.2% (61.4)%
-------------------------------------------------------------------
Operating income 8.9% 8.5% 10.8% 32.2% (8.6)% 12.5%
Other expenses 0.3% 0.4% 0.2% (22.1)% 183.6% (44.8)%
-------------------------------------------------------------------
Earnings before income taxes 8.6% 8.1% 10.6% 35.1% (11.9)% 14.5%
Income taxes 3.3% 3.1% 4.2% 34.5% (14.9)% 20.3%
-------------------------------------------------------------------
Net earnings 5.3% 5.0% 6.4% 35.5% (9.9)% 11.0%
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
The table above 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.
Sales of the Company's signal and control systems are influenced by various
factors. They include the financial condition of the railroad industry, the
railroads' budgets for planned equipment expenditures and the level of
activity in authorizing grade crossing warning system improvements. These
improvements receive up to 80% federal support, up to an authorized limit of
$160 million. Authorization expires in 1997, and the Congress is presently
working on an extension of this funding. Rail transit funding for train
control and signal systems is expected to approximate 1996 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. At year-end 1996, the railroad industry as a whole
was healthy, and it continued to look for ways to improve profits, which
includes the purchase of more efficient operating systems, the use of
outsourced services, and better utilization of current capital equipment. The
industry was also merger minded, which historically has reduced capital
spending while mergers were pending and increased spending after they were
completed.
GROSS PROFIT Gross profit as a percent of sales declined to 24.0% for 1996
compared with 25.9% in 1995 and 28.5% in 1994. The decline in 1996 reflects
the effect of the material increase in system sales, including the Stampede
Pass project, which included wafer-thin profit margins on roughly $6 million
of pass-through sales, and an increase in asset management revenues, which
traditionally provide only modest profit margins. Additionally, the Company
absorbed product upgrade costs of approximately $2.3 million in 1996. These
narrow margins and product upgrade costs were modestly offset, relative to
1995, by the absence of start-up costs for the hot box detector line.
The decline in gross profit margins in 1995 from those of 1994 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.
Traditionally, declining profit margins have negative connotations. Harmon's
experience is otherwise. Management's focus is on net earnings, and less so
on margins. It takes on additional lower margin business when overall
increased profits are likely to occur. Its asset management service business
illustrates this business concept. Standing
20
52
<PAGE>
alone, it is a low margin, but profitable business. But when linked to
Harmon's total business strategy, it makes a healthy profit contribution
because its function adds to the overall sale of Harmon products and systems,
and it performs a service few others in the railroad industry can match.
Moreover, the Company believes this service business will increase as the
railroads continue to outsource their asset management and maintenance
projects.
RESEARCH AND DEVELOPMENT
Research and development expenses increased $1.1 million in 1996, which
illustrates Harmon's commitment to incorporating new technology into its
products. The principal reason for the increase in 1996 was related to
Harmon's intense efforts directed toward the continued development of its
Incremental Train Control System.
Although R&D expenditures were up in absolute terms for 1996, as a percent of
sales they declined fractionally because of the sharp increase in 1996 sales.
Expenditures in 1995 were $670,000 above those in 1994. In both prior years,
R&D as a percentage of sales was 3.8%.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (sg&a) for 1996 were $26.0
million, roughly $2.8 million higher than those of 1995. The 1996 increase
principally relates to the 28% sales increase, which generated more sales
expense and increased profit-based incentive compensation. While sg&a
expenses increased in absolute dollar terms last year, their cost relative to
net sales declined for the third consecutive year--to 14.8% of sales from
17.0% in 1995 and 17.7% in 1994. The $7 million increase in service revenues
in 1996 helped reduce sg&a expenses as a percent of sales because the asset
management services operation incurs proportionally less sg&a expenses per
dollar of revenue than Harmon's other revenue producing units. This
illustrates the beneficial effect on profits when otherwise low-margin
business is added to an already profitable enterprise. Moreover, the 1996
dollar increase in sg&a expenses was only 12% above that of 1995, or roughly
40% of the increase in sales from 1995 to 1996. In short, for every dollar of
increased sg&a expenses in 1996, the Company increased its sales
two-and-a-half fold. Thus relative sg&a cost savings at the corporate level
were a major factor in Harmon's $2.4 million increase in net earnings in
1996. These same expenses increased approximately $2.0 million to $23.2
million for 1995 from $21.2 million for 1994. 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, commissions incident to higher sales
volume, and additions to sg&a expenses incident to acquisitions made in 1996,
1995 and 1994. These expenses were offset somewhat in 1995 by lower
profit-based bonuses.
AMORTIZATION EXPENSES
Amortization expenses increased 7.3% in 1996 and 601% in 1995. The increase
in 1996 is attributable to three acquisitions made that year, and in 1995 to
the acquisitions of the assets of Serrmi Services, Inc. in the first quarter
of 1995, and the hot box detector line of Servo Corporation of America at the
end of 1994. Acquisitions in 1994 were of little consequence relative to
increases in amortization expenses.
OTHER OPERATING EXPENSES
Changes in other operating expenses were insignificant in 1996, 1995 and 1994.
INTEREST EXPENSE
Interest expense was $724,000 in 1996, $741,000 in 1995 and
$264,000 in 1994. The decrease in 1996 reflected lower average borrowings in
1996. The increase for 1995 reflected increased borrowings to finance
acquisitions and to provide working capital that year.
INCOME TAXES
The Company's effective income tax rate for 1996 was 38.3% compared with
38.4% in 1995 and 39.8% for 1994. The tax rate was lower in 1995 than 1994
because more business was done in states with lower tax rates in 1995 than
1994.
