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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
COMMISSION FILE NUMBER 0-7916
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HARMON INDUSTRIES, INC.
IRS Employer Identification Number
44-0657800
State or other jurisdiction of
incorporation or organization
MISSOURI
Address of principal executive offices
1300 JEFFERSON COURT, BLUE SPRINGS, MISSOURI 64015
Registrant's telephone number, including area code
(816) 229-3345
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------------- ---------------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of March 16, 1998, 10,521,189 common shares were outstanding. The
aggregate market value of the common stock (based upon the closing price of
these shares per NASDAQ for Over-the-Counter trading) of Harmon Industries, Inc.
held by non-affiliates was approximately $208,917,000.
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
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PART II
Item 6: Selected Consolidated Financial Data.............. Pages 18 and 19 of the Annual Report to
Shareholders for the year ended December 31,
1997.
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations............. Pages 20 through 25 of the Annual Report to
Shareholders for the year ended December 31,
1997.
Item 8: Financial Statements and Supplementary Data....... Pages 26 through 43 of the Annual Report to
Shareholders for the year ended December 31,
1997.
PART III
Item 10: Directors and Executive Officers of the
Registrant...................................... Pages 3 through 6 of the Company's Proxy Statement
dated April 1, 1998.
Item 11: Executive Compensation and Other Information...... Pages 7 through 15 of the Company's Proxy
Statement dated April 1, 1998.
Item 12: Security Ownership of Certain Beneficial Owners
and Management.................................. Pages 2 and 3 of the Company's Proxy Statement
dated April 1, 1998.
Item 13: Certain Relationships and Related Transactions.... Page 6 (last paragraph of Election of Directors)
and page 6 ("Certain Transactions") of the
Company's Proxy Statement dated April 1, 1998.
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2
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PART I
ITEM 1. BUSINESS
Harmon Industries, Inc. ("Harmon" or "the Company") is a leading supplier of
signal, inspection 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 10 large freight
carriers that the Interstate Commerce Commission defines as Class I railroads
because of their significant annual operating revenues. From the 1930's to the
1980's, the Class I freight railroads endured a nearly constant decrease in
their share of the total inter-city freight transportation market(1). The
reversal of this trend is a result of their ability to offer customers a lower
cost and higher quality method of transporting freight than was provided in the
past. Freight railroads achieved this result through strict cost controls,
reductions in train crew sizes and other employment expenses, divestiture of
unprofitable track segments and other assets unrelated to the railroad industry
and a more marketing oriented operating strategy. The Company has traditionally
sold its products to the freight railroad industry.
Many Harmon products are designed to assist the railroads in cutting costs.
For example, the 27% decrease in Class I employment levels from 1987 to 1996
required the Class I railroads to look to products like those manufactured by
Harmon to monitor the condition of moving trains, help ensure the safe switching
and passage of trains and facilitate better communication among crew members on
a train and between moving trains and railroad traffic controllers.
Class I railroads have also used Harmon products to increase asset
utilization and productivity. The 24% reduction from 1987 to 1996 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 94% from 1987 to 1996. The Class I railroads have become more
profitable despite a 35% reduction (in constant 1987 dollars) from 1987 to 1996
in revenue per ton mile.
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(1) This fact and the other statistical information about the Class I railroads
in this Annual Report come from Railroad Facts, 1997 Edition, a recognized
industry source for information on Class I railroads.
3
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
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 48% from 1987 to 1996. The Company believes
that the willingness of the Class I railroads to enter into such alliances with
their former competitors is a positive development. The Company believes that
the cost reductions and improved efficiencies described above will permit the
Class I railroads to better compete in the long haul segment of the freight
transportation market. While final figures are not yet available for the year
ended December 31, 1997, the total volume of intermodal shipments is estimated
to have increased approximately 6% to 7% from 1996. 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 1987 to 1996, the Class I railroads have reduced their track miles
by 20%, to approximately 177,000 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 1987 to 1996, capital expenditures by Class I
railroads per mile of track owned has increased from approximately $13,500 to
$34,500 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.
In recent years, one of the cost containment strategies increasingly adopted
by the freight railroads has been outsourcing of support functions formerly done
internally. In the areas of interest to Harmon, this has included a reduction in
the internal engineering staffs, construction forces and materials management.
This has led to a dramatic increase in opportunities and business for Harmon in
providing the direct engineering support, materials management and construction
services for the 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 543, with 32 of
these short line railroads being above the threshold of either $40.0 million in
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 focused management, generally
operate at lower speeds and are typically not burdened with the more restrictive
collective bargaining agreements as the Class I railroads.
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 Intermodal Surface Transportation Efficiency Act of
1991 (ISTEA) provided federal funds through 1997 for railroad crossing warning
systems in the same amount each year as existed under previous federal
legislation. During 1997, the ISTEA was extended for six months through March
1998 pending agreement on a new, long-term transportation bill. It is currently
4
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HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
expected that future legislation will provide for grade crossing funding in
amounts comparable to the original ISTEA.
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 the ISTEA, which nearly
doubled the federal funding available annually for 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 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 signaling 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 totaled $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 exceeded $13 million. The project was
completed successfully and on time under an extremely aggressive schedule, and
established Harmon as a major contender in this market.
5
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
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 further established
Harmon as a significant supplier in the rail transit market.
In December 1997, Harmon obtained a license agreement from Hughes Aircraft
Company (now Raytheon Company) to develop, build and market a new Advanced
Automatic Train Control system (AATC) which is based in part on a converted
military communications system. Hughes, in combination with the San Francisco
Bay Area Rapid Transit District (BART), developed a prototype of this system and
demonstrated it on BART in 1996. Harmon will now complete the development and
has a contract with BART to continue through two additional phases of test and
deployment of the system over a substantial portion of the BART system by 2001.
Harmon intends to market this system aggressively in the transit marketplace,
both domestically and internationally.
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 Mexico, Canada, South
America, 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 Mexico, Europe, and South America have been recently
privatized and United States freight railroads, which are Harmon customers, are
investors in some of these privatizations. The Company's relationships with such
railroads provide it the opportunity to sell its products to these new entities
for international use. Harmon is also pursuing strategic alliances with other
railroad industry suppliers to assist its 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 anticipated growth in
trade will increase the railroad traffic in both directions across the borders.
In June 1997, Harmon acquired the remaining interest in Vale-Harmon
Enterprises, Ltd. ("Vale"), located near Montreal, Quebec, Canada, which it
previously did not own. Vale serves the freight and transit markets in Canada.
In July 1996, Harmon acquired Vaughan Systems, Ltd., subsequently renamed
Vaughan Harmon Systems, Ltd. ("Vaughan"), located in the United Kingdom. This
acquisition established the first international manufacturing operations for the
Company. Vaughan manufactures train control products which are complementary to
the Company's domestic product lines and provide a base for introducing the
Company's products into the European market. Vaughan has a contract with
Railtrack for the resignaling of the Cromer line in Norfolk, England. This will
be the first project in which Vaughan products and Harmon products from the
United States will be combined to provide an integrated system to the customer.
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
6
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HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
and services to meet its customers' needs. Harmon expects that the continued
development of its product lines may be accomplished, in part, by strategic
acquisitions of product lines or companies that compliment the Company's current
product lines. 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. 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 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 continues to enhance its Total Quality Systems (TQS) is all
aspects of its operation. The Company was one of the first in its industry to
institute such a program. ISO 9000 certification is one of the foundations of
the Company's TQS which is evident by the fact the Company has thirteen
facilities certified to either ISO 9001 or ISO 9002. Continuous improvement,
employee involvement, education and training continue to receive strong emphasis
as a strategic initiative. The Company actively employs TQS teams to improve
processes, reduce scrap and rework and enhance customer service with up to 50
active teams, at any one time, working on improving internal systems.
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; and
train describers and other train control systems manufactured by Vaughan Harmon
Systems, Ltd. CROSSING SYSTEMS include
7
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HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
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 a moving train as it passes
by a train inspection site. PRINTED WIRING BOARDS include production of custom
designed printed wiring boards for use by Harmon and 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)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1995 1996 1997
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AMOUNT % AMOUNT % AMOUNT %
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<S> <C> <C> <C> <C> <C> <C>
Train Control Systems........................... $ 55,437 40.7% $ 87,080 47.3% $ 101,624 47.4%
Crossing Systems................................ 42,375 31.1% 48,927 26.6% 55,598 25.9%
Asset Management Services....................... 14,194 10.4% 22,217 12.1% 29,913 14.0%
Train Inspection Systems........................ 11,360 8.4% 12,906 7.0% 13,407 6.2%
Printed Wiring Boards........................... 6,752 5.0% 5,249 2.9% 5,772 2.7%
Other........................................... 5,999 4.4% 7,489 4.1% 8,113 3.8%
---------- --------- ---------- --------- ---------- ---------
Total........................................... $ 136,117 100.0% $ 183,868 100.0% $ 214,427 100.0%
---------- --------- ---------- --------- ---------- ---------
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(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 amounts in this table and those presented in the "Consolidated
Statements of Operations". See "Financial Statements." The differences do
not affect the validity of the discussion and analysis.
PRODUCTS
While the Company's principal products and services have been grouped for
purposes of discussion by primary product or service function, each product and
service interrelates or is complementary to other Company products and services.
Substantially all products and services (except printed wiring boards) are
marketed to the railroad industry.
TRAIN CONTROL SYSTEMS include all Company products and services related to
the control of train movement. These include the Company's signal control track
circuits (Electro Code); interlocking control equipment such as Electro Logic,
the Harmon Logic Controller (HLC) and the Vital Harmon Logic Controller (VHLC);
car-borne equipment (Ultra Cab); 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
8
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HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
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 taking place on an Amtrak line in southern
Michigan under a FRA grant to demonstrate enhanced train control technology for
High-Speed Rail corridors.
Advanced Automatic Train Control (AATC) is a very sophisticated radio data
network that links trains with wayside computers to continuously monitor the
location of trains and update the instructions to each train based on the
reported locations of other trains. This will allow much more capacity in high
density transit operations such as San Francisco's Bay Area Rapid Transit
District (BART) where the ability to safely reduce headway between trains will
permit more trains per hour to handle peak load conditions. It also achieves
this result with a dramatic reduction in the amount of physical equipment
required along the track, compared to more conventional train control
techniques.
CROSSING SYSTEMS include all Company products and services related to
rail/highway crossing warning systems including: motion detectors (the Company's
PMD and HXP products, among others); flashing lights and cantilevers; and the
design, wiring and installation of complete systems utilizing these products.
Rail/highway crossing warning systems activate flashing lights and audible
bells, and initiate the lowering of crossing gates to provide traffic barriers
in installations so equipped. While the Company offers complete systems, the
more sophisticated electronic equipment that activates the warning lights or
crossing gates is often sold separately.
The Harmon Railroad Crossing Processor (HXP) and the Phase Motion Detector
(PMD) are the trade names for the electronic controllers used in most of these
systems. The HXP is the Company's most sophisticated device for control of
railroad crossing warning devices, and is protected by U.S. patent #4,581,700.
It uses microprocessors to calculate the train's speed and distance to the
crossing and provides a consistent warning time. The less-costly PMD activates
the warning device when the approaching train is within a predefined distance
from the crossing and may be used over a wider range of trackside conditions.
The latest versions of these two products, HXP-3 and PMD-3, represent superior
technology and offer the convenience of modular interchangeability between the
two products.
9
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
The Highway Crossing Analyzer (HCA) is a recording and monitoring device
intended mostly for use at grade crossings that can monitor and record many
aspects of the warning system operation, detect anomalies and report trouble to
a central reporting location. It is being adopted in many areas as a means for
improving the efficiency of maintenance procedures by providing better and
faster information on the location and nature of potential problems and the
ability to develop pro-active preventative maintenance procedures. The
acquisition of Devtronics, Inc. in 1997 added other related products similar to
the HCA and additional capability and expertise in this area.
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. The Company 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. Success in this area has helped Harmon diversify
from a predominantly manufacturing operation into the service portion of the
railroad supply industry. The Company expanded its service offering in January
1998 with the acquisition of CSS, Inc., a provider of installation and
maintenance services to domestic freight railroads.
TRAIN INSPECTION SYSTEMS include all Company products and services related
to monitoring 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 Devtronics, Inc. in November 1997 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 that includes mobile and stationary two-way radios
specifically designed for railroad applications involving transmission of voice
and/or data messages.
PRODUCT DEVELOPMENT AND PATENTS
The Company considers product development essential to both maintaining its
market position and to future growth. Product innovation has been a major
contributor to the Company's profitability during the past few years, as the
railroads have sought more cost-effective methods of controlling and monitoring
train operations. Frequently, a customer's technical staff works closely with
the Company's staff on the design of a system or component parts. The Company
will continue to focus on rapid response to customer needs in its introduction
of new products. The Company anticipates increasing its efforts and expenditures
for product development.
10
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
The Company continues to develop new products and new variations of
previously successful products, where market demands and competition dictates
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 Advanced Automatic Train Control
(AATC) 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
$5,218,000, $6,331,000 and $7,664,000 in the years ended December 31, 1995, 1996
and 1997, respectively, on research and development (R&D) activities related
either to the improvement of existing products or to the development of new
products. The number of engineers involved in research and development activity
has increased significantly, commensurate with the rise in investment in this
field. However, a much larger increase has occurred in the number of engineers
dedicated to Applications Engineering which apply developed products to specific
customer needs and, in part, replace the customer's internal engineering staffs.
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
Devtronics, Inc., the Company obtained its technology and R&D projects along
with a research workforce that is already in place.
Although the Company believes that its patents and patent applications have
value, the Company relies primarily on trade secrets to protect its technology.
Rapidly changing technology makes the Company's future success dependent on the
technical competence and creative skill of its personnel.
MARKETING AND SALES
The Company's products are sold to the freight railroad and rail transit
industries through experienced direct sales employees who work closely with the
Company's customers to identify existing or potential products to improve the
efficiency and enhance the safety of their operations. The Company's sales force
is organized along industry lines. A separate group is primarily responsible for
sales to each of the market segments: Class I, short line, rail transit and
international.
The international marketing organization is assisted by a distributor in
which the Company has a minority interest. Henkes-Harmon Industries, Pty. Ltd.
is based in Melbourne, Victoria, Australia and sells the Company's products in
Australia and New Zealand. The Company also utilizes foreign nationals to assist
the Company's sales staff with sales in other foreign markets. The addition of
Vaughan Harmon Systems, Ltd. 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 was enhanced in Canada by the June 1997 acquisition of Vale-Harmon
Enterprises, Ltd., which is based in Quebec, Canada and sells Harmon products to
the Canadian railroads. Prior to this acquisition, Harmon had a minority equity
11
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
interest in Vale-Harmon Enterprises, Ltd. The Company is in the process of
establishing a subsidiary in Mexico to manage the increased business it expects
from its customers there.
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 $74.5 million at December
31, 1997. Substantially all of these orders will be filled in 1998. The backlog
of orders was approximately $59.4 million at December 31, 1996, the majority of
which were filled during 1997. 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. The Company's three major competitors, all of which
are subsidiary units of foreign companies, appear to have greater financial
resources than the Company. Nonetheless, the Company has demonstrated its
ability to develop and introduce new products and expects that a continuation of
such ability will permit it to maintain its competitive position.
WARRANTY AND FIELD SERVICE
The Company provides a high level of customer support through warranty and
customer service departments. The Company's engineers and technicians provide
field service support, repairs and customer training in the use and maintenance
of the Company's products. These efforts are important to maintain customer
satisfaction and learn of customer needs, but do not now directly generate
significant revenue for the Company.
MANUFACTURING
Manufacturing consists of the assembly of component parts either purchased
from others or produced internally and the production of printed wiring boards.
The Company generally manufactures products in response to specific customer
orders and specifications and, as a result, does not maintain a significant
finished goods inventory. Furthermore, an increasing number of the products sold
by the Company are incorporated into a complete system that is assembled by the
Company and delivered as a package.
12
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 1. BUSINESS (CONTINUED)
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, 1997, the Company had 1,510 full-time employees. There
were 1,099 employees in manufacturing, 200 in engineering, 143 in general and
administrative services and 68 in marketing and sales. 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 675,000 square feet
of space for manufacturing, warehousing, research and general office use. In
addition, the Company owns land zoned for industrial use, on which the Grain
Valley and Warrensburg facilities are located. The following table summarizes
the Company's principal locations.
<TABLE>
<CAPTION>
LOCATION PRINCIPAL USE
- --------------------------------------- ------------------------------------------------------------------------
<S> <C>
Grain Valley, Missouri................. Administration, design and manufacture of electronic products and
railroad signal systems
Warrensburg, Missouri.................. Manufacture of railroad crossing warning systems and hardware and
printed wiring boards
Jacksonville, Florida.................. Design and manufacture of railroad crossing warning systems and hardware
Atlanta, Georgia....................... Design and assembly of railroad crossing warning systems
Riverside, California.................. Administration, product design, and manufacture of electronic products
Lee's Summit, Missouri................. Assembly, storage and distribution of products for the railroad industry
Blue Springs, Missouri................. Corporate headquarters
Ware, England.......................... Design and manufacture of electronic products and control systems
St. Laurent, Quebec, Canada............ Design, manufacture and distribution of products for the railroad
industry
</TABLE>
13
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 2. PROPERTIES (CONTINUED)
In addition to these principal locations, the Company also owns or leases
various other office, engineering and warehouse facilities. The Company is
planning to relocate its corporate headquarters during the third quarter of 1998
to a larger office building currently under construction in Blue Springs,
Missouri. Management believes that its facilities are adequate for current and
foreseeable needs. For additional discussion and information concerning the
Company's lease commitments, see "Financial Statements--Note 6 of Notes to the
Consolidated Financial Statements."
The Company owns all significant machinery and equipment used in its
manufacturing operations.
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.
MDNR issued a permit on July 31, 1996. Groundwater and other remediation
requirements are set forth in the post-closure permit. The Company has designed
and installed a system to begin soil remediation and that system will continue
in operation for some time. 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. The current market value of
assets in this trust exceeds $550,000.
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 penalties to
$2,343,706.
After several unsuccessful settlement attempts, the case proceeded to
hearing before an EPA administrative law judge on January 12-14, 1994, on the
issue of penalties. Prior to the hearing, the judge found the Company liable for
all alleged violations. The Company presented evidence on several penalty
reduction theories, including good faith, minor potential for harm to human
health and the environment, and minimum economic benefit.
On December 12, 1994, the administrative law judge issued an Initial
Decision in which he assessed penalties against the Company of $586,716.
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 unobtainable. On January 9, 1995, the Company filed a Notice of Appeal of
the Initial Decision with the Environmental Appeals Board ("EAB") and on May 1,
1996, the EAB heard oral arguments. The EAB affirmed the penalty of the
administrative law judge. On June 6,
14
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
1997, Harmon filed a complaint in the Federal District Court for the Western
District of Missouri seeking judicial review of the EAB's decision.
A court-ordered mediation session was held on September 11, 1997. Based on
the parties' statement of position at the mediation session, the facilitator
concluded that the prospects for settlement of this matter were limited.
Harmon and the defendants filed a joint motion with the court to
preliminarily enjoin U.S. EPA from taking any actions to collect on the penalty
assessed by the EAB. While U.S. EPA contends that statutory interest on the
penalty amount continues to accrue while the preliminary injunction remains in
effect, U.S. EPA has agreed that it will not seek any other penalties or fees
based on Harmon's non-payment of the penalty assessed by the EAB while the
litigation is pending in the District Court.
The Court has entered an order requiring Harmon to file its motion for
summary judgment on February 17, 1998, and briefing on cross-motions for summary
judgment will be concluded by mid-April 1998. We are unable to predict when a
decision from the district court may issue.
Special legal counsel has advised the Company that the penalties sought by
EPA in this case are inconsistent with the 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, 1997.
15
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
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 March 9, 1998 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.
C.L. King & Associates
The approximate number of holders of record for the Company's common stock
as of March 9, 1998 was 600.
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.
16
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
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.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR THE LAST FIVE
INDIVIDUAL OFFICE AGE YEARS
- ------------------------- --------------------- --- ----------------------------------------
<S> <C> <C> <C>
Breshears, Ronald G...... VP-Human Resources 51 VP-Human Resources of the Company since
7/1/81.
Bush, William L.......... VP-Research and 52 VP-Research and Development Engineering
Development of the Company since 1/1/98. Prior to
Engineering that, Director-Research and
Development since 8/8/93. Prior to
that, Manager, Defense Business Unit
of Xetron Corporation since 1990.
Daniels, Richard A....... VP-Transit and 57 VP-Transit and International Systems
International Systems Sales of the Company since 1/1/98.
Sales Prior to that, VP-Transit since
2/1/93. Prior to that, Director,
Transit/ Commuter Systems since 1991.
Foudree, Charles M....... Executive VP-Finance, 53 Executive VP-Finance of the Company
Secretary and since 9/9/86. Secretary of the Company
Treasurer since 2/2/82. Treasurer of the Company
since 2/5/74.
Harmon, Robert E......... Chairman of the Board 58 Chairman of the Board of 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 59 VP-Technology of the Company since
10/2/86.
John, James R............ VP-Services 49 VP-Services of the Company since 5/1/96.
Prior to that, President of
Consolidated Asset Management Company,
Inc. since 1992.
Johnson, John W.......... VP-Domestic Sales 50 VP-Domestic Sales of the Company since
2/1/93. Prior to that,
Director-Product Support since 1992.
Kaiser, Lloyd T.......... Executive VP-Domestic 46 Executive VP-Domestic Sales and Service
Sales and Service of the Company since 1/1/98. Prior to
that, Executive VP-Systems since
5/1/96. Prior to that, President of
Harmon Electronics, Inc. since 1992.
</TABLE>
17
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR THE LAST FIVE
INDIVIDUAL OFFICE AGE YEARS
- ------------------------- --------------------- --- ----------------------------------------
<S> <C> <C> <C>
Olsson, Bjorn E.......... President and Chief 52 President and Chief Executive Officer of
Executive Officer the Company since 1/1/95. President of
the Company since 8/1/90.
Rosewall, Raymond A...... VP-Manufacturing 46 VP-Manufacturing of the Company 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.
Scheerer, William J...... VP-Applications 50 VP-Applications Engineering of the
Engineering Company since 1/4/94. Prior to that,
various positions with CSX
Transportation, most recently Chief
Engineer-Train Control.
Schmitz, Stephen L....... VP-Controller 44 VP-Controller of the Company since
11/1/83.
Utterback, Jeffery J..... Assistant VP-Quality 36 Assistant VP-Quality Systems of the
Systems Company since 1/1/98. Prior to that,
Director-Quality Assurance since 1993.
Prior to that, Manager-Product
Assurance since 1990.
</TABLE>
Although some of the above have employment agreements which provide for
twelve months of continued employment on a rolling basis, all of the above serve
as officers at the pleasure of the Board of Directors and are appointed for one
year terms.
18
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
The following is a list of the Board of Directors of the Company:(1)
<TABLE>
<CAPTION>
INDIVIDUAL AFFILIATION
- --------------------------------------------------------------- -------------------------------------------------
<S> <C>
Robert E. Harmon............................................... Chairman of the Board
Bruce M. Flohr................................................. Chairman and Chief Executive Officer
RailTex, Inc., San Antonio, Texas
Charles M. Foudree............................................. Executive Vice President-Finance,
Treasurer and Secretary
Rodney L. Gray................................................. Executive Vice President-Finance
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................................................ President and Chief Executive Officer
John A. Sprague(2)............................................. Managing Partner
Jupiter Partners, LP, New York, New York
Judith C. Whittaker............................................ Vice President, General Counsel/Secretary
Hallmark Cards, Inc., Kansas City, Missouri
</TABLE>
- ------------------------
(1) Thomas F. Eagleton and Donald V. Rentz each served as a Director until
retirement in May 1997.