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
21
53
<PAGE>
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 has a very strong balance sheet at 1996 year-end. Total assets
were $104.7 million, up $17.8 million. Stockholders' equity rose to $57.9
million ($8.48 per share) from $49.2 million ($7.23 per share). Working
capital was $33.6 million, which produced a current ratio of 1.85:1 compared
to 2.6:1 a year earlier. Cash was negligible at both year-ends, and
interest-bearing debt was down $8.7 million at 1996 year-end, which reflects
Harmon's aggressive cash management policies. Cash was used to fund the
acquisitions of two engineering firms and Vaughan Harmon Systems Ltd. ($2.1
million), capital expenditures of $6.4 million, increased receivables of
$14.3 million (largely because of the $19.5 million increase in sales in the
1996 fourth quarter), and to support increased year-end inventories. The
majority of the receivables were collected in January, 1997.
The Company renegotiated its primary bank lines of credit in 1996, which
increased its line of credit to $35 million at reduced interest rates
compared with $18 million a year earlier. At December 31, 1996, approximately
$3 million was borrowed against this line versus $11.5 million at 1995
year-end. In January, 1997 all outstanding borrowings on the line of credit
were paid off. Additionally, the Company completed a private placement of
unsecured senior notes, priced to yield 6.87%, which provided an additional
$15 million of cash and long-term debt with a ten year maturity. Thus, by
January, 1997 the Company had $50 million available for use. Capital
expenditures for 1997 are budgeted at $11 million, roughly $4.6 million
higher than the capital expenditures for 1996. Traditionally, the Company
spends less on capital expenditures than it actually budgets.
1997 OUTLOOK
There is much to be optimistic about for 1997. The Company's core business is
solid. It began the new year with a record backlog of $59.4 million, up $10.3
million from the year earlier backlog of $49.1 million. Customer acceptance
of our newer products has been excellent. In addition, the pending Union
Pacific/Southern Pacific merger may generate additional business.
Despite the favorable climate for increased business for Harmon, there are
some uncertainties to consider as well. Among them are whether the economy
and our railroad customers will perform as well in 1997 as they did in 1996,
and whether government funding for rail transit and grade crossing warning
systems will continue as before, and whether our r&d departments will
continue their output of innovative and very successful products. Further,
1996 sales included a $13 million contract of a onetime nature which will not
recur in 1997.
Merger activity in the railroad industry remains strong. Mergers typically
create short-term problems, particularly with shipment continuity and
immediate new business. The proposed eastern railroad merger battle may
sharply reduce 1997 capital expenditures of these major customers until that
issue is resolved. Long-term, however, mergers often prove beneficial as the
surviving entity often consolidates traffic patterns to strengthen its
operations, which for Harmon translates into additional orders for crossing
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. In
this latter regard, the Company opened an expanded r&d facility at its plant
site in Grain Valley, Missouri, in 1996, and it plans further expansions in
1997 and beyond.
The Company's goal is to achieve an annual order rate of approximately $300
million by the year 2000. This goal is predicated upon maintaining our
current product and systems sales levels and increasing our service business
to the domestic freight railroad market. It also assumes we will book a
representative share of the mass transit
22
54
<PAGE>
projects that are presently contemplated for release during the next three
years, and that our aggressive pursuit of business in the international
market will result in material sales gains. It does not depend on
acquisitions. It should be recognized that these are goals, not forecasts.
Much depends on the future trends of domestic and international economies,
which are unknown.
OTHER
The Company streamlined its organizational structure during 1996, merging its
domestic operating subsidiaries into the parent company effective January 1,
1997. Harmon is now organized along functional lines instead of separate
operating subsidiaries. This realignment is designed to improve customer
service and streamline overall operations.
There are no pending accounting pronouncements that would have a significant
effect on the Company's financial statements.
FOURTH QUARTER RESULTS
Sales for Harmon's 1996 fourth quarter were $56 million, 53.4% greater than
its 1995 fourth quarter sales of $36.5 million. Cost of sales as a percentage
of sales was 78.4% in 1996 compared with 70.8% in 1995. The difference
between the two years reflects greater shipments of lower margin products in
1996, chiefly asset management services, which carry smaller markups than
Harmon-manufactured goods and often include pass-through business--products
not germane to Harmon's core business but which are purchased by Harmon to
complete a turnkey project. A sizable portion of the 1996 fourth quarter
sales included asset management service business from two of its largest
customers, and the completion of a $13 million turnkey project in the Cascade
Mountains, of which approximately 50% was pass-through business.
Net earnings for the 1996 fourth quarter were $2.1 million, or $0.31 per
share, compared with $1.8 million, or $0.27 per share, for the 1995 fourth
quarter.
QUARTERLY CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995
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 $ 38,397 $ 39,111 $ 41,957 $ 55,975 $ 29,415 $ 32,854 $ 38,026 $ 36,485
Cost of sales 27,224 26,141 29,721 43,911 21,330 21,971 26,954 25,839
R&D expenditures 1,458 1,726 1,492 1,656 1,022 1,236 1,503 1,457
-----------------------------------------------------------------------------------------------------
Gross profit 9,715 11,244 10,744 10,408 7,063 9,647 9,569 9,189
Selling, general and
administrative expenses 6,164 6,560 6,491 6,774 5,612 5,990 5,464 6,134
Amortization 137 137 154 159 133 133 144 137
Miscellaneous (income)
expense-net (16) (14) (14) 2 (25) (7) (13) (21)
-----------------------------------------------------------------------------------------------------
Operating income 3,430 4,561 4,113 3,473 1,343 3,531 3,974 2,939
Investment income 169 29 28 25 17 60 4 53
Interest expense 255 234 123 112 147 190 197 207
-----------------------------------------------------------------------------------------------------
Pre-tax earnings 3,344 4,356 4,018 3,386 1,213 3,401 3,781 2,785
Income taxes 1,269 1,699 1,530 1,278 507 1,343 1,501 943
-----------------------------------------------------------------------------------------------------
Net earnings $ 2,075 $ 2,657 $ 2,488 $ 2,108 $ 706 $ 2,058 $ 2,280 $ 1,842
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Earnings per
common share $ 0.30 $ 0.39 $ 0.36 $ 0.31 $ 0.10 $ 0.30 $ 0.33 $ 0.27
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average
shares (000s) 6,829 6,840 6,844 6,864 6,815 6,824 6,837 6,834
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
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.
</TABLE>
55
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
At December 31, 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Trade receivables, less allowance for doubtful accounts
of $307 in 1996 and $362 in 1995 $ 39,656 $25,317
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 2) 1,665 4,053
Inventories:
Work in process 4,145 4,583
Raw materials and supplies 23,076 21,262
-----------------
27,221 25,845
Income tax receivable - 434
Deferred tax asset (note 4) 1,637 584
Prepaid expenses and other current assets 2,851 608
-----------------
Total current assets 73,030 56,841
-----------------
Property, plant and equipment, at cost (note 3):
Land 356 356
Buildings 9,010 5,802
Machinery and equipment 14,292 12,820
Office furniture and equipment 16,032 14,589
Transportation equipment 1,236 1,036
Leasehold improvements 2,395 2,288
-----------------
43,321 36,891
Less accumulated depreciation and amortization 25,389 22,714
-----------------
Net property, plant and equipment 17,932 14,177
Deferred tax asset (note 4) 738 621
Cost in excess of fair value of net assets acquired, net of
accumulated amortization of $2,483 in 1996 and $1,896
in 1995 (note 11) 7,606 7,674
Deferred compensation asset (note 6) 4,998 5,575
Other assets 373 1,957
-----------------
$104,677 $86,845
-----------------
-----------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
56
<PAGE>
At December 31, 1996 1995
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt installments (note 3) $ 737 $ 337
Accounts payable 15,119 11,698
Accrued payroll, bonus and employee benefit plan
contributions (note 6) 10,892 6,688
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 2) 5,926 1,279
Other accrued liabilities 6,235 1,825
Current tax liability 492 -
-----------------
Total current liabilities 39,401 21,827
-----------------
Deferred compensation liability (note 6) 3,925 3,696
Long-term debt (note 3) 3,412 12,090
-----------------
Total liabilities 46,738 37,613
Stockholders' equity (notes 3 and 7):
Common stock of $.25 par value; authorized 20,000,000
shares, issued 6,829,273 shares in 1996 and 6,805,626
shares in 1995 1,707 1,702
Additional paid-in capital 23,194 23,003
Foreign currency translation 203 -
Retained earnings 32,835 24,527
-----------------
Total stockholders' equity 57,939 49,232
Commitments and contingencies (notes 6 and 10)
-----------------
$104,677 $86,845
-----------------
-----------------
25
57
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Net sales $175,440 $136,780 $119,703
Cost of sales 126,997 96,094 81,023
Research and development expenditures 6,331 5,218 4,561
------------------------------
Gross profit 42,112 35,468 34,119
------------------------------
Selling, general and administrative expenses 25,990 23,200 21,176
Amortization of cost in excess of fair value
of net assets acquired 587 547 78
Miscellaneous income - net 43 66 34
------------------------------
Operating income 15,578 11,787 12,899
Interest expense 724 741 264
Investment income 251 134 50
------------------------------
Earnings before income taxes 15,105 11,180 12,685
Income tax expense (benefit) (note 4):
Current 6,945 4,413 5,098
Deferred (1,170) (119) (52)
------------------------------
5,775 4,294 5,046
------------------------------
Net earnings $ 9,330 $ 6,886 $ 7,639
------------------------------
------------------------------
Earnings per common share $ 1.36 $ 1.01 $ 1.16
------------------------------
------------------------------
Weighted average shares outstanding (000s) 6,844 6,827 6,567
------------------------------
------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
58
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Foreign Total
Common Paid-in Currency Retained Stockholders'
Stock Capital Translation Earnings Equity
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Net earnings - - - 9,330 9,330
Cash dividends paid
($0.15 per share) - - - (1,022) (1,022)
Common stock issued (notes 7
and 11):
Acquisition of businesses 4 146 - - 150
Stock options and other 1 45 - - 46
Foreign currency translation - - 203 - 203
------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $1,707 $23,194 $203 $32,835 $57,939
------------------------------------------------------
------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
59
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 9,330 $ 6,886 $ 7,639
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,004 3,906 2,621
Gain on sale of property, plant and equipment (5) (34) (6)
Deferred tax expense (benefit) (1,170) (119) 211
Changes in assets and liabilities, net of
acquisition of businesses:
Trade receivables (13,740) (3,860) (3,046)
Inventories (1,060) (7,830) (1,558)
Estimated costs, earnings and billings on
contracts 7,381 (2,873) (920)
Prepaid expenses and other current assets (360) 131 (109)
Accounts payable 3,345 3,052 2,588
Accrued payroll and benefits 4,000 (651) 1,506
Other liabilities 5,007 (478) (1,423)
Other deferred liabilities 371 157 304
------------------------------
Total adjustments 8,773 (8,599) 168
------------------------------
Net cash provided by (used in)
operating activities 18,103 (1,713) 7,807
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,371) (5,532) (3,242)
Acquisition of businesses (2,146) (1,182) (6,661)
Proceeds from sale of property, plant and
equipment 46 84 30
Deferred compensation, net (1,339) (429) (524)
Other investing activities 1,584 (974) (37)
------------------------------
Net cash used in investing
activities (8,226) (8,033) (10,434)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 46 292 300
Cash dividends (1,022) (1,021) (968)
Borrowings under line of credit agreements 46,530 31,152 5,075
Repayments under line of credit agreements (55,165) (20,491) (4,275)
Principal payments of long-term debt (469) (436) (320)
------------------------------
Net cash provided by (used in)
financing activities (10,080) 9,496 (188)
Foreign currency translation 203 - -
Net decrease in cash and cash equivalents - (250) (2,815)
------------------------------
Cash and cash equivalents at beginning of year - 250 3,065
------------------------------
Cash and cash equivalents at end of year $ - $ - $ 250
------------------------------
------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 690 $ 661 $ 265
Income taxes $ 6,019 $ 4,167 $ 5,939
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. (HEI), Electro Pneumatic Corporation (EPC), Consolidated Asset
Management Company, Inc. (CAMCO), Harmon Railway Systems International
(HRSI) and Vaughan Harmon Systems Limited (Vaughan Harmon). Effective
January 1, 1997 HEI, EPC and CAMCO were merged with and into Harmon
Industries, Inc. such that Harmon Industries was the surviving corporation.