(2) John A. Sprague is a newly nominated Director subject to election at the
shareholders' meeting on May 12, 1998.
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.
19
<PAGE>
HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT 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 1997 Annual
Report to Shareholders at the following pages:
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Independent Auditors' Report............................................................................. 41
Consolidated Balance Sheets--December 31, 1997 and 1996.................................................. 26-27
Consolidated Statements of Earnings--Years ended December 31, 1997, 1996 and 1995........................ 28
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1997, 1996 and 1995............ 29
Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996 and 1995...................... 30
Notes to Consolidated Financial Statements............................................................... 31-40
</TABLE>
(a)(2) Financial Statement Schedules
Selected Financial Data--for the years ended December 31, 1997, 1996 and
1995, are attached hereto at the following pages:
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report on Financial Statement Schedule............................................. 23
Schedule VIII--Valuation and Qualifying Accounts......................................................... 24
</TABLE>
All other schedules are omitted as they are either not applicable or the
required information is presented in the footnotes to the financial statements
in the annual report.
(a)(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE(S)
- --------- ----------------
<S> <C> <C>
3(ii) Amended Bylaws....................................................................... 25 through 35
11 Computation of Per Share Earnings.................................................... 36
13 1997 Annual Report to Shareholders................................................... 37 through 82
21 Listing of Subsidiaries.............................................................. 83
27 Financial Data Schedule.............................................................. 84
99-1 Forward Looking Information.......................................................... Incorporated by
reference to
page 40 of
Exhibit 13
N/A Notice of Annual Meeting and Proxy Statement dated April 1, 1998..................... 85 through 104
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended December 31,
1997.
20
<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.
<TABLE>
<S> <C> <C>
HARMON INDUSTRIES, INC.
Date: March 27, 1998 By: /s/ BJORN E. OLSSON
-----------------------------------------
Bjorn E. Olsson
PRESIDENT
Date: March 27, 1998 By: /s/ CHARLES M. FOUDREE
-----------------------------------------
Charles M. Foudree
EXECUTIVE VICE PRESIDENT-FINANCE
Date: March 27, 1998 By: /s/ STEPHEN L. SCHMITZ
-----------------------------------------
Stephen L. Schmitz
VICE PRESIDENT-CONTROLLER
</TABLE>
21
<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:
<TABLE>
<S> <C> <C>
By: /s/ BRUCE M. FLOHR Date: March 27, 1998
------------------------------------------
Bruce M. Flohr
DIRECTOR
By: /s/ CHARLES M. FOUDREE Date: March 27, 1998
------------------------------------------
Charles M. Foudree
DIRECTOR
By: /s/ RODNEY L. GRAY Date: March 27, 1998
------------------------------------------
Rodney L. Gray
DIRECTOR
By: /s/ ROBERT E. HARMON Date: March 27, 1998
------------------------------------------
Robert E. Harmon
DIRECTOR
By: /s/ HERBERT M. KOHN Date: March 27, 1998
------------------------------------------
Herbert M. Kohn
DIRECTOR
By: /s/ DOUGLASS WM. LIST Date: March 27, 1998
------------------------------------------
Douglass Wm. List
DIRECTOR
By: /s/ GERALD E. MYERS Date: March 27, 1998
------------------------------------------
Gerald E. Myers
DIRECTOR
By: /s/ BJORN E. OLSSON Date: March 27, 1998
------------------------------------------
Bjorn E. Olsson
DIRECTOR
By: /s/ JUDITH C. WHITTAKER Date: March 27, 1998
------------------------------------------
Judith C. Whittaker
DIRECTOR
</TABLE>
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Harmon Industries, Inc.:
Under date of February 10, 1998, we reported on the consolidated balance
sheets of Harmon Industries, Inc. and subsidiaries as of December 31, 1997 and
1996 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,
1997, as contained in the 1997 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 1997. In connection with our audits of
the aforementioned consolidated financial statements, we also have audited the
related financial statement schedule as listed under item 14 of Form 10-K. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, this financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Kansas City, Missouri
February 10, 1998
23
<PAGE>
SCHEDULE VIII
HARMON INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COSTS AND RECOVERIES ENDING
DESCRIPTION BALANCE EXPENSES (DEDUCTIONS) BALANCE
- ------------------------------------------------------------------ ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 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................................................ $ -- $ 2,988 $ -- $ 2,988
Year ended December 31, 1997:
Allowance for doubtful trade accounts receivable................ $ 307 $ 18 $ (7) $ 318
Warranty reserve................................................ $ 2,988 $ 70 $ (335) $ 2,723
</TABLE>
24
<PAGE>
BYLAWS
OF
HARMON INDUSTRIES, INC.
* * * * *
ARTICLE I
Offices
The principal office of the Corporation in the State of Missouri shall be
located in Jackson County, Missouri. The Corporation may have such other
offices, either within or without the State of Missouri, as the businesses of
the Corporation may require from time to time.
The registered office of the Corporation required by The General and
Business Corporation Act of Missouri to be maintained in the State of Missouri
may be, but need not be, identical with the principal office in the State of
Missouri, and the address of the registered office may be changed from time to
time by the Board of Directors.
ARTICLE II
Shareholders
SECTION 1. ANNUAL MEETING: The Annual Meeting of the Shareholders shall
be held at any hour during normal business hours as determined by the President
on the second Tuesday in May of each year, beginning with the year 1990, for the
purpose of electing Directors and for the transaction of such other business as
may come before the meeting. If the day fixed for the Annual Meeting shall be a
legal holiday, such meeting shall be held on the next succeeding business day.
If the election of Directors shall not be held of the date designated herein for
any annual meeting, or at any adjournment thereof, the Board of Directors shall
cause the election to be held at a special meeting of the Shareholders as soon
thereafter as conveniently may be.
SECTION 2. SPECIAL MEETINGS: Special meetings of the Shareholders may be
called by the President, by the Board of Directors or by the holders of not less
than one-fifth of all the outstanding shares of the Corporation.
SECTION 3. PLACES OF MEETING: The Board of Directors may designate any
place, either within or without the State of Missouri, as the place of meeting
for any annual meeting of the Shareholders or for any special meeting of the
Shareholders called by the Board of Directors. The Shareholders may designate
any place, either within or without the State of Missouri, as the place for the
holding of such meeting, and may include the same in a waiver of notice of any
meeting. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the registered office of the Corporation
in the State of Missouri, except as otherwise provided in Section 5 of this
Article.
SECTION 4. NOTICE OF MEETINGS: Written or printed notice stating the
place, day and hour of the meeting and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than ten nor more than fifty days before the date of the meeting, either
personally or by mail, by or at the direction of the President, or the
Secretary, or the office or persons calling the meeting, to each Shareholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail in a sealed envelope
addressed to the Shareholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid.
SECTION 5. MEETING OF ALL SHAREHOLDERS: If all of the Shareholders shall
meet at any time and place, either within or without the State of Missouri, and
<PAGE>
consent to the holding of a meeting, such meeting shall be valid, without call
or notice, and at such meeting any corporate action may be taken.
SECTION 6. BUSINESS WHICH MAY BE TRANSACTED AT ANNUAL AND SPECIAL
MEETINGS: At each annual meeting of the Shareholders, the Shareholders shall
elect, by ballot, a Board of Directors to hold office until the next succeeding
annual meeting and they may transact such other business as may be desired,
whether or not the same are specified in the notice of the meeting, unless the
consideration of such other business without its having been specified in the
notice of the meeting as one of the purposes thereof, is prohibited by law.
Business transacted at all special meetings shall be confined to the
purposes stated in the notice of such meetings, unless the transaction of other
business is consented to by the holders of all of the outstanding shares of
stock of the Corporation entitled to vote thereat.
SECTION 7. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE: The Board
of Directors of the Corporation may close its stock transfer books for a period
not exceeding fifty days preceding the date of any meeting of Shareholders, or
the date for the payment of any dividend or for the allotment of rights, or the
date when any exchange or reclassification of shares shall be effective; or, in
lieu thereof, may fix in advance a date, not exceeding seventy days preceding
the date of any meeting of Shareholder, or to the date for the payment of any
dividends or for the allotment of rights, or to the date when any exchange or
reclassification of shares shall be effective, as the record date for
determination of Shareholders entitled to notice of, or to vote at, such
meeting, or Shareholders entitled to receive payment of any such dividend or to
receive any such allotment of rights, or to exercise rights in respect to any
exchange or reclassification of shares; and the Shareholders of record on such
date of closing the transfer books, or on the record date so fixed, shall be the
Shareholders entitled to notice of and to vote at, such meeting, or to receive
payment of such dividend, or to receive such allotment of rights, or to exercise
such rights in the event of an exchange or reclassification of shares, as the
case may be. If the Board of Directors shall not have closed the transfer books
or set a record date for the determination of its stockholders entitled to vote
as hereinabove provided, no person shall be admitted to vote directly or by
proxy except those in whose names the shares of the Corporation shall have stood
on the transfer books on a date fifty days previous to the date of the meeting.
SECTION 8. VOTING LISTS: At least ten days before each meeting of
Shareholders, the officer or agent having charge of the transfer book for shares
of the Corporation shall make a complete list of the Shareholders entitled to
vote at such meeting, arranged in alphabetical order with the address of, and
the number of shares held by, each Shareholder which list, for a period of ten
days prior to such meeting, shall be kept on file at the registered office of
the Corporation and shall be subject to inspection by any Shareholder at any
time during usual business hours. Such list shall also be produced and kept
open at the time and place of the meeting and shall be subject to inspection of
any Shareholder during the whole time of the meeting. The original share ledger
or transfer book, or a duplicate thereof kept in this state, shall be prima
facie evidence as to who are the Shareholders entitled to examine such list or
share ledger or transfer book or to vote at any meeting of Shareholders.
SECTION 9. QUORUM: A majority of the outstanding shares of the
Corporation, represented in person or by proxy, shall constitute a quorum at any
meeting of the Shareholders; provided, that if less than a majority of the
outstanding shares are represented at said meeting, a majority of the shares so
represented may adjourn the meeting, from time to time, without further notice,
to a date not longer than ninety days from the date originally set for such
meeting.
SECTION 10. PROXIES: At all meetings of Shareholders, a Shareholder may
vote by proxy executed in writing by the Shareholder or by his duly authorized
attorney-in-fact. Such proxy shall be filed with the Secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid after
eleven months from the date of its execution, unless otherwise provided in the
proxy.
<PAGE>
SECTION 11. VOTING OF SHARES: Subject to the provisions of Section 13,
each outstanding share of capital stock having voting rights shall be entitled
to one vote upon each matter submitted to a vote at a meeting of Shareholders.
SECTION 12. VOTING OF SHARES BY CERTAIN HOLDERS: Shares standing in the
name of another corporation, domestic or foreign, may be voted by such officer,
agent, or proxy as the bylaws of such corporation may prescribe, or, in the
absence of such provision, as the Board of Directors of such corporation may
determine.
Shares standing in the name of a deceased person may be voted by his
administrator or executor, either in person or by proxy. Shares standing in the
name of a guardian, conservator, or trustee may be voted by such fiduciary,
either in person or by proxy, but no guardian, conservator, or trustee shall be
entitled, as such fiduciary, to vote shares held by him without a transfer of
such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer thereof into his name if authority so to do be
contained in an appropriate order of the court by which such receiver was
appointed.
A Shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
SECTION 13. VACANCIES AND NEWLY CREATED DIRECTORSHIPS; NOMINATIONS OF
DIRECTORS; ELECTION.
(a) Newly created directorships resulting from any increase in the number
of Directors and any vacancies on the Board resulting from death, resignation,
disqualification, removal, or other cause will be filled solely by the
affirmative vote of a majority of the remaining Directors then in office, even
though less than a quorum of the Board, or by a sole remaining Director. Any
Director elected in accordance with the preceding sentence will hold office for
the remainder of the full term of the class of Directors in which the new
directorship was created or the vacancy occurred and which the new directorship
was created or the vacancy occurred and until such Director's successor is
elected and qualified. No decrease in the number of Directors constituting the
Board will shorten the term of an incumbent Director.
(b) Other than persons nominated and elected pursuant to Paragraph (a),
only persons who are nominated in accordance with the following procedures will
be eligible for election as Directors of the Corporation.
(c) Nominations of persons for election as Directors of the Corporation
may be made at a meeting of stockholders (i) by or at the direction of the Board
(including the Director Nomination and Compensation Committee thereof) or (ii)
by any stockholder who is a stockholder of record at the time of giving of
notice provided for in this Bylaw 13 who is entitled to vote for the election of
such Director at the meeting and who complies with the procedures set forth in
this Bylaw 13. All nominations by stockholders must be made pursuant to timely
notice in proper written form to the Secretary.
(d) To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Corporation not less than
90 calendar days prior to the meeting. To be in proper written form, such
stockholder's notice must set forth or include (i) the name and address, as they
appear on the Corporation's books, of the stockholder giving the notice and of
the beneficial owner, if any, on whose behalf the nomination is made; (ii) a
representation that the stockholder giving the notice is a stockholder of record
of the Corporation entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting for such Director to nominate the person or
persons specified in the notice; (iii) the number of shares of stock of the
Corporation owned beneficially and of record by the stockholder giving the
notice
<PAGE>
and by the beneficial owner, if any, on whose behalf the nomination is made;
(iv) a description of all arrangements or understandings between or among any
of (A) the stockholder giving the notice, (B) the beneficial owner, if any,
on whose behalf the notice is given, (C) each nominee, and (D) any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder giving the
notice; (v) such other information regarding each nominee proposed by the
stockholder giving the notice as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, by
the Board; and (vi) the signed consent of each nominee to serve as a Director
of the Corporation if so elected. At the request of the Board, any person
nominated by the Board for election as a Director must furnish to the
Secretary that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. The presiding officer of the
meeting for election of Directors will, if the facts warrant, determine that
a nomination was not made in accordance with the procedures prescribed by
this Bylaw 13, and if so determined, so declare to the meeting and the
defective nomination will be disregarded.
(e) Stockholders shall not have a right to cumulate their votes for
Directors. Directors shall be elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present.
SECTION 14. INFORMAL ACTION BY SHAREHOLDERS: Any action required to be
taken at a meeting of the Shareholders may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the Shareholders entitled to vote with respect to the subject matter thereof.
SECTION 15. REMOVAL OF DIRECTORS: The Shareholders shall have the power
by a two-thirds vote of the holders of shares at any regular meeting or special
meeting expressly called for that purpose, to remove any director from office
with or without cause.
ARTICLE III
Directors
SECTION 1. POWERS OF THE BOARD OF DIRECTORS: The property and business of
the Corporation shall be managed by the directors, acting as a Board. The Board
of Directors shall have and is vested with all and unlimited powers and
authorities, except as may be expressly limited by law, the Articles of
Incorporation or by these Bylaws, to do or cause to be done any and all lawful
things for and in behalf of the Corporation, to exercise or cause to be
exercised any or all of its powers, privileges and franchises, and to seek the
effectuation of its objects and purposes.
SECTION 2. NUMBER, TENURE AND QUALIFICATIONS: The provisions of Article
VI of the Corporation's Articles of Incorporation provide for an indefinite
number of directors, not less than seven (7) nor more than twelve (12), and
require the exact number of directors to be set forth in the Bylaws. It is
specified that the Corporation shall have nine (9) directors. Such number may
be increased or decreased from time to time within the above-mentioned limits by
amendment of these Bylaws. Directors representing any such increase shall be
elected by the Shareholders of the Corporation. Each director shall hold office
for the term for which he is elected or until his successor shall have been duly
elected and qualified.
SECTION 3. REGULAR MEETINGS: A regular meeting of the Board of Directors
shall be held without other notice than this Bylaw, immediately after, and at
the same place as the annual meeting of Shareholders. The Board of Directors
may provide, by resolution, the time and place, either within or without the
State of Missouri, for the holding of additional regular meetings with notice of
such resolution to all directors.
SECTION 4. SPECIAL MEETINGS: Special meetings of the Board of Directors
may be called by or at the request of the President or any two directors. The
<PAGE>
person or persons authorized to call special meetings of the Board of Directors
may fix any place in the United States, either within or without the State of
Missouri, as the place for holding any special meeting of the Board of Directors
called by them.
SECTION 5. NOTICE: Notice of any special meeting shall be given at
least five days previous thereto by written notice delivered personally or
mailed to each director at his business address, or by telegram provided,
however, that if the designated meeting place is without the State of Missouri,
an additional five days notice be given. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail in a sealed envelope so
addressed, with postage thereon prepaid. If notice be given by telegram, such
notice shall be deemed to be delivered when the telegram is delivered to the
telegraph company. Any director may waive notice of any meeting. The
attendance of a director at any meeting shall constitute a waiver of notice of
such meeting, except where a director attends a meeting for the express purpose
of objecting that the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting.
SECTION 6. QUORUM: A majority of the Board of Directors shall constitute
a quorum for the transaction of business at any meeting of the Board of
Directors, provided that if less than a majority of the directors are present at
said meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice.
SECTION 7. MANNER OF ACTING: The act of the majority of the directors
present at a meeting of the directors at which a quorum is present shall be the
act of the Board of Directors.
SECTION 8. VACANCIES: In case of the death or resignation or
disqualification of one or more of the directors, a majority of the survivors or
remaining directors may fill such vacancy or vacancies until the successor or
successors are elected at the next annual meeting of the Shareholders. A
director elected to fill a vacancy shall serve as such until the next annual
meeting of the Shareholders.
SECTION 9. COMPENSATION: Directors shall be entitled to receive the
annual fee as shall be determined from time to time by resolution of the Board
of Directors; provided that any such fee shall be applicable only to subsequent
terms of the Board of Directors. In addition, the Board of Directors by
resolution may establish a fixed sum to be paid for attendance at each regular
or special meeting of the Board of Directors; provided that any such fee shall
be applicable only to subsequent terms of the reasonable out of pocket expenses
incurred by the directors in attendance at any special or regular meeting of the
Board of Directors. Notwithstanding the foregoing, nothing herein contained
shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor.
SECTION 10. APPOINTMENT OF COMMITTEES: The Board of Directors may, by
resolution or resolutions passed by a majority of the whole Board, designate one
or more committees, each committee to consist of two or more of the directors of
the Corporation, which to the extent provided in said resolution or resolutions,
in the management of the business and affairs of the Corporation, and may have
power to authorize the seal of the Corporation to be affixed to all papers which
may require it. Such committee or committees shall have such name or names as
may be determined from time to time by resolution adopted by the Board of
Directors.
SECTION 11. ADVISORY DIRECTOR: The Board of Directors of the Corporation
may, in its sole discretion, select one Advisory Director per year from the
group consisting of (i) the Presidents of the Corporation's subsidiaries or (ii)
the executive officers of the Corporation; provided, that the outstanding common
stock of such subsidiaries must be at least eighty percent (80%) owned by the
Corporation. Said Advisory Director shall be selected at the Annual Board of
Directors' Meeting of the Corporation and shall serve for a one year period
only,
<PAGE>
terminating upon the earlier of the selection of a successor Advisory
Director or the expiration of one year from the date of acceptance of the
Advisory Director position. The Advisory Director shall not be entitled to vote
on any matters on which the Board of Directors may vote. The Advisory Director
shall not be counted for purposes of determining a majority of the Board or a
quorum present at any meeting. The Advisory Director shall be permitted to
participate in discussion of matters coming before the Board but shall not be
authorized or empowered to present or second motions coming for consideration to
the Board of Director or otherwise present resolutions for adoption by the Board
of Directors. Compensation for the Advisory Director shall be as determined by
the Board of Directors.
SECTION 12. QUALIFICATION FOR DIRECTORS: In order to be nominated to
serve as a director of the Corporation, a nominee must not yet have attained
his/her seventieth birthday. Directors who shall have attained his/her
seventieth birthday may not be renominated to serve another term. However, any
director who reaches his/her seventieth birthday during his/her term as a
director shall not be prohibited from completing such term by application of
this Section; provided, however, that this Section 12 shall not be applicable to
any Board member serving as of March 15, 1988.
ARTICLE IV
Officers
SECTION 1. NUMBER: The officers of the Corporation shall be a Chairman of
the Board, a President, one or more Vice-Presidents (the number thereof to be
determined by the Board of Directors), a Treasurer, a Secretary and such other
officers as the Board may elect. The Chairman of the Board, President and the
Vice-President or if there is more than one Vice-President, then at least one
Vice-President shall be chosen from the Members of the Board of Directors. The
remaining officers of the Corporation need not be chosen from the Members of the
Board, but they may be so chosen. The Board of Directors, by resolution, may
create the offices of one or more Assistant Treasurers and Assistant
Secretaries, all of whom shall be elected by the Board of Directors.
The Board of Directors from time to time may also appoint such other
officers and agents for the Corporation as it shall deem necessary or
advisable. All appointed officers and agents shall hold their respective
positions at the pleasure of the Board of Directors or for such terms as the
Board of Directors may specify, and they shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors or by an elected officer empowered by the Board of Directors to
make such determination.
All officers and agents of the Corporation, as between themselves and the
Corporation, shall have such authority and perform such duties in the management
of the property and affairs of the Corporation as may be provided in the Bylaws,
or, in the absence of such provisions, as may be determined by resolution of the
Board of Directors.
SECTION 2. DELEGATION OF AUTHORITY TO HIRE, DISCHARGE, ETC. The Board of
Directors from time to time may delegate to the Chairman of the Board, the
President or other officer or executive employee of the Corporation, authority
to hire, discharge and fix and modify the duties, salary or other compensation
of employees of the Corporation under their jurisdiction, and the Board of
Directors may delegate to such officer or executive employee similar authority
with respect to obtaining and retaining for the Corporation the services of
attorneys, accountants and other experts.
SECTION 3. ELECTION AND TERM OF OFFICE: The officers of the Corporation
shall be elected annually by the Board of Directors at the first meeting of the
Board of Directors held after each annual meeting of Shareholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as conveniently may be. Vacancies may be filled or new
offices created and filled at any meeting of the Board of Directors. Each
officer shall hold office until his successor shall have been duly elected and
shall have
<PAGE>
qualified or until his death or until he shall resign or shall have
been removed in the manner hereinafter provided.
SECTION 4. REMOVAL: Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board of Directors whenever in its
judgment the best interests of the Corporation would be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.
SECTION 5. VACANCIES: A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the Board
of Directors for the unexpired portion of the term.
SECTION 6. CHAIRMAN OF THE BOARD: The Chairman of the Board shall preside
at all meetings of the Shareholders and Board of Directors at which he is
present. He shall, subject to the direction of the Board of Directors, have
general oversight over the affairs of the Corporation and shall, from time to
time, consult and advise with the President in the direction and management of
the Corporation's business and affairs. He shall also do and perform such other
duties as may, from time to time, be assigned to him by the Board of Directors.
SECTION 7. PRESIDENT: The President shall be the principal executive
officer of the Corporation and shall in general supervise and control all of the
business and affairs of the Corporation. In the absence of the Chairman of the
Board, he shall preside at all meetings of the Shareholders and Board of
Directors. He shall be an ex officio member of all standing committees. He may
sign with Secretary or Treasurer or any other proper officer thereunto
authorized by the Board of Directors, certificates for shares of the
Corporation, any deeds, mortgages, bonds, contracts, or other instruments which
the Board of Directors or any authorized committee have authorized to be
executed, except in cases where the signing and execution thereof shall be
expressly delegated by the Board of Directors or by these Bylaws to some other
officer or agent of the Corporation, or shall be required by law to be otherwise
signed or executed; and in general shall perform such other duties as may be
prescribed by the Board of Directors from time to time.
SECTION 8. THE VICE-PRESIDENTS: In the absence of the President or in the
event of his inability or refusal to act, the Vice-President (or in the event
there be more than one Vice-President, the Vice-Presidents in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. Any Vice-President may sign, with the Secretary or an Assistant
Secretary, or with the Treasurer or an Assistant Treasurer, certificates for
shares of the Corporation and shall perform such other duties as from time to
time may be assigned to him by the President or by the Board of Directors.
SECTION 9. THE TREASURER: If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of his duties in such sum
and with surety or sureties as the Board of Directors shall determine. He
shall: (a) have charge and custody of and be responsible for all funds and
securities of the Corporation; receive and give receipts for moneys due and
payable to the Corporation from any source whatsoever, and deposit all such
moneys in the name of the Corporation in such banks, trust companies or other
depositaries as shall be selected in accordance with the provisions of Article V
of these Bylaws; (b) in general perform all the duties as from time to time may
be assigned to him by the President or by the Board of Directors.
SECTION 10. THE SECRETARY: The Secretary shall: (a) keep the minutes of
the Shareholders' and of the Board of Directors' meetings in one or more books
provided for that purpose; (b) see that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law; (c) be custodian of
the corporate records and of the seal of the Corporation and see that the seal
of the Corporation is affixed to all certificates for shares prior to the issue
thereof and to all documents, the execution of which on behalf of the
Corporation under its seal is duly authorized in accordance with the provisions
of these Bylaws; (d) keep a register of the post office address of each
Shareholder which shall be furnished to the Secretary by such Shareholder; (e)
sign with the President, or
<PAGE>
a Vice-President, certificates for shares of the corporation, the issue of
which shall have been authorized by resolution of the Board of Directors; (f)
have general charge of the stock transfer books of the Corporation; (g) in
general perform all duties incident to the office of Secretary and such other
duties as from time to time may be assigned to him by the President or by the
Board of Directors.
SECTION 11. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES: The Assistant
Treasurers shall respectively, if required by the Board of Directors, give bonds
for the faithful discharge of their duties in such sums and with such sureties
as the Board of Directors shall determine. Assistant Secretaries and
Treasurers, as thereunto authorized by the Board of Directors, may sign with the
President or a Vice-President certificates for shares of the Corporation, the
issue of which shall have been authorized by a resolution of the Board of
Directors. The Assistant Treasurers and Assistant Secretaries, in general,
shall perform such duties as shall be assigned to them by the Treasurer or the
Secretary, respectively, or by the President or the Board of Directors.
SECTION 12. SALARIES: The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a director of the
Corporation.
ARTICLE V
Contracts, Loans, Checks and Deposits
SECTION 1. CONTRACTS: The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
SECTION 2. LOANS: No loans shall be contracted on behalf of the
Corporation and no evidences or indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC.: All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation, shall be signed by such officer or officers, agent or
agents of the Corporation and in such manner as shall from time to time be
determined by resolution of the Board of Directors.
SECTION 4. DEPOSITS: All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositaries as the Board of Directors may
select.
ARTICLE VI
Certificates for Shares and Their Transfer
SECTION 1. CERTIFICATES FOR SHARES OF STOCK: The certificates for
shares of stock of the Corporation shall be numbered, shall be in such form
as may be prescribed by the Board of Directors in conformity with law, and
shall be entered in the stock books of the Corporation as they are issued,
and such entries shall show the name and address of the person, firm,
partnership, corporation or association to whom each certificate is issued.
Each certificate shall have printed, typed or written thereon the name of the
person, firm, partnership, corporation or association to whom it is issued,
and number of shares represented thereby and shall be signed by the President
or a Vice-President, and the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Corporation and sealed with the
seal of the Corporation, which seal may be facsimile, engraved or printed.
If the Corporation has a registrar, a transfer agent, or a transfer clerk who
actually signs such certificates, the signature of any of the other officers
above mentioned may be facsimile, engraved or printed. In case any such
officer who has signed or whose facsimile signature has been
<PAGE>
placed upon any such certificate shall have ceased to be such officer before
such certificate is issued, such certificate may nevertheless be issued by
the Corporation with the same effect as if such officer were an officer at
the date of its issue.
SECTION 2. TRANSFER OF SHARES - TRANSFER AGENT - REGISTRAR: Transfers
of shares of stock shall be made on the stock record or transfer books of the
Corporation only by the person named in the stock certificate, or by his
attorney lawfully constituted in writing, and upon surrender of the
certificate therefor. The stock record book and other transfer records shall
be in the possession of the Secretary or of a transfer agent or clerk for the
Corporation. The Corporation, by resolution of the Board of Directors may
from time to time appoint a transfer agent, and, if desired, a registrar,
under such arrangements and upon such terms and conditions as the Board of
Directors deems advisable; but until and unless the Board of Directors
appoints some other person, firm or corporation as its transfer agent (and
upon the revocation of any such appointment, thereafter until a new
appointment is similarly made) the Secretary of the Corporation shall be the
transfer agent or clerk of the Corporation, without the necessity of any
formal action of the Board of Directors, and the Secretary shall perform all
of the duties thereof.
SECTION 3. LOST OR DESTROYED CERTIFICATES: In case of the loss or
destruction of any certificate for shares of stock of the Corporation, upon due
proof of the registered owner thereof or his representatives, by affidavit of
such loss or otherwise, the President and Secretary may issue a duplicate
certificate (plainly marked "duplicate") in its place, upon the Corporation
being fully indemnified therefor.
ARTICLE VII
Fiscal Year
The fiscal year of the Corporation shall begin on the first day of January
in each year and end of the last day of December in each year.
ARTICLE VIII
Dividends
The Board of Directors may from time to time, declare, and the Corporation
may pay, dividends on its outstanding shares in the manner and upon the terms
and conditions provided by law and its Articles of Incorporation.
ARTICLE IX
Seal
The Board of Directors shall provide a corporate seal which shall be in the
form of a circle and shall have inscribed thereon the name of the Corporation
and the words, "Corporate Seal, Missouri."
ARTICLE X
Waiver of Notice
Whenever any notice whatever is required to be given under the provisions
of these Bylaws or under the provisions of the Articles of Incorporation or
under the provisions of The General and Business Corporation Act of Missouri,
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
<PAGE>
ARTICLE XI
Indemnification of Officers and Directors
Against Liabilities and Expenses in Actions
SECTION 1. INDEMNIFICATION IN NON-DERIVATIVE ACTIONS: The Corporation
will indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceedings,
whether civil, criminal, administrative or investigative, other than an action
by or in the right of the Corporation, by reason of the fact that he is or was a
director (or nominee for a director position) or office of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against any expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to be the best interests
of the Corporation and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful. The determination of
any action, suit, or proceeding by judgment, order, settlement, conviction or
upon a plead of nolo contendere or its equivalent shall not of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to be in the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
SECTION 2. INDEMNIFICATION IN DERIVATIVE ACTIONS: The Corporation will
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director (or nominee for a director position) or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including attorneys' fees,
actually and reasonably incurred by him in connection with the defense or
settlement of the action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation; provided, however, that no indemnification shall be made in respect
of any claim, issue or matter as to which such person shall have been adjudged
to be liable for gross negligence or misconduct in the performance of his duty
to the Corporation unless and only to the extent that the court in which the
action or suit was brought determines upon application that, despite the
adjudication of liability and in view of all the circumstances of the case, the
person is fairly and reasonably entitled to indemnity of such expenses which the
court shall deem proper.
SECTION 3. MANDATORY INDEMNIFICATION WHENEVER DEFENSE IS SUCCESSFUL: To
the extent that a director or officer of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
above, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with the action, suit or proceeding.
SECTION 4. EXPENSES MUST BE AUTHORIZED IN EACH CASE: Any indemnification
under Section 1 and 2, unless ordered by a court, shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
these sections. The determination shall be made by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to the
action, suit, proceeding, or if such a quorum is not attainable, or even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or by the Shareholders.
SECTION 5. EXPENSES TO BE ADVANCED: Expenses incurred in defending a
civil or criminal action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of the action, suit, or proceeding as
authorized by the Board of Directors of the Corporation in the specific case
upon receipt of an undertaking by or on behalf of said director or officer to
repay such amount to be indemnified by the Corporation.
<PAGE>
SECTION 6. NON-EXCLUSIVE INDEMNIFICATION: The indemnification provided by
this section shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any Bylaw, agreement, vote of
Shareholder or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director or
officer of the Corporation and shall inure to the benefit of the heirs,
executors and administrators of such person.
SECTION 7. INSURANCE: The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director (or nominee for a director
position) or officer of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of this
amendment.
ARTICLE XII
Amendments
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted at any annual meeting of the Shareholders or at any special meeting of
the Shareholders called for that purpose or at any meeting of the Board of
Directors provided, however, that the Board of Directors shall take no such
action contrary to the provisions of any resolution of the Shareholders
directing the Board not to do so.
<PAGE>
Exhibit 11
Harmon Industries, Inc.
Computation of Per Share Earnings
1997 Form 10-K
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Quarter ended December 31,
--------------------------
1997 1996
------- -------
<S> <C> <C>
Basic:
Net earnings $ 3,889 $ 2,108
======= =======
Weighted average shares outstanding 10,391 10,236
Shares representing unearned compensation (12) 0
------- -------
Total 10,379 10,236
======= =======
Basic earnings per share $0.37 $0.21
======= =======
Diluted:
Net earnings $ 3,889 $ 2,108
======= =======
Weighted average shares outstanding 10,391 10,236
Shares representing unearned compensation (12) 0
Equivalent shares under option plans 88 60
------- -------
Total 10,467 10,296
======= =======
Diluted earnings per share $0.37 $0.20
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Basic:
Net earnings $10,961 $ 9,330 $ 6,886
======= ======= =======
Weighted average shares outstanding 10,319 10,217 10,187
Shares representing unearned compensation (6) 0 0
------- ------- -------
Total 10,313 10,217 10,187
======= ======= =======
Basic earnings per share $1.06 $0.91 $0.68
======= ======= =======
Diluted:
Net earnings $10,961 $9,330 $6,886
======= ======= =======
Weighted average shares outstanding 10,319 10,217 10,187
Shares representing unearned compensation (6) 0 0
Equivalent shares under option plans 61 51 55
------- ------- -------
Total 10,374 10,268 10,242
======= ======= =======
Diluted earnings per share $1.06 $0.91 $0.67
======= ======= =======
</TABLE>
<PAGE>
[PHOTO]
HARMON INDUSTRIES, INC.
- -------------------------------------------------------------------------------
1997 ANNUAL REPORT
<PAGE>
CORPORATE PROFILE
Harmon is a leading supplier of sophisticated signal, inspection 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
packaging, installation and maintenance services.
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.
Its technology base was greatly enhanced in 1997 when Harmon obtained
exclusive rail transportation rights to a revolutionary radio technology that
was developed at a cost of several hundred million dollars by Hughes Aircraft
Company for the U.S. Department of Defense. This technology will provide the
basis for a communication-based train control system that will be marketed to
rail systems in North America and throughout most parts of the world.
Harmon is headquartered in Blue Springs, Missouri, a suburb of Kansas
City. It operates from numerous facilities in the U.S., as well as Canada,
England, Switzerland, and Australia.
Harmon common stock trades on The Nasdaq Stock Market under the symbol:
HRMN. Its current annual dividend is 11 cents per share, giving effect to a 3-
for-2 stock split and a 10% dividend increase in February, 1998. / /
- ---------------
[PHOTO]
[PHOTO CAPTION]
Cover Photo: San Francisco's Bay Area Rapid Transit (BART) system. Harmon
received a contract, including all options, valued at $45 million in February
1998, to design and install a revolutionary communications-based automatic
train control system on BART's highest density lines. The new system will
employ an innovative radio technology that was developed by Hughes Aircraft
Company (now Raytheon Company) for the U.S. military forces to track vehicles
and personnel on the battlefield.
- ---------------
<PAGE>
FINANCIAL HIGHLIGHTS
(IN THOUSANDS EXCEPT PER SHARE DATA, WHERE APPLICABLE)
<TABLE>
<CAPTION>
OPERATING DATA
Year ended December 31, 1997 1996 Percent Change
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $213,530 $175,440 + 21.7 %
Pre-tax income 17,583 15,105 + 16.4
Income taxes 6,622 5,775 + 14.7
Net earnings 10,961 9,330 + 17.5
Earnings per share (basic and diluted) (3) 1.06 0.91 + 16.5
Dividends per share (3) .10 .10 -0-
</TABLE>
<TABLE>
<CAPTION>
PERFORMANCE DATA
Year ended December 31, 1997 1996 Percent Change
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on sales (pre-tax) 8.2% 8.6% - 4.7 %
Return on year-end equity 15.7% 16.1% - 2.5
Return on capital employed (1) 23.8% 25.9% - 8.1
</TABLE>
<TABLE>
<CAPTION>
YEAR-END DATA
Year ended December 31, 1997 1996 Percent Change
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital $50,323 $33,629 + 49.6 %
Interest-bearing long-term debt $15,456 $ 3,412 +353.0
Approximate number of shareholders (2) 596 637 - 6.4
Number of employees 1,510 1,202 + 25.6
Outstanding shares (000s) (3) 10,437 10,244 + 1.9
</TABLE>
(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.
(3) Adjusted for February 1998 3-for-2 stock split.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights 1
Report to Shareholders 2
The Year in Review 6
Selected Financial Data 18
Financial Review 20
Consolidated Financial Statements 26
Notes to Consolidated Financial Statements 31
Investor Information 42
Management, Directors and Corporate Data 43
Locations 43
</TABLE>
1
<PAGE>
REPORT TO SHAREHOLDERS
1997 was an outstanding year for Harmon Industries. Sales surpassed $200 million
for the first time ever, topping out at $214 million, a gain of 21.7% over the
$175 million reported for 1996. Incoming orders increased 22% to a record
$229 million. Pre-tax earnings gained 16.4% to $18 million. Giving effect to
the 3-for-2 stock split in February 1998, diluted earnings per share rose
16.5% to $1.06, compared with $0.91 in 1996. Our order backlog increased
25.5% to $75 million from $59 million a year ago.
I am very satisfied with our performance in 1997. Even more so because
we produced record earnings while absorbing more than $1 million in
additional capacity-related expenses, chiefly from expanding production
facilities, hiring and training more than 200 new employees, and incurring
certain onetime acquisition expenses. Thus, our day-to-day operations were
even more efficient than our financial results indicate.
Our record breaking performance in 1997 was due to a combination of
continued prosperity among our freight railroad customers, our technology
leadership and our extensive service capabilities. Railroad mergers also
aided our performance as acquiring railroads seek to increase capacities to
generate additional revenues and reduce their operating ratios in order to
validate their acquisition strategies. Signaling and train control are
instrumental to achieving greater capacity and efficiency. Thus Harmon is in
an excellent position to benefit from the ongoing merger trend among North
American railroads.
GROWTH STRATEGY
Our three-pronged growth strategy is working well. In brief, it is to
maintain our strong position with our North American freight railroad
customers with new products and expanded services; build a similar solid
position with North American rail transit authorities, and expand
internationally with basically similar products and technology that we
provide to our domestic markets.
We advanced on all fronts in 1997. Sales to our domestic freight
customers were up 9.1% at $180 million. We had very strong growth among
products and systems related to capacity or efficiency improvements, such as
train control
- ---------------
[PHOTO]
Business soared to record levels in 1997. For 1998, I look for further gains,
particularly in our domestic rail transit and international endeavors.
Bjorn E. Olsson, President
and Chief Executive Officer
- ---------------
2
<PAGE>
systems, carborne equipment and train inspection systems. We finished 1996
with a successful re-signaling of 150 miles of track at Stampede Pass in
Washington. In 1997 we received the biggest turnkey order in our history,
roughly $40 million, to support a major freight railroad's program to upgrade
and expand its capacity between Greenwich, Ohio and Chicago, Illinois. To our
knowledge this is the largest and most ambitious project of its kind and
enables Harmon to develop its capabilities in total turnkey supply even
further.
NEW TECHNOLOGY
Shipments to our rail transit customers, which advanced 4.1% to $15 million
in 1997, are expected to increase in 1998 in part because of a license agreement
we signed last fall with Raytheon Company (formerly Hughes Aircraft Company).
The agreement gives Harmon the manufacturing and exclusive rail transportation
marketing rights to a revolutionary new technology that will give us the
opportunity to provide communication-based train control to rail systems in
North America and throughout most other parts of the world.
Our communication-based train control system is called "Advanced Automatic
Train Control" (AATC). It is a train control technology that is based upon a
very sophisticated wireless data communication network that has the ability to
determine the location, speed and direction of vehicles. AATC will be
implemented in San Francisco on the Bay Area Rapid Transit District (BART) with
whom we signed a $45 million contract, including all options, in February 1998.
The contract calls for the completion and implementation of our AATC system over
the next three years. Our AATC system will enable BART to control increased
train traffic through the most congested portion of its line by allowing trains
to move at 90 second headways, even while operating at speeds of up to 80 miles
per hour.
The AATC system will be the platform for proposals Harmon makes to other
potential rail transit customers worldwide that intend to use communication-
based train control systems.
In February 1998, we delivered our technical proposal to New York City
Transit, which intends to
- ---------------
[CHART]
GROSS SALES
$ - Millions
/ / Domestic Freight Railroads
/ / Domestic Rail Transit
/ / International
<TABLE>
<S> <C>
1993 98.8
1994 119.1
1995 136.1
1996 183.9
1997 214.4
</TABLE>
[CHART]
NET EARNINGS
$ - Millions
<TABLE>
<S> <C>
1993 6.9
1994 7.6
1995 6.9
1996 9.3
1997 11.0
</TABLE>
- ---------------
3
<PAGE>
upgrade its signal system beginning in 1998. We have already successfully
demonstrated the AATC technology on an operating subway line in New York City
for officials from several transit agencies and consulting firms. We are very
hopeful that we will be among the three suppliers selected to prequalify for
approximately $3 billion in advanced train control systems in New York City over
the next 20 years.
INTERNATIONAL SALES
Shipments to our international customers rose 233.5% to $18 million, which
largely reflected orders filled by our British subsidiary, Vaughan Harmon
Systems, Ltd. (Vaughan Harmon), for its technologically-advanced train
describers. International bookings rose 20.8% to $17 million. In the fourth
quarter, Vaughan Harmon was awarded a contract for approximately $10 million,
including options, by Railtrack for the replacement of the signaling on the
Cromer Branch line in Norfolk, England. The first phase representing less than
10% of this amount is included in 1997 bookings and year-end backlog. The system
will involve a Vaughan Harmon PC-based signal and control system and the first
use in Europe of our VHLC, an electronic interlocking controller, and HXP-3
level crossing control, both of which are used extensively in North America.
This achievement should be seen in the context of Railtrack having a $4 billion
capital expenditure plan for upgrading the signaling portion of the rail system
in England during the next 10 years. Obviously to become an approved supplier
should open up tremendous opportunities for Harmon.
INVESTMENTS FOR THE FUTURE
We continued to invest heavily in research and development. In addition, we
also introduced specific cost efficiency improvement teams that continuously
review our existing product program to assure we maintain our competitive
position.
To meet the increased demand for our products and services, we increased
our capacity dramatically during 1997, expanding our manufacturing spaces, our
plant workforce and our engineering staff.
- ---------------
[CHART]
BACKLOG
$ - Millions
<TABLE>
<S> <C>
1993 40.5
1994 44.6
1995 49.1
1996 59.4
1997 74.5
</TABLE>
[CHART]
RETURN ON CAPITAL EMPLOYED
<TABLE>
<S> <C>
1993 39%
1994 34%
1995 22%
1996 26%
1997 24%
</TABLE>
- ---------------
4
<PAGE>
We also made a concerted and successful effort to improve our quality, both
at the point of design and in the manufacturing and assembly processes. As a
consequence, two additional Harmon sites became ISO-9000 certified during 1997,
and the Lee's Summit facility received its certification in early 1998.
CONCLUSION
We are following a successful strategy, which is evident from the dramatic
success we achieved in the three markets where we compete. Our efforts in 1997
not only produced a record performance, they also laid very solid ground for
future expansion. These achievements were the result of a tremendous effort from
our devoted employees, and I wish to thank them for a job well done.
Looking ahead to 1998 we see both potential problems and material
opportunities. Some railroads are experiencing operating problems, which may
affect certain merger plans and spending budgets. Further, the Congress has not
yet finalized appropriations for highway crossing warning programs or for mass
transit projects. On the other hand, the railroad market in general is
experiencing increased car loadings; two major railroads indicated sizable
increases in their proposed capital expenditures for 1998, and rail transit
projects are expanding materially.
Regardless, we entered 1998 with a record backlog and an order intake for
the first two months roughly 30% higher than we achieved during the early months
of 1997. Thus, even though it is a bit early to make projections for 1998, we
remain quite confident about our future.
/s/ Bjorn E. Olsson
- --------------------
Bjorn E. Olsson
President and Chief Executive Officer
Blue Springs, Missouri
March 19, 1998
- ---------------
[CHART]
STOCK PRICE RANGE*
1990-1997
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1990 $ 4.92 $ 2.33
1991 $ 4.83 $ 2.33
1992 $ 8.50 $ 2.25
1993 $15.50 $ 7.75
1994 $16.17 $11.00
1995 $13.67 $ 8.92
1996 $13.00 $ 8.00
1997 $19.67 $11.00
</TABLE>
*All restated for Feb. '98 3-for-2 stock split
5
<PAGE>
THE YEAR IN REVIEW
Harmon's record performance last year was the result of its continued
implementation of its far-ranging strategy for growth. Implicit to the
overall success of this plan were three vital considerations: continued
development of its core business, the North American freight railroads,
expansion of technology, and building an infrastructure to support these
growth plans. Considerable progress on all three issues was achieved last
year.
/ / DOMESTIC FREIGHT-NORTH AMERICA
Sales to this core market, which comprised 84.7% of our revenues in 1997,
increased 9.1% to $180 million, up from $165 million in 1996. New orders
booked in 1997 amounted to $198 million, a gain of 31.7% from the previous
year. Our domestic freight railroad backlog at 1997 year-end was $44 million,
up 78.9% from a year ago.
Our largest customer continued to provide us with sizable orders last
year as it pressed forward with its capacity-enhancing capital expenditure
program. In addition, we experienced increased demand from other railroads,
especially those involved in merger activities.
Last year's sales reflected a continuing trend toward systems and away
from individual products. This was especially evident in our highway grade
crossing warning product line. Very strong growth was also realized with
systems that enhance capacity or efficiency, such as train control systems,
carborne equipment and train inspection systems.
We received our largest individual product order for Harmon
multi-territory Ultra Cab II units. These will be installed in the latest
model AC traction locomotives.
Ultra Cab II is a microprocessor-based train control unit that enhances
safety and capacity by displaying signal indications continuously in the
engine cab where the track is so equipped, and by enforcing the speeds
authorized by these signals. It is also a key component of our Incremental
Train Control System, which is undergoing final tests on the Michigan
high-speed rail project.
Demand for our hot box detectors was also particularly strong last year.
/ / DOMESTIC RAILROAD SERVICES
Our asset management service revenues, which are included in the revenues of
$180 million shown
- ---------------
[CHART]
Gross Sales - 1997
<TABLE>
<S> <C>
/ / Domestic Freight 70.7%
/ / Domestic Services 14.0%
/ / Domestic Rail Transit 7.1%
/ / International 8.2%
</TABLE>
[CHART CAPTION]
[TRIANGLE] Every Harmon market experienced higher revenues in 1997. Gross
sales to our domestic freight market increased by 5%; domestic services by
35%; domestic rail transit by 4%, and international by 234%. An order backlog
of $75 million at 1997 year-end provides a strong start for 1998.