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. Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. 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.
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 five to 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.
29
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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. The fair market value of the Company's financial
instruments approximates the carrying value.
STOCK OPTION PLANS. Prior to January 1, 1996 the Company accounted for its
stock option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No.
123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
2. CONTRACTS IN PROGRESS
Contract costs on uncompleted contracts are as follows:
Costs and Billings in
estimated excess of
earnings costs and
in excess estimated
(Dollars in thousands) of billings earnings Total
- --------------------------------------------------------------------
December 31, 1996:
Costs and estimated earnings $ 7,796 $73,397 $81,193
Billings 6,131 79,323 85,454
-----------------------------------
$ 1,665 $(5,926) $(4,261)
-----------------------------------
-----------------------------------
- --------------------------------------------------------------------
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
-----------------------------------
-----------------------------------
Balances billed, but not paid by customers under retainage provisions in
contracts amounted to $1,165,000 and $1,146,000 at December 31, 1996 and
1995, respectively. All receivables on contracts in progress are considered
to be collectible within twelve months.
3. INDEBTEDNESS
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------
Revolving credit agreements $2,826 $11,461
Bank loan 273 -
Note payable 198 -
Capitalized lease obligations 852 966
--------------------
Total indebtedness 4,149 12,427
Less current installments 737 337
--------------------
Long-term debt $3,412 $12,090
--------------------
--------------------
REVOLVING CREDIT AGREEMENTS. The Company has an unsecured $20,000,000
revolving credit agreement which expires August 1999. At December 31, 1996,
there were no outstanding borrowings. Outstanding borrowings bear interest at
a base rate established by the bank plus a variable component depending on
the Company's funded debt to capitalization percentage and fixed charges
coverage ratio.
30
62
<PAGE>
The Company has a reducing revolving credit agreement with original total
credit availability of $15,000,000 reducing by $536,000 as of the last day of
each quarter beginning September 30, 1996. The Company has remaining total
credit availability of $13,928,000 at December 31, 1996 against which there
are outstanding borrowings of $2,826,000. Outstanding borrowings are due on
August 15, 2001 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 and fixed charges coverage ratio (8.25% at December 31, 1996).
Borrowings under this agreement are collateralized by liens against
substantially all of the Company's equipment and machinery.
The Company pays commitment fees of 1/10 of 1% annually on the unused portion
of the revolving credit agreements.
BANK LOAN. The bank loan is a term note payable in monthly installments
including interest through April 2002. The note bears interest at a base rate
established by the bank plus 2.1% (7.85% at December 31, 1996). The note is
collateralized by liens against real and personal property with a net book
value of $1,537,000 at December 31, 1996.
OVERDRAFT FACILITY. The Company has a $343,000 overdraft facility which
expires August 21, 1997. At December 31, 1996 there were no outstanding
borrowings. Outstanding borrowings bear interest at a base rate established
by the bank plus 1.9%. Borrowings under this agreement are collateralized by
liens against real and personal property which amounts to $1,537,000 at
December 31, 1996.
NOTE PAYABLE. The Company has a term note payable in full within five
business days after January 1, 1997. The note bears interest at 7.25% and is
unsecured. The note was paid in full on January 8, 1997.
CAPITALIZED LEASE OBLIGATIONS. The Company entered into various computer
hardware and software capital lease agreements totaling $330,000 and $295,000
in 1996 and 1995, respectively. Monthly installments are due through October
1998. The average implied interest rate in the lease agreements is 7.0%.
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, 1996, the
Company is in compliance with all covenants under its indebtedness agreements
and has retained earnings available for dividends of $3,643,000.
MATURITIES. At December 31, 1996, long-term debt maturities for 1997 and
thereafter are:
Years ended December 31 (Dollars in thousands)
- --------------------------------------------------------------------
1997 $ 737
1998 417
1999 51
2000 51
2000 and thereafter 2,893
--------
$4,149
--------
--------
On January 24, 1997 the Company issued $15,000,000 of senior unsecured notes.