[PHOTO CAPTION]
[TRIANGLE] No other transportation system can match the load carrying
capabilities and fuel efficiency of a freight hauling railroad. Supplying
signal and control systems to the North American freight railroads defines
Harmon and its core business. Approximately 85% of Harmon's product and
service revenues were derived from this market in 1997.
- ---------------
6
<PAGE>
[PHOTO]
<PAGE>
on page 6 under "Domestic Freight-North America," increased 34.6% to $30
million in 1997 compared with $22 million in 1996.
These services were conceived initially to help our domestic railroad
customers manage their purchasing and warehousing functions for signal
equipment inventories. Later, we added component subassembly and on-site
delivery of signal systems in kit form ready for installation by a railroad
crew. In 1996 we added project management.
These services have proved timely as they support the railroads' ongoing
drive to increase their operating efficiencies, which has become even more
pressing because of many railroad mergers. These mergers have increased
market demand for services and products as the railroads' operating systems
are consolidated. And having an alternate, on-call source to perform certain
services, particularly those that have grown in complexity and cost in recent
years, has proved to be a cost-effective outsource option for many North
American railroads.
Last year our service operation was instrumental in helping several
railroads restore their operations quickly after heavy snows and floods wiped
out signal and control systems along many miles of track. By having
components on hand (including those of our competitors) in semi-assembled
form we were able to rush them to damaged sites, sometimes even overnight, to
get their trains rolling safely again. Without having such backup signal
equipment on hand, nature's rampages might have taken weeks to correct, and
the loss of freight revenue in the interim would have been considerable.
Further, the introduction of full project management in 1996 proved
timely in 1997, as well. Last year we received a $40 million order to improve
and expand a major railroad's capacity on 270 miles of track between
Greenwich, Ohio and Chicago. To our knowledge this is the largest and most
ambitious project of its kind by any Class I railroad. This project, which
enables us to further develop our total turnkey capabilities, is critical to
that railroad's achieving its planned growth objectives in connection with
the acquisition of approximately half of the Conrail system.
We are responsible for all signaling and train control, including the
supervision of the installation. About half of the job was delivered in 1997,
and we are currently negotiating an expansion of this project.
We continued to expand our service function. In 1997 we opened a full
service facility in Fort
- ---------------
[PHOTO]
[PHOTO CAPTION]
[TRIANGLE] Harmon's outsourcing services are being used increasingly by the
nation's Class I railroads. This component produced service revenues of $30
million last year. In addition it also supplied about $35 million in Harmon
products, incremental volume the Company may not have realized without its
service capability.
[PHOTO CAPTION]
[TRIANGLE] Harmon's innovative service operation has expanded from
warehousing and component subassembly to full project management. Shown at
right is construction underway on a project for which the Harmon project
management team directed the signal system installation for a major Class I
railroad.
- ---------------
8
<PAGE>
[PHOTO]
<PAGE>
Wayne, Indiana, and in 1998, we launched another such facility in Spokane,
Washington.
/ / DOMESTIC RAIL TRANSIT
Incoming orders for 1997 were $13 million compared with $22 million the prior
year. The past year was characterized by much quoting activity but few
contract awards for all-new construction, which is our forte.
In October we were awarded two signal projects from the Utah Transit
Authority (UTA) totaling $5.4 million for grade crossings, interlockings and
block signals. The UTA is building a 15-mile light rail transit line to
prepare for the 2002 Winter Olympic Games. This project illustrates the
validity of Harmon technology. Since 1991, we have been awarded every signal
contract, save one, for new light rail systems in the United States. We also
received our fifth order for our microprocessor-based speed enforcement
system from New York City, which brings our total to 40 such systems to date.
Last fall we signed a letter of intent with the San Francisco Bay Area
Rapid Transit District (BART) to install our Advanced Automatic Train Control
system (AATC) on BART's highest density lines. In February 1998, that letter
of intent was turned into a contract for approximately $45 million, including
all options. When completed, it will be our largest rail transit contract to
date.
Domestic rail transit billings amounted to $15 million in 1997 compared with
$14 million in 1996. The bulk of 1997 shipments reflected partial completion
of a $17.6 million contract for New Jersey Transit Authority. That contract
is scheduled for completion by the second quarter of 1998. Our year-end order
backlog, which does not include the BART contract, was $20 million compared
with $24 million at December 31, 1996.
Business activity should improve in 1998. We expect to bid on more than ten
projects, which aggregate $400 million.
/ / INTERNATIONAL
Sales and incoming orders both rose to record levels last year. Billings
amounted to nearly $18 million compared to $5 million in 1996. New orders
were $17 million compared with $14 million in 1996. Our order backlog at
year-end was $11 million, approximately the same as 1996. Most of
- ---------------
[PHOTO]
[PHOTO CAPTION]
[TRIANGLE] Although contracts awarded last year for microprocessor-based rail
transit signal and control systems were relatively modest, prospects are well
above average as the industry expects to let bids in the $300 million-$400
million range in 1998.
[PHOTO CAPTION}
[TRIANGLE] Harmon successfully demonstrated its Advanced Automatic Train
Control technology on an operating subway line in New York City for officials
from several transit agencies and consulting firms. New York City Transit is
expected to select three suppliers this year to prequalify for $3 billion in
advanced train control systems, which that agency is expected to award over
the next 20 years. Harmon is one among several competing for this business.
- ---------------
10
<PAGE>
[PHOTO]
<PAGE>
the impetus relates to our July 1996 acquisition of Vaughan Harmon Systems
Ltd., a British-based manufacturer of train describers, passenger information
systems and modular railway control systems.
For the second consecutive year, Vaughan Harmon turned in an outstanding
performance, receiving contracts totalling $15 million during 1997.
Additionally, it was recently awarded a $10 million contract to replace
signal systems on Railtrack's Cromer Branch Line in Norfolk, England. Phase 1
of this contract, valued at approximately $500,000, is included in 1997
orders. The system marks the first use in Europe of our VHLC electronic
interlocking controller and HXP-3 level crossing controller, as well as a
Vaughan Harmon PC-based signaling control (office) system. Vaughan Harmon
also received contracts earlier in the year for $5 million to supply its
train describers at two locations in Scotland.
These contracts are particularly important because they afford us the
opportunity to demonstrate our products and services to Railtrack, which
plans to modernize the entire British rail system. The portion relating to
signals and controls approximates $4 billion and is expected to be let over
the next ten years.
Vaughan Harmon's solid position in the UK continues to play an important
role in our initiative to expand our business, not only in Britain, but
throughout all of Europe.
Elsewhere, in Brazil we received two contracts from Cia Vale Do Rio Doce
of Sao Luis, Brazil. The first was for our wayside train control and track
circuits. In August, we received a second contract of $2.3 million for our
Ultra-Cab II system, which reads coded cab signals from the rails to control
speed and braking, and stop a train automatically, if necessary.
In addition, we are now developing a sizable amount of business in
Mexico, particularly for hot box detectors and other safety-related devices.
We are establishing a subsidiary in Mexico to facilitate our expanding
business there and to form a base for what we hope will be a long-term
service relationship with these railroads.
At year's end we were also developing additional business in China and
India.
/ / ACQUISITIONS
In 1997, we acquired Devtronics, Inc., which makes products related to
highway grade crossing
- ---------------
[PHOTO]
[PHOTO CAPTION]
[TRIANGLE] Harmon's international reach extends around the globe, which
includes BHP Iron Ore of Australia to whom Harmon supplies a variety of
products, including its advanced hot box detectors.
[PHOTO CAPTION]
[TRIANGLE] A $16 billion project is underway to modernize the entire rail
system in Great Britain. An estimated $4 billion will be invested for new
signal and control systems. Last year, through our British-based subsidiary,
Vaughan Harmon Systems Ltd., we received $15 million in orders from Railtrack
to replace signal systems on the Cromer Line in Norfolk, England, and to
supply train describers in Motherwell, Glasgow and Edinburgh, Scotland.
Our July 1996 acquisition of Vaughan Harmon is proving invaluable. We
now have a well respected railroad supplier in place at a time when business
opportunities are expanding. The new contracts afford us the opportunity to
demonstrate the combined capabilities of Harmon and Vaughan Harmon and its
advanced signal system technologies to Railtrack and to the continental
European rail community, as well.
- ---------------
12
<PAGE>
[PHOTO]
<PAGE>
event monitoring and alarm equipment, with central reporting and networking
capabilities. We also acquired the remaining interest in Vale-Harmon
Enterprises, Ltd., which now gives us 100% ownership of that Canadian-based
sales and marketing organization. Early in 1998 we acquired CSS, Inc., a
railroad installation and maintenance company. These acquisitions fit into our
strategy to provide increased services for the railroads.
/ / TECHNOLOGY
In December, we signed a license agreement with Raytheon Company (formerly
Hughes Aircraft Company) for the manufacturing and exclusive rail transportation
marketing rights to a revolutionary new technology for communication-based train
control applicable to rail and rail transit systems in North America and most
other parts of the world. It is Harmon's most important and far reaching
technology acquisition ever.
The technology has major advantages over other systems. It is a powerful
data transmission system using radio, which can transmit data very rapidly in
both directions between a controlling ground station and multiple trains,
including through tunnels and zones of radio interference. These capabilities
make it particularly attractive to high density rail transit agencies that
operate rapid transit trains in underground subways. Variations of the system
may be of interest to freight railroads.
To make this communications-based system operational, Harmon will add its
on-board equipment, wayside computer controls, and relevant software. When
operational, the system will enable transit authorities to run their trains
faster and closer together. This is particularly desired by rail transit
authorities as it will enable them to move substantially more passengers over
their current track systems.
Our system has a flexible, modular architecture so that it can be adapted
to a wide variety of operational requirements and other systems presently in use
throughout the world. Harmon's Advanced Automatic Train Control (AATC) system,
which will enable BART trains to follow at 90 second intervals at up to 80 miles
per hour, will be the platform for proposals we will make to other transit
systems.
Last fall, we successfully demonstrated the AATC technology on an operating
subway line in New York to officials of several transit agencies. Later, we
submitted a formal proposal to New York
- ---------------
[CHART]
RESEARCH & DEVELOPMENT EXPENDITURES
$ - Millions
<TABLE>
<S> <C>
1993 3.4
1994 4.6
1995 5.2
1996 6.3
1997 7.7
</TABLE>
[CHART CAPTION]
TRIANGLE Harmon's investment for research and development has more than
doubled in the past five years, increasing 126 percent from $3.4 million to
$7.7 million. Much of Harmon's increased sales are due from new products
developed by the research and development team.
[PHOTO CAPTION]
- --) Harmon engineers are dedicated to developing products and systems
that enable railroads to operate more safely and efficiently. In brief,
Harmon's signal and control systems allow railroads to safely operate more
trains on a given stretch of track, thereby increasing their operating
efficiency. In addition, Harmon micro-processor-based products are less
costly to install and maintain compared with signal systems that rely on
mechanical relays.
- ---------------
14
<PAGE>
[PHOTO]
<PAGE>
City for a radio based control system that utilizes the AATC technology. New
York City Transit has a 20-year plan to upgrade its signal system, which has an
estimated price tag of $3 billion. Three companies will be selected to
demonstrate their systems in 1999, and one will be chosen to upgrade the first
segment of the New York network.
/ / EXPANDING CAPACITY
Our drive to expand capacity focused on methods to increase output while
limiting the addition of permanent overhead. This centered on three areas:
increasing the agility of our plants to shift work from one to another,
expanding vendor relationships, and product redesign.
We added 100,000 square feet to our collective manufacturing space and
invested heavily in technologically-advanced incremental production equipment in
1997.
In addition, we continued to cross train our permanent labor force to
perform multiple tasks.
We also intensified our partnering relationships with many vendors. Key
suppliers now maintain their inventories in our facilities, invoicing us only
when we use their products. In turn, we share our order input with them. This
gives our vendors a better understanding of our forecasting processes, and
removes inertia from the order/delivery process.
Finally, we further intensified our quality focus on product design and
build processes, a program which began in earnest in 1990. As new products are
developed, each is more rigorously tested for "designed-in quality" and
simplicity of production than ever before. Further, we increased responsibility
for quality at the production stage rather than having to correct imperfections
at the final inspection process.
As a result, our innovative programs for non-traditional labor, cross
training of our permanent labor force, and attention to quality issues all
combined to enable us to invoice $74 million in products and services in the
final quarter of 1997, which is a strong indication of the productive capacity
that Harmon now possesses. / /
- ---------------
[PHOTO]
[PHOTO CAPTION]
TRIANGLE Harmon invested approximately $4 million for plant expansion in
1997, adding 100,000 square feet to our collective manufacturing spaces at
three locations. These investments were made to handle the sizable increases
in business Harmon expects will occur in 1998 and 1999.
[PHOTO CAPTION]
- --) Harmon's production floor in Grain Valley, MO. Shown at right is a new
automatic insertion machine, which was part of $2 million invested in new
production equipment last year. This state-of-the-art unit is approximately
five times faster than predecessor models.
16
<PAGE>
[PHOTO]
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net sales $ 213,530 $175,440 $ 136,780 $ 119,703
Cost of sales 156,224 126,997 96,094 81,023
Research and development expenditures 7,664 6,331 5,218 4,561
---------------------------------------------------
Gross profit 49,642 42,112 35,468 34,119
Selling, general and administrative expenses 30,298 25,990 23,200 21,176
Other operating expenses (income) 964 544 481 44
---------------------------------------------------
Operating income 18,380 15,578 11,787 12,899
Other expenses 797 473 607 214
---------------------------------------------------
Pre-tax earnings (continuing operations) 17,583 15,105 11,180 12,685
Income taxes 6,622 5,775 4,294 5,046
---------------------------------------------------
Earnings from continuing operations 10,961 9,330 6,886 7,639
Gain (loss) from discontinued operations - - - -
Use of net operating loss carryforward - - - -
---------------------------------------------------
Net earnings (loss) $ 10,961 $ 9,330 $ 6,886 $ 7,639
---------------------------------------------------
---------------------------------------------------
Effective tax rate - continuing operations 37.7% 38.2% 38.4% 39.8%
Return on sales - continuing operations 5.1% 5.3% 5.0% 6.4%
Return on equity - continuing operations 15.7% 16.1% 14.0% 17.7%
Return on equity - total 15.7% 16.1% 14.0% 17.7%
Weighted average shares (000s) - basic* 10,313 10,217 10,187 9,649
PER SHARE DATA*
Earnings from continuing operations - basic $ 1.06 $ .91 $ .68 $ .79
Net earnings (loss) - basic 1.06 .91 .68 .79
Cash dividends .10 .10 .10 .10
Book value 6.68 5.66 4.82 4.27
Price/earnings ratio range - basic 10.3-18.5 8.8-14.2 13.2-20.2 13.9-20.4
OTHER DATA AT YEAR-END
Working capital $ 50,323 $ 33,629 $ 35,014 $ 21,670
Total assets 135,769 104,677 86,845 68,395
Long-term debt 15,456 3,412 12,090 733
Stockholders' equity 69,762 57,939 49,232 43,063
Current ratio 2.09:1 1.85:1 2.60:1 2.03:1
Quick assets ratio 1.12:1 1.01:1 1.16:1 1.03:1
Liabilities to equity ratio .95:1 .81:1 .76:1 .59:1
Capital additions (continuing operations) 10,475 6,371 5,532 3,242
Capital additions (total) 10,475 6,371 5,532 3,242
Depreciation & amortization
(continuing operations) 5,639 5,004 3,906 2,621
Depreciation & amortization (total) 5,639 5,004 3,906 2,621
Outstanding shares (000s)* 10,437 10,244 10,208 10,092
</TABLE>
* Adjusted for three-for-two stock split in February 1998.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Five-Year Ten-Year
Compound Compound
Years ended December 31 1993 1992 1991 1990 1989 1988 1987 Growth Growth
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net sales $99,295 $81,899 $70,934 $ 72,707 $70,154 $64,558 $57,068 +21% +14%
Cost of sales 65,716 54,271 45,536 47,478 46,377 42,044 37,995
Research and development expenditures 3,442 3,541 4,000 3,414 3,200 3,669 3,318
- -----------------------------------------------------------------------------------------------------------------
Gross profit 30,137 24,087 21,398 21,815 20,577 18,845 15,755 +16% +12%
Selling, general and administrative
expenses 18,558 15,646 13,550 14,427 13,186 11,965 10,671
Other operating expenses (income) 114 137 1,122 762 (263) (27) 43
- -----------------------------------------------------------------------------------------------------------------
Operating income 11,465 8,304 6,726 6,626 7,654 6,907 5,041 +17% +14%
Other expenses 388 1,228 2,118 1,504 1,244 1,301 1,519
- -----------------------------------------------------------------------------------------------------------------
Pre-tax earnings (continuing operations) 11,077 7,076 4,608 5,122 6,410 5,606 3,522 +20% +17%
Income taxes 4,193 2,498 1,688 2,022 2,506 2,100 1,613
- -----------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 6,884 4,578 2,920 3,100 3,904 3,506 1,909 +19% +19%
Gain (loss) from discontinued operations - 165 (2,492) (12,306) (2,744) (1,020) (217)
Use of net operating loss carryforward - 273 395 - - - -
- -----------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 6,884 $ 5,016 $ 823 $ (9,206) $ 1,160 $ 2,486 $ 1,692 +17% +21%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Effective tax rate - continuing
operations 37.9% 35.3% 36.6% 39.5% 39.1% 37.5% 45.8%
Return on sales - continuing operations 6.9% 5.6% 4.1% 4.3% 5.6% 5.4% 3.3%
Return on equity - continuing operations 20.8% 30.1% 39.6% 53.9% 26.5% 25.9% 16.5%
Return on equity - total 20.8% 33.0% 11.2% (160.2%) 7.9% 18.3% 14.6%
Weighted average shares (000s) - basic* 8,948 7,672 7,490 7,084 6,948 6,720 6,708
PER SHARE DATA*
Earnings from continuing operations -
basic $ .77 $ .60 $ .39 $ .44 $ .56 $ .52 $ .28 +12% +14%
Net earnings (loss) - basic .77 .65 .11 (1.30) .17 .37 .25 +10% +16%
Cash dividends - - - .042 .083 .083 .083
Book value 3.49 1.88 .98 .80 2.13 2.02 1.73 +29% +14%
Price/earnings ratio range - basic 10.1-20.1 3.4-13.0 21.2-44.0 N/A 23.0-34.9 9.5-14.6 13.2-22.5
OTHER DATA AT YEAR-END
Working capital $20,790 $10,740 $ 9,660 $ 7,955 $14,444 $ 7,037 $11,870 +36% +16%
Total assets 53,000 38,488 36,575 41,408 48,082 42,948 37,984 +29% +14%
Long-term debt 439 4,898 11,915 17,220 17,688 12,139 14,621
Stockholders' equity 33,086 15,197 7,377 5,747 14,756 13,557 11,604 +36% +20%
Current ratio 2.28:1 1.72:1 1.71:1 1.49:1 2.08:1 1.45:1 2.17:1
Quick assets ratio 1.32:1 .87:1 .76:1 .66:1 .84:1 .60:1 1.09:1
Liabilities to equity ratio .60:1 1.53:1 3.96:1 6.21:1 2.26:1 2.17:1 2.27:1
Capital additions (continuing operations 3,189 2,154 1,098 2,187 2,236 1,830 1,504
Capital additions (total) 3,189 2,154 1,098 4,521 4,589 9,886 3,552
Depreciation & amortization
(continuing operations) 2,121 1,936 2,022 2,410 2,373 2,541 2,481
Depreciation & amortization (total) 2,121 1,936 2,022 3,511 3,185 2,834 2,531
Outstanding shares (000s)* 9,493 8,075 7,497 7,185 6,942 6,717 6,707
</TABLE>
* Adjusted for three-for-two stock split in February 1998.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
- -------------------------------------------------------------------------------
Harmon's 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. Demand for Harmon's purchasing, materials management,
pre-assembly and project management services is growing rapidly as these
services fill an increasing need in the railroad industry, which continues to
downsize and outsource functions it previously did internally. Because of
Harmon's advanced technology and service, Harmon now occupies a strong
position within the new construction portion of the rail transit market,
securing every domestic microprocessor-based signal and control contract
awarded since 1991, save one. Harmon's international operations are growing
rapidly as evidenced by a 234% gain in international sales to $17.5 million
in 1997 from $5.2 million in 1996.
Harmon's growth has been aided also by acquisitions of businesses and/or
product lines that fit its core business. Last November it acquired
Devtronics, Inc., which makes recorders and remote maintenance monitoring
equipment that offer substantial savings to railroads. In 1997 it also
acquired a remaining majority interest in Vale-Harmon Enterprises, Ltd. (Vale
Harmon), a Canadian-based railroad sales and marketing company. In 1996
Harmon acquired United Kingdom-based Vaughan Systems Ltd. (since renamed
Vaughan Harmon Systems Ltd.). It was a strategic acquisition to increase
Harmon's sales in Europe. Vaughan Harmon Systems Ltd. designs signal and
control software and is a leading manufacturer of train describers, passenger
information and modular railway control systems, which complement Harmon's
existing product line. It has proved to be a most promising acquisition,
producing the bulk of Harmon's international sales and new orders last year.
Harmon also acquired two railroad contract-engineering firms in 1996, 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.
PROFILE OF CURRENT OPERATIONS
- -------------------------------------------------------------------------------
The Company's sales are summarized by product category in the table on page
21. 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. Service functions continue to expand. They now include asset and
materials management, and kitting of various components, which are delivered as
a complete unit, ready for installation. Total project management was added in
1996 and has since grown rapidly.
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.
20
<PAGE>
SALES BY PRODUCT OR SERVICE FUNCTION*
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Train Control Systems $101,624 47.4% $ 87,080 47.3% $ 55,437 40.7%
Crossing Systems 55,598 25.9% 48,927 26.6% 42,375 31.1%
Asset Management Services 29,913 14.0% 22,217 12.1% 14,194 10.4%
Train Inspection Systems 13,407 6.2% 12,906 7.0% 11,360 8.4%
Printed Wiring Boards 5,772 2.7% 5,249 2.9% 6,752 5.0%
Other 8,113 3.8% 7,489 4.1% 5,999 4.4%
------------------------------------------------------------------
Total $214,427 100.0% $183,868 100.0% $136,117 100.0%
---------------------------------------------------------------------------------------------------
</TABLE>
* Sales volumes shown above are gross totals and do not include cash
discounts or deferred contract revenue. As a result, there are
differences between the amounts 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, 1997, 1996 AND 1995.
Harmon achieved record sales and earnings in 1997. Net sales increased 22% to
a record $213.5 million compared with $175.4 million for 1996 and $136.8
million for 1995. Net earnings increased 17% to a record $11.0 million ($1.06
per share-diluted) compared with $9.3 million in 1996 ($0.91 per
share-diluted) and $6.9 million in 1995 ($0.67 per share-diluted). The
increase in earnings from 1996 to 1997 and from 1995 to 1996 was due chiefly
to substantially higher sales levels in 1997 and 1996. Return on equity was
15.7% for 1997 compared with 16.1% for 1996 and 14.0% for 1995. Return on
capital employed was 23.8% in 1997 compared with 25.9% in 1996 and 21.7% in
1995. The backlog at 1997 year-end was $75 million, an increase of 26% from
one year earlier.
SALES ANALYSIS. Throughout 1997, the railroad industry continued its move
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 in 1997, wherein every product line experienced higher
sales. Sales of train control systems increased $14.5 million to $101.6
million; sales of crossing systems were up $6.7 million to $55.6 million;
sales of asset management services were up $7.7 million to $29.9 million; and
sales of train inspection systems, printed wiring boards and other
miscellaneous products each recorded gains in excess of $500,000. The
increase in train control system sales is chiefly the result of increased
orders from recently-merged railroad companies and continued strong sales of
Harmon's Ultra Cab units. The increase in crossing system sales primarily
reflects higher levels of business with recently-merged railroad companies.