The notes are payable in seven equal annual installments beginning January 24,
2000. The notes bear interest at 6.87% payable semi-annually.
31
63
<PAGE>
4. INCOME TAXES
Income tax expense consisted of the following:
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------
Current:
Federal $ 5,741 $3,664 $4,193
State 1,204 749 905
---------------------------
Total current 6,945 4,413 5,098
Deferred:
Federal (976) (99) (14)
State (194) (20) (38)
---------------------------
Total deferred (1,170) (119) (52)
---------------------------
Total income tax expense $ 5,775 $4,294 $5,046
---------------------------
---------------------------
Income tax expense for the years ended December 31, 1996, 1995, and 1994,
respectively, differed from the amounts computed by applying the U.S. federal
income tax rate of 35 percent to pretax income as a result of the following:
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------
Computed "expected" tax expense $5,287 $3,913 $4,440
Increase (reduction) in income
taxes resulting from:
State and local income
taxes, net of federal
income tax benefit 657 473 564
Other, net (169) (92) 42
---------------------------
$5,775 $4,294 $5,046
---------------------------
---------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------
Deferred tax assets:
Deferred compensation $1,531 $1,442
Compensated absences 353 356
Inventories 490 329
Allowance for doubtful accounts 120 141
Various other reserves 1,043 127
-----------------
Total gross deferred tax assets 3,537 2,395
Less valuation allowance 369 369
-----------------
3,168 2,026
Deferred tax liabilities:
Plant and equipment (793) (821)
-----------------
Net deferred tax assets $2,375 $1,205
-----------------
-----------------
The valuation allowance for deferred tax assets as of January 1, 1995 was
approximately $369,000. There were no net changes in the total valuation
allowance for the years ended December 31, 1996 and 1995. 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 as
reduced by the valuation allowance.
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.
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 $77,302,000 and
$16,126,000 for the year ended December 31, 1996, net sales of approximately
$19,091,000 and $15,532,000 for the year ended December 31, 1995 and net
sales of approximately $25,735,000 and $11,015,000 for the year ended
December 31, 1994. At December 31, 1996, the Company had significant
receivable balances from five customers totaling approximately $23,734,000.
The Company has no other unusual credit risks or concentrations.
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
$1,661,000, $1,581,000 and $1,398,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
32
64
<PAGE>
A summary of non-cancelable long-term operating lease commitments follows
(Dollars in thousands):
Real Total
Years ended December 31, Equipment property commitments
- --------------------------------------------------------------------
1997 $75 $1,216 $1,291
1998 20 1,132 1,152
1999 7 883 890
2000 - 734 734
2001 - 259 259
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 1997.
EMPLOYEE BENEFITS. In 1985, the Company formed an Employee Stock Ownership
Plan and Trust (ESOP), which includes all employees. The ESOP held 503,497
shares and 506,904 shares of Company common stock which had been allocated to
plan participants at December 31, 1996 and 1995, respectively. 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 $3,815,000, $2,785,000
and $3,045,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company and its subsidiaries have various bonus plans based primarily on
Company performance. Accrued and unpaid bonuses at December 31, 1996 and 1995
were $2,505,000 and $757,000, respectively.
The Company has a nonqualified, unfunded deferred compensation plan for
certain key executives providing for payments upon retirement, death or
disability. Under the plan, certain employees receive retirement payments
equal to a portion of the three highest continuous years' average
compensation. These payments are to be made for the remainder of the
employees' life with a minimum payment of ten years' benefits to either the
employee or his or her beneficiary. The plan also provides for reduced
benefits upon early retirement, disability or termination of employment. The
deferred compensation (gain) expense was $(365,000), $491,000 and $522,000
for the years ended December 31, 1996, 1995 and 1994, 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.
The Company does not provide other post-retirement benefits.
7. STOCKHOLDERS' EQUITY
A summary of stock options granted, exercised and expired follows:
Shares Price Per Share
- --------------------------------------------------------------------
Balance at
January 1, 1994 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
Granted 101,000 13.50-17.00
Exercised (6,000) 5.50-8.25
Expired (25,500) 16.50-20.63
Balance at
December 31, 1996 194,000 $14.69 Average Price
The Company has outstanding stock options for 38,500 shares of common stock
at prices ranging from $5.50 to $8.25 and outstanding stock options for
155,500 shares of common stock at prices ranging from $14.00 to $20.63. The
Company has exercisable outstanding stock options for
33
65
<PAGE>
151,885 shares of common stock at prices ranging from $5.50 to $22.75 a share
($14.21 average per share) as of December 31, 1996. In May 1996 the Company
granted stock options for up to 1,000 common shares to each of the Company's
nine non-employee directors which expire on May 31, 2003. In May 1995, the
Company granted stock options for up to 2,000 common shares to each of the
Company's eleven directors which expire on May 31, 1997. In May 1994, the
Company granted stock options for up to 2,000 common shares to each of the
Company's eleven directors as of that date which expired on May 31, 1996.
The Company issued 17,647 shares of unregistered common stock in connection
with the 1996 acquisition of businesses. (See Note 11). The Company issued
260,000 shares of unregistered common stock to Servo Corporation of America
in December 1994 (See Note 11).
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, 1996,
1995 and 1994. The Company had sales to these related entities totaling
$841,000, $1,477,000 and $272,000 for 1996, 1995 and 1994, respectively. The
Company had receivables due from these entities of $223,000 and $434,000 as
of December 31, 1996 and 1995, respectively.
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 $283,000, $215,000 and $164,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
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 $2,232,000 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.
11. ACQUISITION OF BUSINESSES
On July 1, 1996 the Company acquired the stock of Vaughan Systems Limited for
an initial purchase price of $2,003,000 in cash. In addition to the initial
purchase price, the purchase agreement provides for contingent payments.
These payments are based on the average after-tax earnings of Vaughan Harmon
over the three year period ending June 30, 1999 as well as the utilization of
certain tax net operating loss carryforwards. Any additional consideration
paid will
34
66
<PAGE>
be recorded as goodwill. 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 $156,000.
In 1996 the Company acquired the assets of two contract engineering firms.
These acquisitions were made with the issuance of 17,467 shares of
unregistered common stock valued at $8.50 per share, a $198,000 note payable
and $145,000 in cash. These acquisitions have 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
dates of acquisition. The excess of the consideration given over the fair
value of net assets acquired has been recorded as goodwill of $363,000.
The pro forma effects of the 1996 acquisitions on the consolidated financial
statements are not significant.
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.
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------
Net sales $131,024
Operating income 13,730
Net earnings 8,152
Earnings per common share 1.19
12. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for
its plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for restricted stock and
performance-based awards. Had compensation cost for the Company's other stock
option plans been determined based upon the fair value at the grant date for
1996 awards under these plans consistent with the methodology presented in
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, the Company's net income and earnings per share in
1996 would have been reduced by approximately $325,000 ($88,000 - 1995), or
$.05 per share ($.01 per share -1995). The fair value of the options granted
during 1996 is estimated at values ranging from $5.88 to $8.86 on the dates
of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend rate of .15 per share, volatility ranging between 41%
and 70%, risk-free interest rate ranging between 5.25% and 7.01%, assumed
forfeiture rate of 0%, and an expected life ranging between 1.9 and 3.75
years.
35
67
<PAGE>
FORWARD LOOKING INFORMATION
This annual report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which may include
statements concerning projection of revenues, income or loss, capital
expenditures, capital structure, or other financial items, statements
regarding the plans and objectives of management for future operations,
statements of future economic performance, statements of the assumptions
underlying or relating to any of the foregoing statements, and other
statements which are other than statements of historical fact.
These statements appear in a number of places in this annual report and
include statements regarding the intent, belief, or current expectations of
the Company's management with respect to (i) the demand and price for the
Company's products and services, (ii) the Company's competitive position,
(iii) the supply and price of materials used by the Company, (iv) the cost
and timing of the completion of new or expanded facilities, or (v) other
trends affecting the Company's financial condition or results of operations.
Statements made throughout this report are based on current estimates of
future events, and the Company has no obligation to update or correct these
estimates.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially as a result of these various
factors.
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.
/s/ BJORN E. OLSSON
Bjorn E. Olsson
President and Chief Executive Officer
/s/ CHARLES M. FOUDREE
Charles M. Foudree
Executive Vice President - Finance, Treasurer and Secretary
February 4, 1997
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68
<PAGE>
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
February 4, 1997
37
69
<PAGE>
INVESTOR INFORMATION
FORM 10-K
Shareholders may receive a copy of the Corporation's 1996 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 Annual Meeting of
Shareholders, which will be held at 2:00 p.m. on Tuesday, May 13, 1997, 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 LLP
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, 1996, there were 6,829,273 shares outstanding and
approximately 637 shareholders of record. Cash dividends were resumed in 1994
at the rate of 15 cents per share per year, paid semi-annually at 7H cents
per share.
The range of high and low prices for the past eight quarters ended
December 31, 1996 is shown below. Per share prices have been adjusted for all
stock splits and stock dividends, if any.
Price Range
Calendar Quarter Ended 1996 1995
- --------------------------------------------------------------------
March 31 $15 3/4 - $12 $19 1/2 - $13 1/2
June 30 18 3/4 - 13 3/4 18 - 13 1/2
September 30 18 - 15 1/2 20 1/2 - 13 3/8
December 31 19 1/2 - 15 18 1/4 - 14
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 March 6 , 1997, the following securities firms were making a dual
auction market in the Company's common stock:
George K. Baum & Company
Piper Jaffray Companies Inc.
PaineWebber Inc.
HARMON ON THE WORLD WIDE WEB
Information on Harmon Industries, Inc. is available on the Company's World Wide
Web site at:
http://www.harmonind.com
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70
<PAGE>
MANAGEMENT, DIRECTORS AND CORPORATE DATA
BOARD OF DIRECTORS
Robert E. Harmon (57)
CHAIRMAN OF THE BOARD
Thomas F. Eagleton (67)
ATTORNEY-AT-LAW
THOMPSON & COBURN
ST. LOUIS, MISSOURI
Bruce M. Flohr (58)
CHAIRMAN & CEO
RAILTEX, INC.
SAN ANTONIO, TEXAS
Charles M. Foudree (52)
EXECUTIVE VICE PRESIDENT-
FINANCE, TREASURER AND SECRETARY
Rodney L. Gray (44)
CHAIRMAN & CEO
ENRON INTERNATIONAL, INC.
HOUSTON, TEXAS
Herbert M. Kohn (58)
ATTORNEY-AT-LAW
BRYAN CAVE LLP
KANSAS CITY, MISSOURI
Gary E. Ryker* (47)
EXECUTIVE VICE PRESIDENT
MARKETING, SALES AND SERVICE
Douglass Wm. List (41)
MANAGEMENT CONSULTANT
BALTIMORE, MARYLAND
Gerald E. Myers (55)
MANAGEMENT CONSULTANT
TEMPE, ARIZONA
Bjorn E. Olsson (51)
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Donald V. Rentz (58)
GRANT LEIGHTON ASSOCIATES OF TEXAS, INC.
PLANO, TEXAS
Judith C. Whittaker (58)
VICE PRESIDENT-LEGAL
HALLMARK CARDS, INC.
KANSAS CITY, MISSOURI
- ----------------------------
* Denotes Advisory Director
() Indicates age of director
MANAGEMENT
Bjorn E. Olsson
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Charles M. Foudree
EXECUTIVE VICE PRESIDENT-
FINANCE, TREASURER AND SECRETARY
Lloyd T. Kaiser
EXECUTIVE VICE PRESIDENT-SYSTEMS
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
J. Randall John
VICE PRESIDENT-SERVICES
John W. Johnson
VICE PRESIDENT-DOMESTIC SALES
Raymond A. Rosewall
VICE PRESIDENT-MANUFACTURING
William J. Scheerer
VICE PRESIDENT-APPLICATIONS ENGINEERING
Stephen L. Schmitz
VICE PRESIDENT-CONTROLLER
William L. Bush
DIRECTOR-RESEARCH & DEVELOPMENT
Jeffery J. Utterback
DIRECTOR-QUALITY ASSURANCE
DOMESTIC LOCATIONS
Riverside, California (2) +
Jacksonville, Florida
Atlanta, Georgia
Louisville, Kentucky
Blue Springs, Missouri
Grain Valley, Missouri (3) +
Lee's Summit, Missouri
Warrensburg, Missouri (2) +
Omaha, Nebraska
Hauppauge, New York
- ----------------------------------------
+ Denotes number of plants and locations
INTERNATIONAL LOCATIONS
Harmon Industries
Lausanne, Switzerland
Henkes-Harmon Industries, Pty. Ltd.