The sales gain in asset management services reflects a continuation toward
outsourcing among domestic freight railroads, which enables them to complete
specific upgrade projects more quickly. Train inspection sales, which are
principally made to domestic railroads, increased 3.9% in 1997. Sales of
printed wiring boards were up 10%, which reversed the trend of the previous
year.
Harmon's strengths in train control and crossing systems and asset
management services were the principal reasons its 1997 sales reached a
record $213.5 million, which was $38.1 million greater, or 21.7%, than those
of 1996. Net sales of $175.4 million in 1996 were 28.3% ahead of those of
1995. Incoming orders for 1997 were also a record at $228.6 million, which
despite record shipments that year, resulted in a backlog of $75 million.
Approximately 59% ($44 million) of the backlog was domestic freight related;
15% ($11 million) related to international business, chiefly in Great Britain
and Brazil, and 26% ($20 million) related to domestic rail transit. The rail
transit backlog increased by approximately $8 million in February, 1998,
following reception of the first phase of a $45 million communications-based
train control contract with BART, which involves the use of the
newly-acquired wireless data communication technology.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING SUMMARY
<TABLE>
Percentage of Net Sales Percentage of Change
---------------------------- -----------------------------
Years ended December 31, 1997 1996 1995
over over over
1997 1996 1995 1996 1995 1994
-------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 21.7% 28.3 % 14.3 %
Cost of sales 73.2% 72.4% 70.3% 23.0% 32.2 % 18.6 %
Research and development 3.6% 3.6% 3.8% 21.1% 21.3 % 14.4 %
---------------------------- -----------------------------
Gross profit 23.2% 24.0% 25.9% 17.9% 18.7 % 4.0 %
Selling, general
and administrative expenses 14.2% 14.8% 17.0% 16.6% 12.0 % 9.6 %
Other operating expenses, net 0.4% 0.3% 0.4% 77.2% 13.1 % 993.2 %
---------------------------- -----------------------------
Operating income 8.6% 8.9% 8.5% 18.0% 32.2 % (8.6)%
Other expenses 0.4% 0.3% 0.4% 68.5% (22.1)% 183.6 %
---------------------------- -----------------------------
Earnings before income taxes 8.2% 8.6% 8.1% 16.4% 35.1 % (11.9)%
Income taxes 3.1% 3.3% 3.1% 14.7% 34.5 % (14.9)%
---------------------------- -----------------------------
Net earnings 5.1% 5.3% 5.0% 17.5% 35.5 % (9.9)%
-------------------------------------------------------------- -----------------------------
-------------------------------------------------------------- -----------------------------
</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, with an aggregate limit
of $160 million per year. Authorization for the current funding program
expires in March, 1998, and the Congress is presently working on an extension
of this funding. It is expected that appropriations will be authorized later
this year, and spending levels will be comparable for rail-highway crossing
warning systems and increased for rail transit projects.
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 1997, the freight
railroad industry was enjoying good market conditions with increased revenues
in most segments of their business, particularly intermodal traffic. Its
estimated 1998 capital expenditure budgets will be at or above 1997 levels.
The industry continues 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 23.2% for 1997
compared with 24.0% for 1996 and 25.9% in 1995. The incremental declines in
1997 and 1996 reflect the shift away from individual product sales to those
of entire systems and outsourced services, both of which deliver
substantially higher sales but with reduced profit margins. For example, the
$40 million upgrade project, which commenced in 1997 for a Class I railroad,
added substantially to the sale of Harmon products and systems, but it also
contained sizable amounts of "pass-through" business, which provide only
modest profit margins. In addition, profit margins were under additional
pressure during the past two years because of capacity expansions in 1997 and
product upgrades in 1996.
Traditionally, declining profit margins have negative connotations.
Harmon's experience is otherwise. Management's primary 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
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 begets additional sales of Harmon products and systems,
and it performs a service few others in the railroad industry can match.
Moreover, the Company is confident its service business will increase as the
railroads continue to outsource their asset management, maintenance and line
upgrade projects.
22
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenditures increased
$1.3 million in 1997 following a $1.1 million increase in 1996, which
illustrates Harmon's ongoing commitment to incorporating new technology into
its products. The principal reasons for the increase in 1997 relate to
continued development of our Incremental Train Control System (ITCS),
development of next-generation products, and costs related to demonstrating
our Advanced Automatic Train Control (AATC) system in New York City to
several prospective buyers.
Although R&D expenditures were up in absolute terms in 1997 and 1996, as
a percent of sales they remained the same at 3.6% because of the sales
increase in 1997. Expenditures in 1995 were 3.8%.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) for 1997 were $30.3 million, roughly $4.3
million higher than those of 1996. The 1997 increase relates principally to
the 21.7% sales increase for 1997, which naturally generated more sales
expense and increased profit-based incentive compensation. While SG&A
expenses increased in absolute dollar terms last year their costs relative to
net sales declined for the fourth consecutive year--to 14.2% of sales from
14.8% in 1996, 17.0% in 1995 and 17.7% in 1994. This downward trend as a
percentage of net sales reflects improvements 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 1997,
1996 and 1995. These expenses were offset somewhat in 1995 by lower
profit-based bonuses.
Apart from higher SG&A expenses incurred due to higher sales in 1997,
certain other expenses (chiefly, costs related to employee recruiting as well
as legal and outside computer consulting services) approximated $1.5 million
last year, resulting in operating cost increases. Conversely, a $7.7 million
increase in service revenues in 1997 helped reduce SG&A expenses as a percent
of sales because the service operation incurs proportionally less SG&A
expenses per dollar of revenue than Harmon's other revenue producing
products. This illustrates the beneficial effect on profits when otherwise
low-margin business is added to an already profitable enterprise.
AMORTIZATION EXPENSES. Amortization expenses increased 18.7% from 1996 to
1997 and 7.3% from 1995 to 1996. The increases are the result of acquisitions
made during 1997 and 1996.
OTHER OPERATING EXPENSES. The increase in other operating expenses in 1997
reflects the Company's equity in the net loss of Vale Harmon prior to the
acquisition. Changes between 1996 and 1995 were insignificant.
INTEREST INCOME AND EXPENSE. Interest expense was $1,219,000 in 1997,
$724,000 in 1996 and $741,000 in 1995. The increase in 1997 was the result of
a January, 1997 private placement of $15 million in senior unsecured notes.
The decrease in 1996 reflected lower average borrowings in 1996 compared with
1995. Interest income was greater in 1997 than in the two previous years
because the proceeds from the private placement were invested during the
first half of 1997. During the second half of 1997, those same funds were
redeployed to support greater working capital needs and for capital expansion
programs to increase the Company's manufacturing capacity.
INCOME TAXES. The Company's effective income tax rate was 37.7% in 1997
compared with 38.2% in 1996 and 38.4% in 1995. The tax rate in 1997 was lower
because of United Kingdom net operating loss usage.
INFLATION
- -------------------------------------------------------------------------------
Inflation has been modest in the past three years. Wage increases have been
about 4% in each of the past three years. Raw material cost increases were
about 3% in 1995 and 1996, and negligible in 1997. Competitive pressure has
required the Company to maintain or reduce sales prices to sustain market
share. Management believes that competitive pricing pressures will remain for
the foreseeable future. Its program to combat this is to continue to increase
productivity, adopt emerging lower-cost technological advances into its
products, expand its available products through internal development and
acquire products or companies in the railroad supply industry that will
expand Harmon's product or service offerings.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY, CASH FLOW AND CAPITAL RESOURCES
- -------------------------------------------------------------------------------
The Company concluded 1997 with a very strong balance sheet. Total assets
were $135.8 million, up $31.1 million. Stockholders' equity rose to $69.8
million ($6.68 per share) from $57.9 million ($5.66 per share). Working
capital was $50.3 million, which produced a current ratio of 2.09:1 compared
to 1.85:1 a year earlier. Interest-bearing debt was up $12.5 million. This
chiefly reflects a $15 million private debt placement of unsecured 10-year
senior notes, which Harmon completed in January, 1997. Cash was used to fund
capital expenditures of $10.5 million chiefly for plant expansions and
purchases of additional production equipment, increased receivables and
contract costs of $5.3 million (largely because of the $17.8 million sales
increase in the 1997 fourth quarter), and to support an $11.7 million
increase in year-end inventories, offset by cash provided by an increase in
trade payables of $5.2 million.
At December 31, 1997, availability under the Company's primary bank
lines of credit amounted to $31 million, with no borrowings against it.
Capital expenditures for 1998 are budgeted at $14.5 million, roughly $4.0
million higher than the capital expenditures for 1997. Traditionally, the
Company spends less on capital expenditures than it actually budgets.
1998 OUTLOOK
- -------------------------------------------------------------------------------
On balance, the outlook for 1998 is bright. The Company began 1998 with a
backlog of $74.5 million, up $15.1 million from its year earlier backlog of
$59.4 million. Its principal Class I railroad customers indicate they will
increase expenditures for capacity enhancements, which include purchases of
products, systems and services of a type that Harmon provides. Harmon's
recent addition of wireless radio technology for railroad application is
expected to be major factor in Harmon's future sales of its
communication-based automatic train control systems. Other positive factors
include: (1) continued upgrading and privatization of railroads in Mexico;
(2), a trend toward increased outsourcing among Class I railroads; (3),
greater sales opportunities internationally, particularly because of the
expanding business relationship between Harmon's British-based subsidiary
(Vaughan Harmon Systems Ltd.) and British Railtrack; (4), a sizable increase
in the number of bids expected to be let in 1998 by domestic rail transit
authorities; and (5), continuing mergers between Class I railroads, which
upon completion, generally lead to signal and train control upgrades across
the newly-combined systems.
Despite the many positives for Harmon, there are two potential negatives
as well. The first relates to the potential for a heightened competitive
environment. The parent of a significant competitor was recently sold to a
European company, which is a world giant in railroad equipment and systems.
Another domestic railroad supplier has become a sizable force in railroading
in recent years, and there are rumors that the parent company of a third
railroad equipment supplier may be sold. The second issue relates to the fact
that the Congress has not yet authorized funds for rail-highway grade
crossing upgrades or rail-transit projects. What effect these factors will
have on Harmon is uncertain.
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 projects that are presently
contemplated for release in 1998 and 1999, 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 uncertain.
OTHER
- -------------------------------------------------------------------------------
The Company streamlined its organizational structure during 1996, merging its
domestic operating subsidiaries into the parent company effective January 1,
1997. This realignment has improved customer service and streamlined overall
operations.
There are no recently issued accounting pronouncements which have not
been implemented that would have a significant effect on the Company's
financial statements.
24
<PAGE>
YEAR 2000 ISSUE
- -------------------------------------------------------------------------------
Management is presently conducting a formal Year 2000 survey with its
suppliers of critical inventory items. To date it has uncovered nothing
significant in its supply chain that would cause Harmon Year 2000 problems.
Simultaneously, management is conducting a review of its products that
contain imbedded software. Only small issues have been discovered, and
management expects to resolve these during 1998 at minimal cost. In addition,
the Company is in the midst of a multi-year project to upgrade its operating
systems, which includes a review of all its computer systems and applications
at all its locations to assess the impact of the Year 2000 date change. As
part of its overall systems upgrade to accommodate its recent and expected
future growth, Harmon has been working the past year to bring all its
information systems, including manufacturing controls, on line with a common
operating software. The Company has been advised that the new software, which
is expected to be implemented during 1998-1999, is Year 2000 compliant. The
cost to bring all the Company's operating systems onto one platform is
approximately $2.5 million.
FOURTH QUARTER RESULTS
- -------------------------------------------------------------------------------
Sales for Harmon's 1997 fourth quarter were a record $73.8 million, 31.8%
greater than its 1996 fourth quarter sales of $56.0 million. Cost of sales as
a percentage of sales was 74.4% compared with 78.5% in 1996. The positive
difference between the two years reflects greater shipments of higher margin
products in 1997. In 1996, a sizable portion of Harmon's fourth quarter
revenues were comprised of asset management service billings, which carry
smaller markups than Harmon-manufactured goods and often include pass-through
business--products not manufactured by Harmon but which are purchased by
Harmon to complete a turnkey project.
Net earnings for the 1997 fourth quarter were $3.9 million, or $0.37 per
share - diluted, compared with $2.1 million, or $0.20 per share - diluted,
for the 1996 fourth quarter.
QUARTERLY CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
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 $35,988 $47,621 $56,125 $73,796 $38,397 $39,111 $41,957 $55,975
Cost of sales 26,196 33,607 41,512 54,909 27,224 26,141 29,721 43,911
R&D expenditures 1,602 1,809 1,758 2,496 1,458 1,726 1,492 1,656
-------------------------------------------------------------------------------------------
Gross profit 8,190 12,205 12,855 16,391 9,715 11,244 10,744 10,408
Selling, general and
administrative expenses 5,847 6,687 8,228 9,534 6,164 6,560 6,491 6,774
Amortization 160 166 178 192 137 137 154 159
Miscellaneous (income)
expense-net (23) 281 (4) 13 (16) (14) (14) 2
-------------------------------------------------------------------------------------------
Operating income 2,206 5,071 4,453 6,652 3,430 4,561 4,113 3,473
Investment income 138 176 67 41 169 29 28 25
Interest expense 124 428 333 334 255 234 123 112
-------------------------------------------------------------------------------------------
Pre-tax earnings 2,220 4,819 4,187 6,359 3,344 4,356 4,018 3,386
Income taxes 772 1,832 1,548 2,470 1,269 1,699 1,530 1,278
-------------------------------------------------------------------------------------------
Net earnings $ 1,448 $ 2,987 $ 2,639 $ 3,889 $ 2,075 $ 2,657 $ 2,488 $ 2,108
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Earnings per common
share-diluted $ 0.14 $ 0.29 $ 0.25 $ 0.37 $ 0.20 $ 0.26 $ 0.24 $ 0.20
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Weighted average
shares-diluted (000s) 10,304 10,335 10,392 10,467 10,244 10,262 10,266 10,296
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
Quarterly per share amounts may not add to annual amounts due to the timing
of net earnings and changes in common stock equivalents during each year.
STOCK SPLIT
- -------------------------------------------------------------------------------
Effective February 27, 1998, the Company's common stock was split on a
three-for-two basis. Per share information included herein reflects the
effect of that stock split.
25
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
At December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,748 $ -
Trade receivables, less allowance for doubtful accounts
of $318 in 1997 and $307 in 1996 45,001 39,656
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 2) 2,850 1,665
Inventories:
Work in process 6,171 4,145
Raw materials and supplies 32,894 23,076
----------------------
39,065 27,221
Deferred tax asset (note 4) 2,215 1,637
Prepaid expenses and other current assets 473 2,851
----------------------
Total current assets 96,352 73,030
----------------------
Property, plant and equipment, at cost (note 3):
Land 465 356
Buildings 11,363 9,010
Machinery and equipment 16,319 14,292
Office furniture and equipment 20,671 16,032
Transportation equipment 1,393 1,236
Leasehold improvements 3,120 2,395
----------------------
53,331 43,321
Less accumulated depreciation and amortization 29,302 25,389
----------------------
Net property, plant and equipment 24,029 17,932
Deferred tax asset (note 4) 414 738
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $3,180 in 1997 and $2,483 in 1996 (note 11) 8,766 7,606
Deferred compensation asset (note 6) 5,807 4,998
Other assets 401 373
----------------------
$135,769 $104,677
----------------------
----------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current debt installments (note 3) $ 1,162 $ 737
Accounts payable 21,554 15,119
Accrued payroll, bonus and employee
benefit plan contributions (note 6) 11,893 10,892
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 2) 5,677 5,926
Other accrued liabilities 5,177 6,235
Current tax liability 566 492
-------------------
Total current liabilities 46,029 39,401
-------------------
Deferred compensation liability (note 6) 4,522 3,925
Long-term debt (note 3) 15,456 3,412
-------------------
Total liabilities 66,007 46,738
Stockholders' equity (notes 3, 6, 7 and 11):
Common stock of $.25 par value; authorized 20,000,000 shares,
issued 10,437,369 shares in 1997 and 10,243,910 shares in 1996 $ 2,609 2,561
Additional paid-in capital 24,514 22,340
Foreign currency translation 104 203
Unearned compensation (224) -
Retained earnings 42,759 32,835
-------------------
Total stockholders' equity 69,762 57,939
Commitments and contingencies (notes 6 and 10)
-------------------
$135,769 $104,677
-------------------
-------------------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $213,530 $175,440 $136,780
Cost of sales 156,224 126,997 96,094
Research and development expenditures 7,664 6,331 5,218
------------------------------------
Gross profit 49,642 42,112 35,468
------------------------------------
Selling, general and administrative expenses 30,298 25,990 23,200
Amortization of cost in excess of fair value
of net assets acquired (note 11) 697 587 547
Equity in net loss of affiliate (note 8) 330 - -
Miscellaneous income - net 63 43 66
------------------------------------
Operating income 18,380 15,578 11,787
Interest expense 1,219 724 741
Investment income 422 251 134
------------------------------------
Earnings before income taxes 17,583 15,105 11,180
Income tax expense (benefit) (note 4):
Current 6,876 6,945 4,413
Deferred (254) (1,170) (119)
------------------------------------
6,622 5,775 4,294
------------------------------------
Net earnings $ 10,961 $ 9,330 $ 6,886
------------------------------------
------------------------------------
Basic earnings per common share* $ 1.06 $ 0.91 $ 0.68
Diluted earnings per common share* $ 1.06 $ 0.91 $ 0.67
------------------------------------
------------------------------------
Weighted average shares used in computation (000s)*
Basic earnings per common share 10,313 10,217 10,187
Diluted earnings per common share 10,374 10,268 10,242
------------------------------------
------------------------------------
</TABLE>
* Adjusted for three-for-two stock split in February 1998.
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Foreign Total
Common Paid-in Currency Unearned Retained Stockholders'
Stock Capital Translation Compensation Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994* $2,523 $21,878 $ - $ - $18,662 $43,063
Net earnings - - - - 6,886 6,886
Cash dividends paid ($0.10 per share) - - - - (1,021) (1,021)
Common stock issued (note 7):
Stock options and other 30 274 - - - 304
--------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995* 2,553 22,152 - - 24,527 49,232
Net earnings - - - - 9,330 9,330
Cash dividends paid ($0.10 per share) - - - - (1,022) (1,022)
Common stock issued (notes 7 and 11):
Acquisitions of businesses 6 144 - - - 150
Stock options and other 2 44 - - - 46
Foreign currency translation - - 203 - - 203
--------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996* 2,561 22,340 203 - 32,835 57,939
Net earnings - - - - 10,961 10,961
Cash dividends paid ($0.10 per share) - - - - (1,037) (1,037)
Common stock issued (notes 6, 7 and 11):
Acquisition of business 23 1,337 - - - 1,360
Deferred compensation 6 355 - (224) - 137
Stock options and other 19 482 - - - 501
Foreign currency translation - - (99) - - (99)
--------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997* $2,609 $24,514 $104 $(224) $42,759 $69,762
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
* Adjusted for three-for-two stock split in February 1998.
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 10,961 $ 9,330 $ 6,886
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,639 5,004 3,906
Loss (gain) on sale of property, plant and equipment 45 (5) (34)
Deferred tax expense (benefit) (254) (1,170) (119)
Earned stock compensation 137 - -
Equity in net loss of affiliate 330 - -
Changes in assets and liabilities, net of acquisitions of businesses:
Trade receivables (3,900) (13,740) (3,860)
Inventories (11,677) (1,060) (7,830)
Estimated costs, earnings and billings on contracts (1,371) 7,381 (2,873)
Prepaid expenses and other current assets 2,454 (360) 131
Accounts payable 5,209 3,345 3,052
Accrued payroll and benefits 911 4,000 (651)
Other liabilities (995) 5,007 (478)
Other deferred liabilities 597 371 157
---------- --------- ---------
Total adjustments (2,875) 8,773 (8,599)
---------- --------- ---------
Net cash provided by (used in) operating activities 8,086 18,103 (1,713)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (10,475) (6,371) (5,532)
Acquisitions of businesses (196) (2,146) (1,182)
Proceeds from sale of property, plant and equipment 29 46 84
Deferred compensation, net (809) (1,339) (429)
Other investing activities (358) 1,584 (974)
---------- --------- ---------
Net cash used in investing activities (11,809) (8,226) (8,033)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 501 46 292
Cash dividends (1,037) (1,022) (1,021)
Proceeds from issuance of long-term debt 15,000 - -
Borrowings under line of credit agreements 52,370 46,530 31,152
Repayments under line of credit agreements (55,293) (55,165) (20,491)
Principal payments of long-term debt (971) (469) (436)
---------- --------- ---------
Net cash provided by (used in) financing activities 10,570 (10,080) 9,496
Foreign currency translation (99) 203 -
Net increase (decrease) in cash and cash equivalents 6,748 - (250)
---------- --------- ---------
Cash and cash equivalents at beginning of year - - 250
---------- --------- ---------
Cash and cash equivalents at end of year $ 6,748 $ - $ -
---------- --------- ---------
---------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 884 $ 690 $ 661
Income taxes $ 6,635 $ 6,019 $ 4,167
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
- ------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION. The consolidated
financial statements of the Company include the accounts of Harmon Industries,
Inc., and its wholly-owned subsidiaries, Vaughan Harmon Systems Limited
(Vaughan Harmon), Vale-Harmon Enterprises, Ltd. (Vale Harmon), Devtronics, Inc.
(Devtronics) and Harmon Railway Systems International (HRSI). Effective January
1, 1997 the Company's former subsidiaries Harmon Electronics, Inc. (HEI),
Electro Pneumatic Corporation (EPC) and Consolidated Asset Management Company,
Inc. (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. 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 and
measures impairment, if any, 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.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT. Costs incurred in the creation of new products or in
changing existing products are charged to expense as incurred.
STOCK SPLIT. On February 3, 1998, the Company declared a three-for-two stock
split, payable on February 27, 1998 in the form of a stock dividend to
stockholders of record on February 13, 1998. Share and per share data for all
periods presented have been adjusted to give retroactive effect to this stock
split.
EARNINGS PER COMMON SHARE. Prior to December 31, 1997 the Company computed
earnings per share (EPS) in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 15, Earnings per Share and related
interpretations. As such, primary earnings per common share was based on the
weighted average number of common shares outstanding, giving effect to common
stock equivalents (stock options), if dilutive. On December 31, 1997 the
Company adopted SFAS No. 128, Earnings per Share, which replaces the
presentation of primary and fully diluted EPS with a presentation of basic and
diluted EPS. Previously reported EPS information has been restated to reflect
the adoption of SFAS No. 128.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in
the earnings of the entity.
For the years ended December 31, 1997, 1996 and 1995 there are no
differences between the numerator used in computing basic and diluted
earnings per share which represents the net earnings of the Company. For the
years ended December 31, 1997, 1996 and 1995 the denominator used in
computing basic earnings per share represents the weighted average number of
common shares outstanding (10,319,000 shares-1997, 10,217,000 shares-1996,
10,187,000 shares-1995), reduced, in the case of 1997, by the weighted
average number of shares of nonvested stock (6,000 shares) issued pursuant to
employee benefit plans. The denominator used in computing diluted earnings
per share represents the weighted average number of common shares outstanding
used for purposes of the basic earnings per share computation (10,313,000
shares-1997, 10,217,000 shares-1996, 10,187,000 shares-1995) increased to
reflect the potential dilution under the treasury stock method of the
outstanding stock options and nonvested stock under the Company's employee
benefit plans and stock option programs (61,000 shares-1997, 51,000
shares-1996, 55,000 shares-1995).
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 subsequent 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.
ENVIRONMENTAL REMEDIATION LIABILITIES. In October 1996 the American Institute
of Certified Public Accountants issued Statement of Position ("SOP") 96-1,
Environmental Remediation Liabilities. SOP 96-1 was adopted by the Company on
January 1, 1997 and requires, among other things, environmental remediation
liabilities to be accrued when the criteria of SFAS No. 5, Accounting for
Contingencies, have been met. The guidance provided by the SOP is consistent
with the Company's current method of accounting for environmental remediation
costs and, therefore, adoption of this new Statement did not have a material
impact on the Company's financial position or results of operations.
<PAGE>
NOTE 2. CONTRACTS IN PROGRESS
- -------------------------------------------------------------------------------
Contract costs on uncompleted contracts are as follows:
<TABLE>
<CAPTION>
Costs and Billings in
estimated excess of
earnings costs and
in excess estimated
(Dollars in thousands) of billings earnings Total
---------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1997:
Costs and estimated earnings $13,850 $110,836 $124,686
Billings 11,000 116,513 127,513
-------------------------------------
$ 2,850 $ (5,677) $ (2,827)
-------------------------------------
-------------------------------------
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)
-------------------------------------
-------------------------------------
</TABLE>
Balances billed, but not paid by customers under retainage provisions in
contracts amounted to $798,000 and $1,165,000 at December 31, 1997 and 1996,
respectively. All receivables on contracts in progress are considered to be
collectible within twelve months.
NOTE 3. INDEBTEDNESS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Revolving credit agreements $ - $2,826
Senior unsecured notes payable 15,000 -
Lines of credit 583 -
Bank loans 336 273
Note payable - 198
Capitalized lease obligations 699 852
--------------------
Total indebtedness 16,618 4,149
Less current installments 1,162 737
--------------------
Long-term debt $15,456 $3,412
--------------------
--------------------
</TABLE>
REVOLVING CREDIT AGREEMENTS. The Company has an unsecured $20,000,000
revolving credit agreement which expires August 1999. At December 31, 1997,
there are 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.
The Company has an unsecured 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 $11,784,000 at December 31, 1997
against which there are no outstanding borrowings at December 31, 1997.
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. The Company pays commitment fees of 110 of 1% annually on the unused
portion of the revolving credit agreements.
SENIOR UNSECURED NOTES PAYABLE. On January 24, 1997 the Company issued
$15,000,000 of senior unsecured notes. The notes bear interest at 6.87% and
are payable in equal annual installments of $2,142,857 commencing in 2001
with the final payment due in 2007.
<PAGE>
LINES OF CREDIT. A subsidiary company has a line of credit with total
availability of $457,000 against which there are outstanding borrowings of
$457,000 at December 31, 1997. The line of credit does not have a stated
expiration date as all amounts are payable upon demand of the lender and
accordingly the entire balance outstanding has been classified as current in
the Consolidated Balance Sheets. The line of credit bears interest at the
lender's prime lending rate plus 1% (6.5% at December 31, 1997), payable
monthly. The line of credit is collateralized by liens against certain real
and personal property.
A subsidiary company has a line of credit with total availability of
$500,000 against which there are outstanding borrowings of $126,000 at
December 31, 1997. The line of credit expires May 29, 2001. All amounts are
payable upon demand, and if not sooner demanded, May 29, 2001 and accordingly
the entire balance outstanding has been classified as current in the
Consolidated Balance Sheets. The line of credit bears interest at the prime
interest rate as published in the Wall Street Journal rate plus 1% (9.5% at
December 31, 1997), adjusted and payable monthly. The line of credit is
collateralized by liens against certain personal property.
BANK LOANS. A subsidiary company has a $211,000 bank loan which 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% (9.3% at
December 31, 1997). The note is collateralized by liens against certain real
and personal property.
A subsidiary company has a $125,000 bank loan which is a term note
payable in monthly installments including interest through December, 2000.
The note bears interest at a base rate established by the bank plus 3.0%
(11.00% at December 31, 1997). The note is collateralized by liens against
certain real and personal property.
CAPITALIZED LEASE OBLIGATIONS. The Company entered into various computer
hardware and software capital lease agreements totaling $312,000 and $330,000
in 1997 and 1996, respectively. Monthly installments are due through
November, 2000. The implied interest rates in the lease agreements range from
7.0% to 9.0%.
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, 1997, the
Company is in compliance with all covenants under its indebtedness agreements
and has retained earnings available for dividends of $8,087,000.
MATURITIES. At December 31, 1997, long-term debt maturities for 1998 and
thereafter are:
<TABLE>
<CAPTION>
Years ended December 31 (Dollars in thousands)
-------------------------------------------------------
<S> <C>
1998 $ 1,162
1999 212
2000 180
2001 2,192
2002 and thereafter 12,872
-------
$16,618
-------
-------
</TABLE>
<PAGE>
NOTE 4. INCOME TAXES
- -------------------------------------------------------------------------------
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $4,992 $ 5,741 $3,664
Foreign 1,002 - -
State 882 1,204 749
------------------------------
Total current 6,876 6,945 4,413
Deferred:
Federal (223) (976) (99)
State (31) (194) (20)
------------------------------
Total deferred (254) (1,170) (119)
------------------------------
Total income tax expense $6,622 $ 5,775 $4,294
------------------------------
------------------------------
</TABLE>
Income tax expense for the years ended December 31, 1997, 1996, and 1995,
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:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax expense $6,154 $5,287 $3,913
Increase (reduction) in income
taxes resulting from:
State and local income taxes, net of
federal income tax benefit 553 657 473
Other, net (85) (169) (92)
------------------------------
$6,622 $5,775 $4,294
------------------------------
------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 1,805 $1,531
Compensated absences 425 353
Inventories 481 490
Allowance for doubtful accounts 117 120
Various other reserves 1,561 1,043
--------------------
Total gross deferred tax assets 4,389 3,537
Less valuation allowance 369 369
--------------------
4,020 3,168
Deferred tax liabilities:
Plant and equipment (1,391) (793)
--------------------
Net deferred tax assets $ 2,629 $2,375
--------------------
--------------------
</TABLE>
There were no net changes in the total valuation allowance for the years
ended December 31, 1997 and 1996. 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. BUSINESS SEGMENT INFORMATION
- -------------------------------------------------------------------------------
The Company and its subsidiaries operate in one reportable segment of railroad
electronics and related products.
Two customers accounted for net sales of approximately $66,340,000 and
$17,406,000 for the year ended December 31, 1997, net sales of approximately
$77,302,000 and $16,126,000 for the year ended December 31, 1996 and net sales
of approximately $19,091,000 and $15,532,000 for the year ended December 31,
1995. At December 31, 1997, the Company had significant receivable balances
from five customers totaling approximately $18,360,000. The Company has no
other unusual credit risks or concentrations.
NOTE 6. COMMITMENTS
- -------------------------------------------------------------------------------
The Company has also entered into various operating lease arrangements covering
the use of manufacturing facilities, administrative offices and equipment.
Rental expense related to these leases amounted to $2,122,000, $1,661,000 and
$1,581,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
A summary of non-cancelable long-term operating lease commitments follows
(Dollars in thousands):
<TABLE>
<CAPTION>
Real Total
Years ended December 31, Equipment property commitments
----------------------------------------------------------------
<S> <C> <C> <C>
1998 $ 11 $ 752 $ 763
1999 4 689 693
2000 - 498 498
2001 - 341 341
</TABLE>
It is expected that in the normal course of business, leases that expire will
be renewed or replaced by leases on other properties; thus, it is anticipated
that future minimum lease commitments will not be less than the amounts shown
for 1998.
EMPLOYEE BENEFITS. In 1985, the Company formed an Employee Stock Ownership Plan
and Trust (ESOP), which includes all employees. The ESOP held 746,358 shares
and 755,246 shares of Company common stock which had been allocated to plan
participants at December 31, 1997 and 1996, 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 $3,874,000, $3,815,000
and $2,785,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Company and its subsidiaries have various bonus plans based primarily
on Company performance. Accrued and unpaid bonuses at December 31, 1997 and 1996
were $2,776,000 and $2,505,000, 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 cost (gain) related to this plan
was $573,000, $(365,000) and $491,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
In 1997 the Company established a nonqualified, unfunded deferred
compensation plan for certain key executives providing for payments upon
termination, retirement, death or disability. This plan is available to new
officers of the Company in lieu of participation in the plan described above.
Under the plan, contributions are based on a formula which is expected to
result in a target benefit for the participant and vest on a graded basis. The
amount of a participant's benefit is based solely on the participant's vested
account balance except in the case of death prior to termination in which case
the participant's
<PAGE>
benefit is the greater of the participant's vested account balance or the
lesser of eight times the participant's base annual compensation which would
have been paid for the calendar year of death or $1,400,000. Plan
contributions are made in the form of stock and cash to a grantor trust. The
cost related to this plan was $27,000 in 1997.
In 1997 the Company also established a supplemental executive retirement
plan which is a nonqualified, unfunded deferred compensation plan for certain
key employees providing for payments upon termination, retirement, death or
disability. This plan is available to key employees of the Company exclusive
of members of the Executive staff. Under the plan Company contributions equal
to three percent of each participant's annual compensation are made if the
Company's earnings per share are at least 75% of the Company's earnings per
share for the prior calendar year with such contributions vesting on a graded
basis. The plan also allows for participant deferrals of compensation and
bonus awards to be contributed to the plan. The amount of a participant's
benefit is based solely on the participant's vested account balance. Plan
contributions are made in the form of cash to a grantor trust. The cost
related to the plan was $108,000 in 1997.
The Company also has employment agreements with certain key executives.
Under the terms of these agreements the Company contributed 24,150 shares of
common stock of the Company to a grantor trust. Stock prices as of the dates
of grant ranged from $13.92 to $16.50. These contributions vest on a graded
basis with the unvested portion shown in the Consolidated Balance Sheets and
Statements of Stockholders' Equity as "Unearned Compensation".
The Company has recorded the assets and liabilities for the deferred
compensation plans and employment agreements 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.
NOTE 7. STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Share and per share information reflected herein has been adjusted for the
three-for-two stock split in February 1998.
A summary of stock options granted, exercised and expired follows:
<TABLE>
<CAPTION>
Shares Price Per Share
- -------------------------------------------------------------------------------
<S> <C> <C>
Balance at January 1, 1995 284,475 $ 6.96 Average Price
Granted 42,000 9.33-11.83
Exercised (124,725) 2.59-8.92
Expired (15,000) 8.92
Balance at December 31, 1995 186,750 10.13 Average Price
Granted 151,500 9.00-11.33
Exercised (9,000) 3.67-5.50
Expired (38,250) 11.00-13.75
Balance at December 31, 1996 291,000 9.79 Average Price
Granted 132,000 12.17-13.00
Exercised (76,253) 3.67-13.75
Expired (35,647) 11.00-13.75
BALANCE AT DECEMBER 31, 1997 311,100 $11.51 AVERAGE PRICE
</TABLE>
The Company has outstanding stock options for 311,100 shares of common stock at
prices ranging from $9.33 to $15.17 with a weighted-average remaining
contractual life of 4.7 years of which 181,320 shares are exercisable as of
December 31, 1997. In May 1997 the Company granted stock options for up to
1,500 common shares to each of the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's nine non-employee directors which expire on May 31, 2004. In May
1996 the Company granted stock options for up to 1,500 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 3,000 common shares to
each of the Company's eleven directors which were exercisable through May 31,
1997.
The Company issued 92,307 shares of unregistered common stock in connection
with a 1997 acquisition (See Note 11). The Company issued 26,471 shares of
unregistered common stock in connection with the 1996 acquisitions of
businesses (See Note 11).
NOTE 8. AFFILIATES
- -------------------------------------------------------------------------------
The Company has an investment of 20% in an unconsolidated affiliate which is
accounted for under the equity method. Equity in earnings (losses) of this
affiliate was not significant for the years ended December 31, 1997, 1996 and
1995. The Company had sales to this related entity totaling $253,000, $559,000
and $934,000 for 1997, 1996 and 1995, respectively. The Company had receivables
due from this entity of $69,000 and $144,000 as of December 31, 1997 and 1996,
respectively.
As of December 31, 1996 the Company also had an investment of 38% in a
formerly unconsolidated affiliate, Vale Harmon, which was accounted for under
the equity method. During 1997 the Company acquired the remaining interest in
this subsidiary company (See note 11). Equity in losses of this affiliate prior
to acquisition amounted to $330,000 in 1997. Equity in earnings (losses) of
this affiliate was not significant for the years ended December 31, 1996 and
1995. The Company had sales to this related entity totaling $27,000 in 1997
prior to acquisition and $282,000 and $543,000 in 1996 and 1995, respectively.
The Company had receivables due from this entity of $79,000 as of December 31,
1996.
NOTE 9. OTHER FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
The Company has classified certain environmental compliance expenses as cost of
sales in the accompanying statements of operations. These expenses amounted to
$150,000, $283,000 and $215,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
NOTE 10. LITIGATION
- -------------------------------------------------------------------------------
ENVIRONMENTAL MATTER. On September 30, 1991, the United States Environmental
Protection Agency (EPA) issued a complaint against the Company alleging
violations of the Resource Conservation and Recovery Act (RCRA) and RCRA
regulations in the disposal of solvents at the Company's Grain Valley,
Missouri, plant. The complaint sought penalties in the amount of $2,344,000 and
proposed certain compliance actions. In January 1994 the administrative hearing
on the penalty assessment was heard. The decision from that hearing reduced the
penalties to $586,000. On January 9, 1995 the Company filed a Notice of Appeal
of the initial decision with the Environmental Appeals Board (EAB) and on May
1, 1996, the EAB heard oral arguments. The EAB ruled and affirmed the penalty
of the administrative law judge. On June 6, 1997 the Company filed a complaint
in the Federal District Court for the Western District of Missouri seeking
judicial review of the EAB's decision.
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.
<PAGE>
The Company has recorded a total of $2,382,000 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.
NOTE 11. ACQUISITIONS OF BUSINESSES
- -------------------------------------------------------------------------------
On November 10, 1997 the Company acquired the stock of a railroad industry
equipment and services supplier. This acquisition was made with the issuance of
92,307 (post-split) shares of unregistered common stock valued at $14.73 (post-
split) per share. This 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 consideration given over the fair value of net
assets acquired has been recorded as goodwill of $591,000.
On June 12, 1997 the Company acquired the remaining 62% of the outstanding
stock of Vale Harmon for $167,000 in cash. Prior to this transaction the
Company held a 38% ownership interest in Vale Harmon and accounted for the
investment under the equity method. This 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 consideration given over the fair value of
net assets acquired has been recorded as goodwill of $1,083,000.
The pro forma effects of the 1997 acquisitions on the consolidated financial
statements are not significant.
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 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 1997 the Company recorded an additional $131,000 in goodwill relating to
the use of certain tax net operating loss carryforwards.
In 1996 the Company acquired the assets of two contract engineering firms.
These acquisitions were made with the issuance of 26,201 (post-split) shares of
unregistered common stock valued at $5.67 (post-split) 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 1997, 1996 and 1995
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 basic earnings per share would have
been reduced by approximately $280,000 in 1997, $325,000 in 1996 and $88,000 in
1995, or $.03 per share in 1997, $.03 per share in 1996 and $.01 per share in
1995. The fair value of the options granted is estimated at values ranging from
$3.91 to $5.93 in 1997 and $3.92 to $5.91 in 1996, on the dates of grant using
the Black-Scholes option-pricing model with the following assumptions: dividend
rate of .10 per share in 1997 and 1996, volatility ranging between 46% and 48%
in 1997 and between 41% and 70% in 1996, risk-free interest rate ranging
between 5.90% and 6.40% in 1997 and 5.25% and 7.01% in 1996, assumed forfeiture
rate of 0% in 1997 and 1996, and an expected life ranging between 1.9 and 3.75
years in 1997 and 1996.
Pro forma net income reflects only options granted since December 31, 1994.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options vesting
period and compensation cost for options granted prior to January 1, 1995 is
not considered.
- -------------------------------------------------------------------------------
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.
<PAGE>
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 /s/ Charles M. Foudree
Bjorn E. Olsson Charles M. Foudree
President and Executive Vice President - Finance,
Chief Executive Officer Treasurer and Secretary
February 10, 1998
- -------------------------------------------------------------------------------
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
February 10, 1998
<PAGE>
INVESTOR INFORMATION
FORM 10-K
- -------------------------------------------------------------------------------
Shareholders may receive a copy of the Corporation's 1997 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.
e-mail: [email protected]
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 12, 1998, 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
e-mail: [email protected]
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, 1997, there were 10,437,369 shares outstanding and
approximately 596 shareholders of record. Cash dividends are 11 cents per
share per year, paid semi-annually at 5 1/2 cents per share.
The range of high and low prices for the past eight quarters ended
December 31, 1997 is shown below. Per share prices and cash dividends have
been adjusted for all stock splits and stock dividends.
<TABLE>
<CAPTION>
Calendar Price Range
Quarter Ended 1997 1996
- -----------------------------------------------------------
<S> <C> <C>
March 31 $12 2/3 - $11 $10 1/2 - $ 8
June 30 16 - 11 1/6 12 1/2 - 9 1/6
September 30 18 1/3 - 12 5/6 12 - 10 1/3
December 31 19 2/3 - 15 1/3 13 - 10
</TABLE>
STOCK TRADING
- -------------------------------------------------------------------------------
The Company's common stock trades on The Nasdaq Stock Market under the
symbol: HRMN. Stock price quotations can be found in major daily newspapers
and in THE WALL STREET JOURNAL.
At March 9, 1998, the following securities firms were making a dual
auction market in the common stock of the Company:
George K. Baum & Company
Piper Jaffray Companies Inc.
PaineWebber Inc.
C.L. King & Associates
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
<PAGE>
MANAGEMENT, DIRECTORS AND CORPORATE DATA
BOARD OF DIRECTORS
- -------------------------------------------------------------------------------
Robert E. Harmon (58)
Chairman of the Board
Bruce M. Flohr (59)
Chairman & CEO
RailTex, Inc.
San Antonio, Texas
Charles M. Foudree (53)
Executive Vice President-
Finance, Treasurer and Secretary
Rodney L. Gray (45)
Executive Vice President-
Finance
Enron International, Inc.
Houston, Texas
John W. Johnson* (50)
Vice President
Domestic Sales
Herbert M. Kohn (59)
Attorney-at-Law
Bryan Cave LLP
Kansas City, Missouri
Douglass Wm. List (42)
Management Consultant
Baltimore, Maryland
Gerald E. Myers (56)
Management Consultant
Tempe, Arizona
Bjorn E. Olsson (52)
President & CEO
Judith C. Whittaker (59)
Vice President, General
Counsel/Secretary
Hallmark Cards, Inc.
Kansas City, Missouri
- ---------------------
* Denotes Advisory Director
( ) Indicates Age of Director
MANAGEMENT
- -------------------------------------------------------------------------------
Bjorn E. Olsson
President & CEO
Charles M. Foudree
Executive Vice President-
Finance, Treasurer and Secretary
Lloyd T. Kaiser
Executive Vice President-
Domestic Sales and Service
Ronald G. Breshears
Vice President-
Human Resources
William L. Bush
Vice President-Research &
Development Engineering
Richard A. Daniels
Vice President-Transit and
International Systems 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
Jeffery J. Utterback
Assistant Vice President-
Quality Systems
DOMESTIC LOCATIONS
- -------------------------------------------------------------------------------
Riverside, California
Torrance, California
Atlantic Beach, Florida
Jacksonville, Florida
Atlanta, Georgia
Delphi, Indiana
Fort Wayne, Indiana
Louisville, Kentucky
Blue Springs, Missouri
Grain Valley, Missouri (3) +
Lee's Summit, Missouri
Warrensburg, Missouri (3) +
Omaha, Nebraska
Hauppauge, New York
Spokane, Washington
- ---------------------
+ 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
<PAGE>
---------------------------------
[LOGO]
Harmon Industries, Inc.
1300 Jefferson Court
Blue Springs, MO 64015
816-229-3345
Fax: 816-229-0556
www.harmonind.com
---------------------------------
<PAGE>
Exhibit 21
Harmon Industries, Inc.
Listing of Subsidiaries
1997 Form 10-K
<TABLE>
<CAPTION>
Name Under Which
Subsidiary Name Business is Conducted Jurisdiction
- --------------- --------------------- ------------
<S> <C> <C>
Consolidated Asset Management Consolidated Asset Management Missouri
Company, Inc. Company, Inc.
Cedrite Technologies, Inc. Cedrite Technologies, Inc. Kansas
Harmon Railway Systems Harmon Railway Systems Virgin Islands
International Corporation International Corporation
Vaughan Harmon Systems, Ltd. Vaughan Harmon Systems, Ltd. Ware, England
Vale Harmon Enterprises, Ltd. Vale Harmon Enterprises, Ltd. Quebec, Canada
Devtronics, Inc. Devtronics, Inc. Florida
</TABLE>
<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,
1997 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> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,748
<SECURITIES> 0
<RECEIVABLES> 45,319
<ALLOWANCES> (318)
<INVENTORY> 39,065
<CURRENT-ASSETS> 96,352
<PP&E> 53,331
<DEPRECIATION> (29,302)
<TOTAL-ASSETS> 135,769
<CURRENT-LIABILITIES> 46,029
<BONDS> 16,618
0
0
<COMMON> 2,609
<OTHER-SE> 67,153
<TOTAL-LIABILITY-AND-EQUITY> 135,769
<SALES> 213,530
<TOTAL-REVENUES> 213,530
<CGS> 163,888
<TOTAL-COSTS> 163,888
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,219
<INCOME-PRETAX> 17,583
<INCOME-TAX> 6,622
<INCOME-CONTINUING> 10,961
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,961
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
<PAGE>
[LOGO]
1300 JEFFERSON COURT
BLUE SPRINGS, MISSOURI 64015
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AT 2:00 P.M. ON MAY 12, 1998
AT THE COUNTRY CLUB OF BLUE SPRINGS
1600 N. CIRCLE DRIVE
BLUE SPRINGS, MISSOURI
To the Holders of Common Stock of Harmon Industries, Inc.:
Notice is hereby given that the Annual Meeting of the Shareholders of Harmon
Industries, Inc. will be held for the following purposes:
1. To elect ten (10) members of the Board of Directors;
2. To approve an amendment of the Company's Articles of Incorporation to
increase the number of shares of common stock ($.25 par value) authorized
from 20,000,000 shares to 50,000,000 shares.
3. To approve an amendment to the Company's 1996 Long-Term Incentive Plan
to extend the expiration of the Plan from May 31, 2001 to May 31, 2003
and to increase the amount of shares available annually under the Plan
from 1.15% to 1.25% of outstanding shares on January 1 of each year of
the Plan, commencing January 1, 1999;
4. To approve the selection of KPMG Peat Marwick LLP, as Auditors for the
forthcoming fiscal year; and
5. To transact such other business as may properly come before the meeting
or any adjournments thereof.
Only shareholders of record at the close of business on March 16, 1998, will
be entitled to notice of and to vote at the meeting and any adjournments
thereof. The transfer books of the Company will not be closed.
Shareholders who do not expect to attend the meeting in person are asked to
date, sign and return the proxy using the enclosed envelope which needs no
postage if mailed in the United States.