Mooroolbark, Victoria, Australia
Vale-Harmon Enterprises, Ltd.
Saint-Laurent, Quebec, Canada
Vaughan Harmon Systems Ltd.
Ware, England
39
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<PAGE>
[HARMON LOGO]
CORPORATE OFFICE
1300 JEFFERSON COURT
BLUE SPRINGS, MO 64015
816-229-3345
FAX: 816-229-0556
72
<PAGE>
Exhibit 21
HARMON INDUSTRIES INC.
FILE #0-7916
DECEMBER 31, 1996
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
Vaughan Harmon Systems Ltd. Same Ware, England
**Effective 1/1/97 these companies were merged into Harmon Industries, Inc.
73
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HARMON INDUSTRIES, INC. AT DECEMBER 31,
1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 39,963
<ALLOWANCES> (307)
<INVENTORY> 27,221
<CURRENT-ASSETS> 73,030
<PP&E> 43,321
<DEPRECIATION> (25,389)
<TOTAL-ASSETS> 104,677
<CURRENT-LIABILITIES> 39,401
<BONDS> 4,149
0
0
<COMMON> 1,707
<OTHER-SE> 56,232
<TOTAL-LIABILITY-AND-EQUITY> 104,677
<SALES> 175,440
<TOTAL-REVENUES> 175,440
<CGS> 133,328
<TOTAL-COSTS> 133,328
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 724
<INCOME-PRETAX> 15,105
<INCOME-TAX> 5,775
<INCOME-CONTINUING> 9,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,330
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.36
</TABLE>
<PAGE>
ARTICLES OF MERGER
BY AND AMONG
HARMON INDUSTRIES, INC.,
HARMON ELECTRONICS, INC.,
CONSOLIDATED ASSET MANAGEMENT COMPANY, INC.
AND
ELECTRO PNEUMATIC CORPORATION
-----------------------------
(Section 351.447 RSMo)
Pursuant to the provisions of The General and Business Corporation Law
of Missouri, the undersigned corporations certify the following:
1. Electro Pneumatic Corporation, a California corporation ("EPC"),
Consolidated Asset Management Company, Inc., a Missouri corporation
("CAMCO"), Harmon Electronics, Inc., a Missouri corporation ("HEI"), are
hereby merged (the "Merger") with and into Harmon Industries, Inc., a
Missouri corporation ("HII").
2. HII is the surviving corporation in the Merger.
3. CAMCO, EPC and HEI are hereinafter referred to collectively as the
"Constituent Corporations".
4. The Boards of Directors of the Constituent Corporations have
approved these Articles of Merger and the Plan of Merger ("Plan of Merger")
set forth herein by resolutions adopted on August 23, 1996 by unanimous
written consent of all of the members of the Boards of Directors of the
Constituent Corporations. The resolutions adopted by the Board of Directors
of HII are as follows:
WHEREAS, HII is the sole shareholder of HEI, a Missouri
corporation; and
WHEREAS, HII is the sole shareholder of EPC, a California
corporation; and
WHEREAS, HII is the sole shareholder of CAMCO, a Missouri
corporation; and
WHEREAS, HEI, CAMCO and EPC are solvent active corporations; and
WHEREAS, the directors of HII deem it advisable and in the best
interest of HII that HEI, CAMCO and EPC shall merge with and into HII;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors of HII
hereby approve the merger (the "Merger") of its wholly owned
subsidiaries HEI, CAMCO and EPC with and into HII, pursuant to which HII
shall be the surviving corporation and all the rights and obligations
75
<PAGE>
of HEI, CAMCO and EPC shall become the rights and obligations of HII;
FURTHER RESOLVED, that all rights to or associated with the names
of the Constituent Corporations, including, but not limited to,
trademarks, service marks and other intellectual or common law rights,
shall be the property of HII after the merger;
FURTHER RESOLVED, that the Merger shall be a statutory merger and
is intended to be a tax-free reorganization under the Internal Revenue
Code.
FURTHER RESOLVED, that the Plan of Merger by and among HII, CAMCO,
HEI and EPC, attached hereto as Exhibit A and incorporated herein by
reference, is hereby adopted and approved;
FURTHER RESOLVED, that the officers of HII be, and they hereby
are, authorized and directed to prepare, execute and file with the
appropriate office of any jurisdiction any documents, including but not
limited to, Articles of Merger setting forth the Plan of Merger, and to
take any actions on behalf of HII as they deem necessary and appropriate
for the purpose of effecting the Merger.
5. The Plan of Merger has been adopted pursuant to Section 351.447 RSMo.
6. The Plan of Merger is set forth in Exhibit A attached hereto and
incorporated herein by reference.
7. HII, the parent corporation, is in compliance with the 90 percent
ownership requirement of Section 351.447 RSMo, and will maintain at least 90
percent ownership of each of HEI, CAMCO and EPC, parties to the Merger, until
the issuance of the Certificate of Merger by the Secretary of State of
Missouri.
IN WITNESS WHEREOF, these Articles of Merger have been executed in
duplicate by the aforementioned corporations as of the day and year hereafter
acknowledged.
HARMON INDUSTRIES, INC.
(CORPORATE SEAL)
By:
--------------------------------------
Bjorn E. Olsson, President
ATTEST:
- ----------------------------------------
Charles M. Foudree, Secretary
-2-
76
<PAGE>
HARMON ELECTRONICS, INC.