BY ORDER OF THE BOARD OF DIRECTORS
Robert E. Harmon
Chairman
1300 Jefferson Court
Blue Springs, Missouri 64015
April 1, 1998
<PAGE>
[LOGO]
1300 JEFFERSON COURT
BLUE SPRINGS, MISSOURI 64015
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 12, 1998
SOLICITATION OF PROXIES
This Proxy Statement and the accompanying form of proxy are being mailed to
shareholders of Harmon Industries, Inc. (the "Company") commencing on April 1,
1998. The enclosed proxy is solicited by and on behalf of the Board of Directors
of the Company to be used at the Annual Meeting of Shareholders, which will be
held at the Country Club of Blue Springs, 1600 N. Circle Drive, Blue Springs,
Missouri on May 12, 1998 at 2:00 p.m. and at any adjournments thereof, for the
purposes set forth in the accompanying Notice of Annual Meeting of Shareholders.
Any shareholder who executes and returns the enclosed proxy has the right to
revoke it, in writing, at any time before it is voted at the meeting.
The Company will bear the cost of solicitation of proxies. In addition to
the use of the mail, proxies may be solicited personally or by telephone or
facsimile by the directors or by a few executives or employees of the Company at
a nominal cost, and the Company may reimburse brokers and other persons holding
stock in their names or in the names of their nominees for their expenses in
sending proxy material to principals.
ON FEBRUARY 27, 1998, THE COMPANY EFFECTED A 3 FOR 2 STOCK SPLIT, PAID AS A
DIVIDEND TO SHAREHOLDERS OF RECORD FEBRUARY 13, 1998. ALL SHARE INFORMATION,
INCLUDING CURRENT AND HISTORICAL DATA, HAS BEEN ADJUSTED IN THIS PROXY STATEMENT
TO REFLECT THIS STOCK SPLIT.
The Board of Directors of the Company has fixed the close of business on
March 16, 1998, as the record date for the determination of shareholders
entitled to notice of and to vote at the meeting. As of that date, the Company
had 10,521,189 shares of Common Stock outstanding and entitled to vote at the
meeting.
Each share of Common Stock entitles the shareholders to one vote for each
share held. All voting, unless otherwise specifically indicated, requires
approval by a majority of the shares of stock represented in person or by proxy
at the meeting and voted on the matter in question. Abstentions and broker
non-votes will be treated as present at the meeting for purposes of determining
a quorum but are tabulated as if no vote was cast on the matter indicated.
Directors are elected by a plurality of the votes cast. Shareholders do not have
the right to accumulate votes in the election of directors. Votes withheld in
the election of directors are not tabulated as a vote for or against the person
or persons indicated. The selection of directors is determined in the order of
those nominees receiving the highest number of votes in favor of election until
the number of nominees to be elected in the election have been selected.
1
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock of the
Company owned beneficially as of March 16, 1998 by each person who, as of that
date, to the best knowledge of management, was the beneficial owner of more than
5% of the outstanding shares or who is a named executive officer. Common Stock
is the only class of voting securities.
<TABLE>
<CAPTION>
PERCENT
TITLE NAME AND ADDRESS OF BENEFICIAL OF
OF CLASS BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
- ------------------ ------------------------------------------------- --------------- -------------
<C> <S> <C> <C>
Common Stock St. Denis J. Villere & Company 1,139,775(3) 11%
210 Baronne Street, Suite 808
New Orleans, LA 70112-1727
Common Stock Wellington Management Company, LLP 827,400(4) 8%
75 State Street
Boston, Massachusetts 02109
Common Stock Mercantile Bancorporation Inc. 768,360 7%
#1 Mercantile Center
St. Louis, MO 63101
Common Stock Charles M. Foudree 64,000(5) 1%
Common Stock Robert E. Heggestad 37,185(6) --%
Common Stock Lloyd T. Kaiser 40,822(7) --%
Common Stock Bjorn E. Olsson 51,000(8) --%
Common Stock Raymond A. Rosewall 35,250(9) --%
Common Stock Beneficial ownership of all officers and 920,725 9%
directors as a group (20 in group)
</TABLE>
(1) All amounts of shares reflect sole voting and disposition power unless
otherwise indicated. The share amounts reflected in this column include
outstanding shareholdings, as well as unexercised ISOP option shares and
unexercised director option shares (see discussion under caption "Executive
Compensation" herein). Shares allocated under the Company's ESOP are not
included since participants have no disposition power and have only shared
voting rights. Shares in the ESOP allocated to Messrs. Foudree, Heggestad,
Kaiser, Olsson and Rosewall and all officers and directors as a group were
8,070; 6,630; 2,686; 2,778; 3; and 49,615 shares, respectively.
(2) Rounded to the nearest whole percentage. Percentages are calculated on
10,829,289 shares representing the total of 10,521,189 outstanding shares
(including certain shares held in a Rabbi Trust) and 308,100 shares for
unexercised director, ISOP options and LTIP options.
(3) St. Denis J. Villere & Company has shared voting power and shared
dispositive power over 1,139,775 shares.
(4) Wellington Management Co. has shared voting power over 464,250 shares and
shared dispositive power over 827,400 shares.
(5) 41,250 shares are beneficially owned and held of record by M. Colleen
Foudree as trustee for the M. Colleen Foudree Trust with sole voting and
disposition power. 9,700 shares are held by the Charles M. Foudree Trust
with sole voting and disposition power. 300 shares are held directly by
Charles M. Foudree. The remainder are held by Charles M. Foudree and
represent unexercised option shares.
2
<PAGE>
(6) 26,685 shares are owned by Robert E. Heggestad with sole voting and
dispositive power. The remainder represent unexercised option shares.
(7) 30,322 shares are held by Lloyd T. Kaiser with sole voting and dispositive
power. The remainder represent unexercised option shares.
(8) 38,250 shares are held by Bj(3)rn E. Olsson with sole voting and dispositive
power, not including 24,150 shares held by a Rabbi Trust for deferred
compensation, 8,740 shares of which are currently vested. The remainder
represent unexercised option shares.
(9) Raymond A. Rosewall holds no shares directly with sole voting and
dispositive power. 35,250 shares represent unexercised option shares.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
Based on a review of reports on Forms 3, 4 and 5 and amendments to such
forms filed with the Company, the Company is aware of only one late filing of
such forms by any person required to file such forms in connection with Section
16(a) of the Securities Exchange Act of 1934, as amended. A Form 4 was filed
approximately one month late by a director relating to beneficial ownership
changes of his children. The Company is unaware of any transactions in which
there was a failure to file by a reporting person under such Act.
ELECTION OF DIRECTORS
Ten directors are to be elected at the Annual Meeting of Shareholders for
one year or until their successors are elected and qualified. It is the
intention of the persons named in the accompanying form of proxy to vote for the
election of the nominees listed below. If, for any reason, any of the nominees
is unable or declines to serve, the proxies will be voted for the other persons
listed or for substitute nominees nominated by management. During fiscal 1997,
the Board of Directors held five meetings. All of the directors nominated for
re-election herein attended greater than 75% of the meetings of both the Board
and the respective committees for which they were eligible to serve.
The Director Nomination and Compensation Committee proposes nominees for
Board positions and evaluates director compensation. The Committee consists of
Herbert M. Kohn (Chair), Douglass Wm. List, Bruce M. Flohr and Judith C.
Whittaker. Mr. List joined the Committee in May 1997. The Committee met two
times during 1997. The Committee will consider proposed director candidates
submitted by shareholders. Proposals for the 1999 election must be received in
writing on or prior to November 13, 1998.
The Audit Committee of the Board of Directors was composed of Judith C.
Whittaker (Chair), Herbert M. Kohn and Gerald E. Myers during 1997.
Additionally, Thomas F. Eagleton was a member of the Committee until his
retirement as a director in May 1997. The Audit Committee reviews and monitors
financial controls throughout the Company, supervises the internal audit
function and monitors the Company's relationship with the external auditors. The
committee met two times in 1997.
The Compensation Committee was composed of Rodney L. Gray (Chair), Bruce M.
Flohr and Douglass Wm. List during 1997. Additionally, Donald V. Rentz was a
member of the Committee until his retirement as a director in May 1997. The
Compensation Committee is a standing committee of the Board of Directors and
establishes executive salary and bonus levels for the executive officers and the
Presidents of the Company's subsidiaries. During 1997, the Compensation
Committee met six times.
3
<PAGE>
DIRECTOR NOMINEES
<TABLE>
<CAPTION>
SERVED
PRINCIPAL CONTINUOUSLY STOCK
OCCUPATION FOR AS A DIRECTOR PERCENT OF OWNED
NAME OF NOMINEE AGE LAST FIVE YEARS SINCE CLASS(2) BENEFICIALLY(1)
- ------------------------ ----------- -------------------------------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Bruce M. Flohr 59 Since 1977, Chairman and Chief 05/11/93 --% 6,000(3)
Executive Officer of RailTex, Inc.
Charles M. Foudree 53 Executive Vice President-Finance of 07/27/72 1% 64,000(4)
the Company since Sept. 1986.
Treasurer of the Company since 1974.
Secretary of the Company since 1982.
Rodney L. Gray 45 Since November 1997, Executive Vice 05/11/93 --% 12,000(5)
President, Finance of Enron
International, Inc.; from 1994 to
November 1997, Chairman and Chief
Executive Officer of Enron Global
Power & Pipelines, LLC; prior to that,
Senior Vice-President-Finance and
Treasurer of Enron Corp. from October
1992 to 1994.
Robert E. Harmon 59 Chairman of the Board of the Company 10/02/61 4% 386,938(6)
since February 1975. Chief Executive
Officer of the Company from November
1969 to December 1994. President of
the Company from November 1969 to July
1990.
Herbert M. Kohn 59 Since June 1991, a partner in the law 09/01/85 --% 40,650(7)
firm of Bryan Cave.
Douglass Wm. List 42 Since January 1988, President, List & 05/08/90 --% 6,300(8)
Company, Inc., a management consulting
firm based in Baltimore, Maryland.
Since December 1992, also President of
Railway Engineering Associates, Inc.,
having been Vice-President and General
Manager of that company since May
1988. Since January 1997, President of
Moorgate, Inc., an investment advisory
company.
Gerald E. Myers 56 Self-employed management consultant 05/03/88 --% 46,376(9)
through GEM Financial Services, Inc.
since July 1989.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SERVED
PRINCIPAL CONTINUOUSLY STOCK
OCCUPATION FOR AS A DIRECTOR PERCENT OF OWNED
NAME OF NOMINEE AGE LAST FIVE YEARS SINCE CLASS(2) BENEFICIALLY(1)
- ------------------------ ----------- -------------------------------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Bjorn E. Olsson 52 President and Chief Executive Officer 05/06/86 --% 51,000(10)
of the Company since January 1995;
President and Chief Operating Officer
of the Company from August 1990 to
December 1994.
John A. Sprague 44 Managing General Partner of a private New nominee --% (0)
equity investment firm, Jupiter
Partners, LP since 1994; from June
1993 to February 1994, a private
investor.
Judith C. Whittaker 59 Since January 1997, Vice President, 05/11/93 --% 6,000(11)
General Counsel/Secretary of Hallmark
Cards, Incorporated; prior to that
Vice- President-Legal of Hallmark
Cards, Incorporated.
</TABLE>
(1) All amounts of shares reflect sole voting and disposition power unless
otherwise indicated. The share amounts reflected in this column include
outstanding shareholdings, as well as unexercised ISOP option shares and
unexercised director option shares (see discussion under caption "Executive
Compensation" herein). Shares allocated under the Company's ESOP are not
included since participants have no disposition power and shared voting
rights. Shares in the ESOP allocated to Messrs. Foudree and Olsson were
8,070 and 2,778 shares, respectively.
(2) Percentages shown are rounded to the nearest whole percentage. Percentages
are calculated on 10,829,289 shares representing the total of 10,521,189
outstanding shares (including certain shares held in a Rabbi Trust) and
308,100 shares for unexercised director ISOP and LTIP options.
(3) 6,000 shares are beneficially owned and held of record by Bruce M. Flohr.
(4) 41,250 shares are beneficially owned and held of record by M. Colleen
Foudree as trustee for the M. Colleen Foudree Trust with sole voting and
disposition power. 9,700 shares are held by the Charles M. Foudree Trust
with sole voting and disposition power. 300 shares are held directly by
Charles M. Foudree. The remainder are held by Charles M. Foudree and
represent unexercised option shares.
(5) 9,000 shares are held of record by Rodney L. Gray. The remainder represent
unexercised LTIP director options.
(6) 12,030 shares are held by Robert E. Harmon directly. 368,908 shares are held
of record by Robert E. Harmon, as Trustee for the Robert E. Harmon Trust,
with sole voting and dispositive powers. Does not include 11,430 shares
owned by his wife for which Robert E. Harmon disclaims beneficial ownership.
The remainder are held by Robert E. Harmon and represent unexercised
director options.
(7) 18,000 shares are held directly by Herbert M. Kohn. 19,650 shares are held
through an IRA and the remainder represent unexercised LTIP director
options.
(8) 3,000 shares are held through an IRA. 300 shares in the aggregate are held
on behalf of the daughters of Douglass William List. The remainder represent
unexercised LTIP director options.
5
<PAGE>
Does not include 300 shares held by Moorgate Foundation Fund, L.L.C., for
which Mr. List disclaims beneficial ownership. Mr. List owns approximately
9% of Moorgate Foundation Fund, L.L.C. Moorgate, Inc., an investment
advisory company, provides investment advisory services to Moorgate
Foundation Fund, L.L.C., and Mr. List is President of Moorgate, Inc.
(9) Includes 43,114 shares which are held in a living trust, 262 shares are held
in an IRA and the remainder represent unexercised LTIP director options.
(10) 38,250 shares are held by Bj(3)rn E. Olsson with sole voting and
dispositive power, not including 24,150 shares held by a Rabbi Trust for
deferred compensation, 8,740 shares of which are currently vested. The
remainder represent unexercised option shares.
(11) 3,000 shares are held directly by Judith C. Whittaker. The remainder
represent unexercised LTIP director options.
Ms. Whittaker serves as a director of MCI Communications Corporation, a
publicly-held company. Mr. Flohr serves as an officer and director of RailTex,
Inc., a publicly-held company. Mr. List is a director of Mark VII, Inc., a
publicly-held company. Mr. Gray is a director of Battlemountain Gold Company, a
publicly-held company. Mr. Foudree is a director of OTR Express, Inc., a
publicly-held company. Mr. Kohn is a director of American Pad & Paper Company, a
publicly-held company. Mr. Sprague is a director of Heartland Communications,
Inc., a publicly-held company. None of the other director nominees serves as a
director of any other company with a class of stock registered pursuant to
Section 12 of the Securities Exchange Act of 1934 or subject to the requirements
of Section 15(d) of that Act or any company registered under the Investment
Company Act of 1940.
CERTAIN TRANSACTIONS.
Mr. Kohn is currently a partner of the Bryan Cave law firm, which the
Company retains as legal counsel for certain matters.
6
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries (determined as
of the end of the last fiscal year), to or on behalf of the Company's Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company or its subsidiaries (together hereafter referred to as
the "named executive officers") for the fiscal years ended December 31, 1997,
1996 and 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
---------------------------------------
OTHER ANNUAL
FISCAL SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(2) ($)(3) ($)
- ----------------------------------- ------ ------- ------- ------------
<S> <C> <C> <C> <C>
Bjorn E. Olsson 1997 305,848 192,309 --
President & CEO 1996 298,274 218,791 --
1995 264,747 -- --
Charles M. Foudree Executive 1997 180,445 110,498 --
V.P.-Finance, 1996 176,568 109,895 --
Secretary and Treasurer 1995 163,281 -- --
Robert E. Heggestad 1997 131,061 82,505 --
Vice President-Technology 1996 130,738 77,455 --
1995 129,352 -- --
Lloyd T. Kaiser 1997 151,131 98,842 --
Executive Vice President- 1996 156,717 103,441 --
Domestic Sales & Service 1995 151,821 -- --
Raymond A. Rosewall 1997 137,163 85,186 --
V.P. Manufacturing 1996 172,651 81,145 --
1995 -- -- --
<CAPTION>
LONG TERM COMPENSATION
----------------------------------
AWARDS
------------------------ PAYOUTS
RESTRICTED -------
STOCK OPTIONS (# LTIP ALL OTHER
AWARD(S) OF SHS.) PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION ($) (4) ($) ($)(5)
- ----------------------------------- ---------- ----------- ------- ------------
<S> <C> <C> <C> <C>
Bjorn E. Olsson -- 5,250 -- 162,418
President & CEO -- 5,250 -- 47,028
-- -- -- 44,339
Charles M. Foudree Executive -- 5,250 -- 51,307
V.P.-Finance, -- 5,250 -- 75,304
Secretary and Treasurer -- -- -- 70,470
Robert E. Heggestad -- 5,250 -- 10,909
Vice President-Technology -- 5,250 -- 72,515
-- -- -- 85,652
Lloyd T. Kaiser -- 5,250 -- 10,909
Executive Vice President- -- 5,250 -- 20,693
Domestic Sales & Service -- -- -- 22,317
Raymond A. Rosewall -- 5,250 -- 5,454
V.P. Manufacturing -- 30,000 -- 36,049
-- -- -- --
</TABLE>
(1) Includes no perquisites (i.e. auto allowance, club dues or aircraft use)
because in all instances these total less than $50,000 or 10% of the total
of annual salary and bonus reported for each named executive officer.
(2) Salary includes amounts deferred under the Company's 401(k) and the SERP at
the election of the named executive officer.
(3) Bonus consists of cash. (See discussion under the heading "Employment
Contracts" below.)
(4) Includes grants of options in the amount of 5,250 shares in 1997 under the
Company's 1996 Long-Term Incentive Plan and in 1996 under the Company's 1990
Incentive Stock Option Plan.
(5) Includes allocation of contributions to the Company's Deferred Compensation
Plan, SERP and to the Company's non-discriminatory Employee Stock Ownership
Plan (ESOP). The amounts included in this column representing allocation of
the contribution made in 1997 to the Company's ESOP for Messrs. Olsson,
Foudree, Heggestad, Kaiser and Rosewall were $10,909; $10,909; $10,909;
$10,909; and $5,454, respectively. The remainder shown for each in the
column represents allocation of contributions for such named executive
officers under the Company's Deferred Compensation Plan. During 1997, a
total of 24,150 shares were deposited in a Rabbi Trust for deferred
compensation through the SERP allocated to Mr. Olsson, 8,740 shares of which
were vested. $124,011 of the amount in 1997 included in this column for Mr.
Olsson represents the value of the vested shares. (See discussion under the
heading "Pension Plan" below.)
7
<PAGE>
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.
During 1997, all of the named executive officers received a grant of stock
options under the Company's 1996 Long-Term Incentive Plan. The Company has no
outstanding Stock Appreciation Rights (SARs). The following table contains
information concerning the grant of stock options under the Company's 1996
Long-Term Incentive Plan to the named executive officers (see discussion below
under "Compensation Committee Report--1996 Long-Term Incentive Plan"):
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- -------------------------------------------------------------------------------------------- ANNUAL RATES OF
% OF TOTAL STOCK PRICE
OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OR OPTION TERM(3)
GRANTED (1) EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME (# OF SHARES) FISCAL YEAR ($/SH) (2) DATE(1) 5% ($) 10% ($)
- ----------------------------------- ------------- ------------ ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bjorn E. Olsson 5,250 4.3 12.17 2/14/02 26,225 61,750
through
2/14/06
Charles M. Foudree 5,250 4.3 12.17 2/14/02 26,225 61,750
through
2/14/06
Robert E. Heggestad 5,250 4.3 12.17 2/14/02 26,225 61,750
through
2/14/06
Lloyd T. Kaiser 5,250 4.3 12.17 2/14/02 26,225 61,750
through
2/14/06
Raymond A. Rosewall 5,250 4.3 12.17 2/14/02 26,225 61,750
through
2/14/06
</TABLE>
(1) Each of Messrs. Olsson, Foudree, Heggestad, Kaiser and Rosewall received
5,250 shares pursuant to a non-qualified stock option grant from the
Company's 1996 Long-Term Incentive Plan (LTIP) in 1997. For a description of
the terms of the options see "Compensation Committee Report-Incentive Stock
Option Plan" below.
(2) The exercise price for non-qualified LTIP equals the fair market value of
the underlying shares on the date of grant. The grants are 20% vested at the
date of grant and an additional 20% vests on each anniversary of the date of
grant until fully vested. Non-qualified LTIP options expire on the later of
five years from the date of grant or the date the options first become
exercisable. The following tables illustrate the effect of vesting,
expiration dates and assumed appreciation calculated at specified rates for
5,250 share options granted on February 14, 1997, with vesting as shown:
<TABLE>
<CAPTION>
IMPLIED PER SHARE POTENTIAL
FUTURE REALIZABLE VALUE @
STOCK PRICE @ APPRECIATION @
GRANT DATE DATE SHARES TERM OF OPTION -------------------- ---------------------- --------------------
PRICE VESTED EXPIRES VESTED IN YEARS 5% 10% 5% 10% 5% 10%
- --------- --------- ----------- ----------- --------------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$12.17 2/14/97 2/14/02 1,050 5 $ 15.53 $ 19.60 $ 3.36 $ 7.43 $ 3,531 $ 7,802
2/14/98 2/14/03 1,050 6 $ 16.31 $ 21.56 $ 4.14 $ 9.39 $ 4,346 $ 9,859
2/14/99 2/14/04 1,050 7 $ 17.12 $ 23.72 $ 4.95 $ 11.55 $ 5,202 $ 12,123
2/14/00 2/14/05 1,050 8 $ 17.98 $ 26.09 $ 5.81 $ 13.92 $ 6,101 $ 14,613
2/14/01 2/14/06 1,050 9 $ 18.88 $ 28.70 $ 6.71 $ 16.53 $ 7,045 $ 17,353
--------- ---------
$ 26,225 $ 61,750
</TABLE>
8
<PAGE>
(3) These amounts represent only the fully vested amounts over the full vesting
period (see footnote 2 above) and certain assumed rates of appreciation
only. The assumed rates may have no correlation to current or future actual
market conditions. Option Exercises and Holdings. The following table
provides, for the named executive officers, information concerning the
exercise of stock options during the last fiscal year and unexercised
options held as of the end of the last fiscal year for both the Company's
1988 Director Option Plan ("Director"), 1990 Incentive Stock Option Plan
("ISOP") and 1996 Long-Term Incentive Plan ("LTIP"):
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE (IN $) OF
NUMBER OF UNEXERCISED
NUMBER OF SHARES UNEXERCISED IN-THE-MONEY
TYPES OF ACQUIRED ON VALUE (IN $) OPTIONS/SHARES AT OPTIONS AT
NAME OPTION EXERCISE REALIZED(1) 12/31/96 12/31/96(2)(3)
- ------------------------------ ---------- ------------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Bjorn E. Olsson Director 3,000 2,000 -- --
ISOP 1,500 3,875 7,500 60,383
LTIP -- -- 5,250 33,233
Charles M. Foudree Director 3,000 2,000 -- --
ISOP -- -- 7,500 67,883
LTIP -- -- 5,250 33,233
Lloyd T. Kaiser ISOP 8,250 65,312 5,250 47,250
LTIP -- -- 5,250 33,233
Robert E. Heggestad ISOP -- -- 5,250 47,250
LTIP -- -- 5,250 33,233
Raymond A. Rosewall ISOP -- -- 30,000 285,000
LTIP -- -- 5,250 33,233
</TABLE>
(1) Market price at exercise less exercise price times the number of options
exercised.
(2) There are no SARs.
(3) Market price at 12/31/97 ($18.50) less exercise price.
LONG-TERM INCENTIVE PLANS.