(CORPORATE SEAL)
By
-------------------------------------
Lloyd T. Kaiser, President
ATTEST:
- -------------------------------------
James O. Selzer, Secretary
CONSOLIDATED ASSET MANAGEMENT
COMPANY, INC.
(CORPORATE SEAL)
By
-------------------------------------
J. Randall John, President
ATTEST:
- --------------------------------------
James O. Selzer, Secretary
ELECTRO PNEUMATIC CORPORATION, INC.
(CORPORATE SEAL)
By
------------------------------------
Raymond A. Rosewall, President
ATTEST:
- ---------------------------------------
James O. Selzer, Secretary
-3-
77
<PAGE>
STATE OF______________________________)
) ss.
COUNTY OF_____________________________)
On this _______day of ________________________, 1996, before me,
_______________________________________, Notary Public in and for said state
and county, personally appeared Bjorn E. Olsson, President of Harmon
Industries, Inc., known to me to be the person who executed the within
Articles of Merger in behalf of said corporation and acknowledged to me that
he executed the same for the purposes therein stated.
----------------------------------------
Notary Public
(NOTARY SEAL)
My Commission Expires:
- --------------------------
STATE OF ____________________________)
) ss.
COUNTY OF____________________________)
On this _________ day of ________________________, 1996, before me,
_______________, Notary Public in and for said state and county, personally
appeared Lloyd T. Kaiser, President of Harmon Electronics, Inc., known to me
to be the person who executed the within Articles of Merger in behalf of said
corporation and acknowledged to me that he executed the same for the purposes
therein stated.
---------------------------------------
Notary Public
(NOTARY SEAL)
My Commission Expires:
- ----------------------------------
-4-
78
<PAGE>
STATE OF______________________________)
) ss.
COUNTY OF_____________________________)
On this _______day of ________________________, 1996, before me,
_______________________________________, Notary Public in and for said state
and county, personally appeared J. Randall John, President of Consolidated
Asset Management Company, Inc., known to me to be the person who executed the
within Articles of Merger in behalf of said corporation and acknowledged to
me that he executed the same for the purposes therein stated.
----------------------------------------
Notary Public
(NOTARY SEAL)
My Commission Expires:
- --------------------------
STATE OF ____________________________)
) ss.
COUNTY OF____________________________)
On this _________ day of ________________________, 1996, before me,
_________________, Notary Public in and for said state and county, personally
appeared Raymond A. Rosewall, President of Electro Pneumatic Corporation,
known to me to be the person who executed the within Articles of Merger in
behalf of said corporation and acknowledged to me that he executed the same
for the purposes therein stated.
---------------------------------------
Notary Public
(NOTARY SEAL)
My Commission Expires:
- --------------------------------
-5-
79
<PAGE>
EXHIBIT A
---------
PLAN OF MERGER
BY AND AMONG
HARMON INDUSTRIES, INC.,
HARMON ELECTRONICS, INC.,
CONSOLIDATED ASSET MANAGEMENT COMPANY, INC.
AND
ELECTRO PNEUMATIC CORPORATION
-----------------------------
1. Harmon Electronics, Inc., a Missouri corporation ("HEI"),
Consolidated Asset Management Company, Inc., Missouri corporation ("CAMCO")
and Electro Pneumatic Corporation, a California corporation ("EPC"), hereby
merge (the "Merger") with and into Harmon Industries, Inc., a Missouri
corporation ("HII"). HII is the surviving corporation (the "Surviving
Corporation") in the Merger.
2. The effective date of the Merger (the "Effective Date") shall be
December 31, 1996, at midnight.
3. On the Effective Date of the Merger, the separate existence of HEI,
CAMCO and EPC shall cease. On the Effective Date, HEI, CAMCO and EPC shall be
merged with and into HII, and HII, as the Surviving Corporation, shall,
without further action, succeed to and possess all the rights, privileges,
immunities and franchises, as well of a public as of a private nature, of
HII, HEI, CAMCO and EPC; and all property, real, personal, and mixed, and all
debts due on whatever account, including subscriptions to shares, and all
other causes in action and all and every other interest of or belonging to or
due to each of said corporations, shall be taken and deemed to be transferred
to and vested in HII as the Surviving Corporation without further act or
deed; and the title to any real estate, or any interest therein, under the
laws of the State of Missouri vested in any of such corporations shall not
revert or be in any way impaired by reason of the Merger. All rights to or
associated with the names of HEI, CAMCO and EPC, including, but not limited
to, trademarks, service marks and corporate usage rights, shall be the
property of HII after the merger.
4. The officers and directors of the above named corporations are
authorized to execute all deeds, assignments and documents of every nature
which may be needed to effectuate a full and complete transfer of ownership.
5. The Articles of Incorporation and Bylaws of HII shall continue in
full force and effect as the Articles of Incorporation and Bylaws of the
Surviving Corporation.
6. The directors and officers of HII on the Effective Date shall
continue in office as the directors and officers of the Surviving Corporation
and shall hold such offices until their respective successors have been duly
elected and qualified.
-6-
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<PAGE>
7. Upon and after the Effective Date of the Merger:
a. The Surviving Corporation may be served with process in the State of
Missouri in any proceeding for the enforcement of any obligation of any
corporation organized under the laws of the State of Missouri which is a
party to the Merger and in any proceeding for the enforcement of the
rights of a dissenting shareholder of any such corporation organized
under the laws of the State of Missouri against the Surviving
Corporation;
b. The Surviving Corporation will promptly pay to the dissenting
shareholders of any corporation organized under the laws of the State of
Missouri which is a party to the merger the amount, if any, to which
they shall be entitled under the provisions of The General and Business
Corporation Law of Missouri with respect to the rights of dissenting
shareholders.
-7-
81