Under the 1996 Long-Term Incentive Plan (the "1996 Plan"), the Compensation
Committee may establish vesting criteria for the grant of options or other
permitted awards under the 1996 Plan. The Compensation Committee currently
anticipates that the primary awards vehicle under the plan will consist of
non-qualified options, with vesting over a four-year period from the date of
grant so that 20% of the grant vests at grant and the remaining amount will vest
on the anniversary of the grant for the next four years. There are no
performance-based criteria relating to the award or vesting under the
contemplated plan in connection with the non-qualified options. The exercise
prices of such non-qualified options equal the Closing price for the Company's
stock on the date of grant. Under the 1996 Plan, the Compensation Committee
currently anticipates that grants to executive officers will be in the amount of
5,250 option shares per year so that 1,050 option shares will be vested as of
the date of grant and an additional 1,050 option shares will vest over each of
the following four years from the date of grant. In addition, the Compensation
Committee anticipates granting non-qualified options to certain key employees of
the Company, which grants will be in the amount of 750 option shares, with 150
option shares vested upon grant and 150 option shares vesting in each of the
following four years following the date of grant. Finally, grants of LTIP option
shares are anticipated to five Assistant Vice Presidents at 1,500 non-qualified
option shares to each with similar vesting percentage provisions to those
options granted to officers.
9
<PAGE>
Under the 1996 Plan, on the last business day of May, commencing May 31,
1996 (or if later, on the date on which the person is first elected or begins to
serve as a non-employee director, other than by reason of termination of
employment) and, thereafter on the date of each annual meeting of shareholders
of the Company, each person who is a non-employee director after such meeting of
stockholders shall be granted a non-qualified option for 1,500 option shares of
the Common Stock of the Company. The option amount shall be prorated if such
non-employee director is first elected or begins to serve as a non-employee
director on a date other than the date of an annual meeting of stockholders. The
exercise prices of such non-qualified options equal the Closing price for the
Company's stock on the date of grant. Options granted to non-employee directors
pursuant to the 1996 Plan will immediately vest and will have a term of seven
years for exercise.
On May 13, 1997, each of the non-employee directors received a grant of
1,500 non-qualified options, with an exercise price of $13.00 per share. On
February 14, 1997, non-qualified options for 68,250 option shares (5,250 to each
officer) were issued to 13 key employees under the 1996 Plan. Additionally, on
February 14, 1997, non-qualified options for 40,500 option shares (750 to each
key employee) were granted to 54 key employees of the Company. The exercise
price of the officer and key employee options was $12.17 per share, and the
other terms of such options were as set forth above.
PENSION PLANS.
The Company has no defined benefit pension plans. The Company has a
non-qualified, unfunded deferred compensation plan and trust for certain
officers and key employees, providing for payments upon retirement, death or
disability. Under the plan, the employees receive retirement payments equal to a
portion of the average of the three highest consecutive years' compensation.
Upon retirement, these payments are to be made for the remainder of the
employee's life with a minimum payment of ten years' benefits to either the
employee or his beneficiary. The plan provides for reduced benefits upon early
retirement, disability or termination of employment. The amount of the deferred
compensation expense for all covered employees for 1997 was approximately
$573,000 and amounts allocated to the named executive officers are included in
the "All Other Compensation" column of the Summary Compensation Table.
Participation in the Deferred Compensation Plan and Trust has been frozen and no
additional participants are permitted.
On October 7, 1997, the Compensation Committee of the Board of Directors
approved the establishment of one or more defined contribution plans for
executive management of the Company who were not covered under the prior
deferred compensation plan of the Company. The defined contribution plans have a
variable contribution level up to 12% of base salary for new members of senior
management. Contribution levels above 12% require Compensation Committee
approval. Contributions are made in cash and stock to a rabbi trust with vesting
over a rolling period based on 20% at the time of contribution and 20% on each
of the anniversary dates of the contribution until fully vested. Finally, the
defined contribution plan includes life insurance coverage at eight times
current salary up to a cap of $1,400,000. Currently, the only member of senior
management participating in a defined contribution plan is William L. Bush.
The Company also has an Employee Stock Ownership Plan and Trust ("ESOP").
Employees, including officers of the Company who satisfy the ESOP's eligibility
criteria with respect to hours and years of service are eligible to participate.
Allocations are based on the ratio that an eligible individual's salary (subject
to current regulatory caps) represents to the total salaries of all eligible
persons. Standards for vesting are based upon years of service with the Company
in accordance with current regulatory guidelines. Under the ESOP, the Company is
not required to make any contributions, other than matching employee 401K
contributions up to 4% of eligible compensation. However, the Company's current
intention is to contribute approximately 15% of the Company's pre-tax earnings
to the ESOP. The 15% contribution would include the funds required to fulfill a
portion of the Company's obligation to match a portion of the employee's 401K
contribution. The contribution to the ESOP for
10
<PAGE>
the years ended December 31, 1995, 1996 and 1997 totaled $2,785,000, $3,815,000
and $3,874,000, respectively, which amounts were paid in cash. The amount of
compensation included in the "All Other Compensation" column of the Summary
Compensation Table includes the amounts of respective annual contributions
allocated for the named executive officers as of March 31 of the preceding year.
CANCELLATION AND REGRANT OF OPTIONS.
During 1997, the Company did not cancel, regrant or reprice any outstanding
stock options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Mr. Rodney L. Gray (Chairman), Mr. Douglass Wm. List, Mr. Bruce M. Flohr and
Mr. Donald V. Rentz (until his retirement) served on the Compensation Committee
of the Company during the past fiscal year. None of the members of the
Compensation Committee are officers or employees of the Company. The
Compensation Committee of the Company establishes executive salary and bonus
levels for the executive officers of the Company.
The Company does not believe that any interlocks exist between members of
the Compensation Committee and any third party represented on the Board of
Directors or providing significant services to the Company.
EMPLOYMENT CONTRACTS.
Messrs. Olsson, Foudree, Heggestad, Kaiser and Rosewall had employment
contracts with the Company as of December 31, 1997 which provides for the
payment to such officers of annual base salaries of $325,000, $182,481,
$135,570, $156,933 and $140,933, respectively. The employment contracts have a
rolling 12-month term, except that Mr. Olsson's contract has a rolling 24-month
term. For the year ended December 31, 1997, these officers' contracts included
an annual cash bonus. Cash bonuses paid to the named executive officers for
calendar year 1997 under the cash bonus plan were $192,309, $110,498, $82,505,
$98,842 and $85,186, respectively. (See description below under "Compensation
Committee Report on Bonuses".)
During 1997, non-qualified LTIP options for 5,250 shares were granted to
each of thirteen executive officers effective February 14, 1997 at an exercise
price of $12.17 per share. (See discussion in the Compensation Committee Report
under "Bonuses" below.)
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
RESPONSIBILITIES AND COMPOSITION OF THE COMMITTEE.
The Compensation Committee is responsible for (i) establishing compensation
programs for executive officers of the Company and its subsidiaries designed to
attract, motivate and retain key executives responsible for the success of
Company as a whole; (ii) administering and maintaining such programs in a manner
that will benefit the long-term interests of the Company and its shareholders;
and (iii) determining the compensation of the Company's executive officers and
certain key employees. The Committee serves pursuant to a charter adopted by the
Board of Directors. The Committee is composed entirely of directors who have not
served as officers or employees of the Company within the past ten years.
11
<PAGE>
COMPENSATION PHILOSOPHY AND OBJECTIVES.
The Committee believes that the Company's executive officer compensation
should be determined according to a competitive framework and based on overall
financial results, individual contributions and teamwork that together help
build value for the Company's shareholders. Within this overall philosophy the
Committee addresses a number of specific objectives, including (i) a total
compensation program that takes into account compensation practices and
financial performance as compared to similar companies, (ii) annual bonus
programs that take into account the Company's overall performance relative to
corporate objectives established in advance by the Committee which help create
value for the Company's shareholders, and (iii) alignment of the financial
interests of executive officers to those of shareholders by providing equity
based compensation through option grants and through mandatory minimum
shareholding requirements.
The Committee believes that the top management of the Company must operate
as a team and that the cause and effect relationship between the efforts of any
one individual and corporate performance is difficult to discern. Hence, in
general, the compensation of the executive team tends to track as a group with
the performance of the Company. The Committee does, however, make exceptional
decisions where exceptional circumstances exist. Furthermore, the Committee does
establish individual performance objectives and measures individual performance
against these objectives in an effort to ensure that all members of the top
management team are fulfilling the expectations set for them.
COMPENSATION COMPONENTS AND PROCESS.
There are three major components of the Company's executive officer
compensation: (i) base salary; (ii) annual bonuses and (iii) equity incentives
through ISOP and LTIP option grants and minimum shareholding requirements.
During 1997, the Committee utilized option grants under the Company's 1996
Long-Term Incentive Plan ("LTIP"). Upon approval by the shareholders, the
Committee replaced the ISOP plan and the 1988 Director Option Plan with the
Company's new 1996 Long Term Incentive Plan (the "1996 Plan"). The Committee
began use of this plan during 1996. The 1996 Plan operates to cover both the
executive officer group, as well as a fairly extensive key employee group.
Non-employee directors also receive an automatic annual option grant of 1,500
shares each year. (See discussion above under Executive Compensation--Long-Term
Incentive Plan).
The process utilized by the Committee in determining executive officer
compensation levels for all of these components is based on the Committee's
objective judgment and takes into account both qualitative and quantitative
factors. No predetermined weights are assigned to such factors with respect to
any compensation component. Recommendations for base salaries and awards for
each individual executive officer are established after evaluation of individual
performance factors (equally weighted) including the following: knowledge of job
responsibilities, relationship with others, working capacity, initiative,
character, leadership, adaptability, teamwork, administrative ability and
individual goal attainment. The evaluation by the Committee includes the degree
to which each individual has met individual performance objectives. These
performance objectives are believed to relate directly to the Company's
performance and are therefore related to shareholder value. Among the factors
considered by the Committee are the recommendation of the Chief Executive
Officer with respect to compensation of the Company's other key executive
officers. However, the Committee makes the final compensation decisions
concerning such officers.
Comparative information is utilized by the Company relating to its peer
group (as set forth below under the section herein dealing with the "Performance
Graph"). In addition, the Committee reviews at least two other surveys of
industry trade groups with similarities to the Company's operations. The trade
group survey data sources are standard general indices constructed and provided
by outside vendors. The surveys consist of many more data points than the
limited number of companies in the peer performance stock group. In making
compensation decisions, the Committee also from time to
12
<PAGE>
time receives assessments and advice regarding the compensation practices of the
Company and others from independent compensation consultants. During 1997, the
Compensation Committee analyzed the base salary and the total compensation (base
salary plus annual incentives) of the Company's executives as compared to median
survey data and to comparative companies in the rail supply industry, the
electronic equipment manufacturing industry and the greater Kansas City area.
In order to meet the objectives set out above, the Committee has designed
the executive compensation program to be consistent with the Company's overall
pay philosophy. Base salaries, the fixed regular periodic component of pay, are
conservatively established at levels comparable to base salaries for similar
positions at companies with similar levels of sales and overall financial
performance. Annual cash bonus and equity awards, which are directly linked to
the short-term and long-term financial performance of the Company as a whole,
are designed to provide better than competitive pay only for better than
competitive financial performance.
BASE SALARY.
On August 20, 1997, the Committee conducted a review of the performance and
compensation of the Company's executive officer group, including Bjorn E. Olsson
and the other named executive officers. This review included an analysis of key
accomplishments of each officer, an evaluation of achievement of individual
goals and objectives, and an assessment of their contributions to the Company's
performance. Based on this review and its assessment of competitive compensation
practices, the Committee recommended a general increase in base salaries of 4%
for certain executive officers and key employees (including some of the named
executive officers) effective September 1, 1997.
BONUSES.
The Company's cash bonus or Incentive Bonus Plan for its Executive Officer
Group includes not only the traditional ROCE (Return on Capital Employed)
measurement standard, but also earnings growth as a critical indicator of
financial health of the Company. The objective of this Incentive Bonus Plan is
to provide an additional incentive to each officer of the Company so as to
advance the interests of the Company and its stockholders and create a more
direct tie between annual performance and increased shareholder values. The
Committee believes that the cash bonus plan encourages the creation of
shareholder wealth by creating incentives both to maximize operating profit for
the Company and minimize capital employed. Additionally, the cash bonus plan
rewards efficiencies in production and innovation in quality-based productivity
techniques. The executive cash bonus plan was based on 70% weighting for ROCE
and 30% weighting for earnings growth for 1997. For 1998, the executive cash
bonus plan will be based on 50% weighting for ROCE and 50% weighting for
earnings growth. The formula for ROCE is the sum of pretax earnings plus
interest expense divided by the sum of average total assets minus non-interest
bearing liabilities. The new proposal establishes target base bonus levels as a
percentage of current base salary. Percentages are 35%, with the exception of
Mr. Olsson, whose target base bonus is established at 45% of his base salary.
For 1997, the base bonus levels for Messrs. Olsson, Foudree, Heggestad, Kaiser
and Rosewall were $131,332, $61,412, $38,369, $51,817 and $40,576, respectively.
For 1998, the base bonus levels of Messrs. Olsson, Foudree, Heggestad, Kaiser
and Rosewall will be $146,250, $63,868, $40,671, $54,927; and $42,199,
respectively. The actual bonus is calculated based on actual performance numbers
for ROCE as compared to budget and earnings growth based on primary earnings per
share as compared to an Earnings Growth Rate Target established by the Board of
Directors at 10% for fiscal 1997 and 1998. The ROCE portion of the formula is
adjusted as follows based on the ratio of actual versus budget ROCE: under 75%
of budgeted ROCE--no bonus award; from 75% to 99% of budgeted ROCE--pro-rated
bonus award; at 100% of budgeted ROCE--100% of potential ROCE bonus award and
for each 1% above budgeted ROCE a $7,000 incremental increase for each officer.
13
<PAGE>
For 1997, budgeted ROCE was 18.7% and actual ROCE was 23.8%. Targeted
earnings per share growth was 10% and actual primary earnings per share growth
was 16.5%. Amounts payable under the cash bonus plan for 1997 to all
participants totaled $1,123,900 and the named executive officers, Messrs.
Olsson, Foudree, Heggestad, Kaiser and Rosewall received the following amounts:
$192,309, $110,498, $82,505, $98,842 and $85,186, respectively.
INCENTIVE STOCK OPTION PLAN.
The Committee historically considered outstanding option holdings in
determining whether to grant additional options under the Company's 1990
Incentive Stock Option Plan to any individual. Each of the named executive
officers received no grant of options pursuant to the ISOP during 1996 except
for 5,250 option shares granted in lieu of their annual stock bonus. The
exercise price for option shares granted under the ISOP is equal to the closing
price for the Company's stock on the date of grant. Options are exercisable
immediately upon grant unless delays are necessary to avoid the statutory
limitations on grants established under the Internal Revenue Code. The options
are exercisable anytime during a five-year period from date of grant or the date
on which the option was first exercisable. Upon approval of the 1996 Long-Term
Incentive Plan by the Shareholders of the Company on May 14, 1996, the 1990
Incentive Stock Option Plan was replaced. No additional grants are permitted
under the 1990 ISOP, although outstanding options remain exercisable in
accordance with their terms.
LONG-TERM INCENTIVE PLANS.
On May 14, 1996, the shareholders of the Company approved the Company's 1996
Long-Term Incentive Plan ("1996 Plan"), which plan became effective May 31,
1996. The purposes of the 1996 Plan are (i) to align the interests of the
Company's shareholders and recipients of awards under the 1996 Plan by
increasing the proprietary interests of such recipients in the Company's growth
and success, and (ii) to advance the interests of the Company by attracting and
retaining officers, other employees and non-employee directors. Upon adoption of
the 1996 Plan, it replaced both the Company's 1988 Non-Qualified Director Option
Plan and the Company's 1990 Qualified Incentive Stock Option Plan. Outstanding
options under both the 1988 Non-Qualified Director Option Plan and the 1990
Incentive Stock Option Plan remain valid although no new grants were permitted
under either plan after May 31, 1996.
Under the 1996 Plan, the Compensation Committee may establish vesting
criteria for the grant of options or other permitted awards under the 1996 Plan.
The Compensation Committee currently anticipates that the primary awards vehicle
under the plan will consist of non-qualified options, with vesting over a
four-year period from the date of grant so that 20% of the grant amount will
vest each year. The exercise prices of such non-qualified options are equal to
the Closing price for the Company's stock on the date of grant. Under the 1996
Plan, the Compensation Committee currently anticipates that grants to executive
officers will be in the amount of 5,250 option shares per year so that 1,050
option shares will be vested as of the date of grant and an additional 1,050
option shares will vest over each of the following four years from the date of
grant. In addition, the Compensation Committee anticipates granting
non-qualified options to certain key employees of the Company, which grants will
be in the amount of 750 option shares, with 150 option shares vested upon grant
and 150 option shares vesting in each of the following four years following the
date of grant. Finally, the Committee anticipates grants of 1,500 non-qualified
option shares each to certain Assistant Vice Presidents with similar percentage
vesting schedules to the officer grants.
Under the 1996 Plan, on the last business day of May, commencing May 31,
1996 (or if later, on the date on which the person is first elected or begins to
serve as a non-employee director, other than by reason of termination of
employment) and, thereafter on the date of each annual meeting of shareholders
of the Company, each person who is a non-employee director after such meeting of
stockholders shall be granted a non-qualified option for 1,500 option shares of
the Common Stock of the
14
<PAGE>
Company. The option amount shall be prorated if such non-employee director is
first elected or begins to serve as a non-employee director on a date other than
the date of an annual meeting of stockholders. Options granted to non-employee
directors pursuant to the 1996 Plan will immediately vest and will have a term
of seven years for exercise.
During 1996, no awards of non-qualified option grants were made to the
executive officers of the Company under the 1996 Plan and, therefore, none of
the named executive officers received grants of non-qualified options or other
awards under the 1996 plan during 1996. On February 14, 1997, each executive
officer (13 in all) received grants of non-qualified options under the 1996 Plan
for 5,250 option shares, vesting over 4 years at an exercise price of $12.17 per
option share. On May 13, 1997, each of the non-employee directors received a
grant of 1,500 non-qualified options, with an exercise price of $13.00 per
share. In February 1997, non-qualified options for 40,500 option shares (750 to
each key employee) were issued to 54 key employees under the 1996 Plan. The
option exercise price of the non-qualified options granted to key employees was
$12.17 per option share with vesting over 4 years.
MINIMUM STOCKHOLDING REQUIREMENT.
During 1996, the Compensation Committee, with the Board of Director's
approval, established a minimum stockholding requirement for Company stock
(exclusive of ESOP and unexercised option shares) in amounts equal to two times
base salary for the CEO, one-time base salary for the Executive Vice Presidents
and one-half of base salary for all other members of the Executive Officer
Group. For any person subject to the minimum stockholding requirements who holds
less than the minimum stockholding requirement (measured at each year-end), the
delinquency will result in up to one-third of that person's annual cash bonus
being utilized to purchase shares of the Company's stock in the name of such
individual. New officers will be given five years in which to satisfy their
minimum stockholding requirement before application of the bonus withholding
procedure. At December 31, 1997, each member of the Company's Executive Group,
including each of the Named Executive Officers, satisfied their respective
minimum stockholding requirements.
Rodney L. Gray (Chair) Douglass Wm. List
Bruce M. Flohr
TOTAL RETURN TO SHAREHOLDERS
PERFORMANCE GRAPH.
The Company has included in this proxy statement, a graph of five-year
shareholder returns on an indexed basis comparing the Company's common stock
performance to other broad market indices or an index of selected peer group
companies. The Board of Directors has constructed a peer group consisting of the
Company and nine other manufacturing and service companies in the railroad
supply industry. Revenues (on a 12-month trailing basis) for this group of
companies range from $213.5 Million to $2,617.6 Million, as compared to $213.5
Million for the Company. Total Assets for these companies range from $124.4
Million to $2,224.2 Million, as compared to $135.7 Million for the Company. The
peer group consists of the following companies: Harsco Corporation; Trinity
Industries, Inc.; The Timken Companies; Morrison Knudsen Corporation; Varlen
Corporation; L.B. Foster Company; Ansaldo Signal NV (acquired on December 11,
1996, by merger); ABC Rail Products, Inc.; Wabash National Corporation and the
Company. Last year's peer group also included Brenco, Incorporated, which was
acquired by Varlen Corporation and is, therefore, not included as a separate
company. The performance graph shows comparisons between the Company, the peer
group and the S&P Composite 500 Stock Index. Data points for the performance
graph comparisons are included in the legend below. All indices have been
weighted for market capitalization. The following performance graph also sets
forth the percentage of cumulative total return for the last fiscal year and
cumulative return since January 1, 1993.
15
<PAGE>
Comparison of Five-Year Cumulative Total Return* Among the Company, Peer
Performance Group and S&P Composite 500 Index.
Comparison of 5 Year Cumulative Total Return
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HARMON INDUSTRIES PEER GROUP S&P 500
<S> <C> <C> <C>
Dec. 1992 $100.00 $100.00 $100.00
Dec. 1993 $191.70 $136.20 $109.80
Dec. 1994 $163.80 $134.70 $111.30
Dec. 1995 $133.60 $144.60 $153.10
Dec. 1996 $159.40 $169.10 $188.80
Dec. 1997 $239.10 $229.60 $252.00
</TABLE>
The reference points on the foregoing graph are as follows:
<TABLE>
<CAPTION>
DEC. 1992 DEC. 1993 DEC. 1994 DEC. 1995 DEC. 1996 DEC. 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Harmon Industries.................... 100.00 191.70 163.80 133.60 159.40 239.10
Peer Group........................... 100.00 136.20 134.70 144.60 169.10 229.60
S&P 500.............................. 100.00 109.80 111.30 153.10 188.80 252.00
</TABLE>
* Assumes that the value of the Company's common stock, Performance Peer Group
and S&P 500 Index were each $100 on December 31, 1992 and that all dividends
were reinvested.
DIRECTOR COMPENSATION
From May 14, 1996 to May 12, 1998, the Board of Directors' compensation
consists of annual fees of $8,000 plus travel expenses to and from the meetings
for each director. Effective May 14, 1996, only non-employee directors were
entitled to receive annual directors fees. In addition, the directors who are
not employees of the Company receive $500 for each Board or separate committee
meeting in which the director participates by attending or through telephonic
conference. In addition, each chairperson of the respective committees of the
Board of Directors receives an annual payment of $500 for acting as chairperson
of a committee.
Effective May 12, 1998, each non-employee director will receive an annual
cash director's fee of $6,000 and 360 shares of Common Stock of the Company per
year. In addition, non-employee directors receive $1,500 per Board meeting, $750
per committee meeting and $500 for special telephonic board meetings on specific
subjects. Board and committee meeting fees are payable for attendance in person
16
<PAGE>
or for telephonic participation. Each chair of a committee receives $250 per
quarter. Finally, each non-employee director may receive $500 for a three-hour
block of such director's time (capped at $1,500 total per day) for special or ad
hoc projects assigned to such non-employee director by the Board.
The package also grants each director an annual non-qualified option to
purchase 1,500 shares of the Company's Common Stock at a price equal to the
closing market price on the date of grant. The non-qualified options are granted
under and are governed by the Company's 1996 Long-Term Incentive Plan. These
options are exercisable at any time during a seven year period following the
date of grant. On May 31, 1995, options for 3,000 shares were granted to each of
the directors pursuant to the 1988 Director Option Plan, which options expired
May 31, 1997 and had an exercise price of $11.83 per share. During 1997, Messrs.
Foudree, Gray, Kohn, Olsson, Rentz and List exercised those outstanding director
options for 3,000, 3,000, 1,500, 3,000, 3,000 and 3,000 shares, respectively. On
May 31, 1996, options for 1,500 shares were granted to each of the Non-Employee
Directors pursuant to the 1996 Long-Term Incentive Plan. Such options have an
exercise price of $11.33 per share, are fully vested and are exercisable over a
term of seven years. On May 13, 1997, options for 1,500 shares were granted to
each of the non-employee directors pursuant to the 1996 Long-Term Incentive
Plan. These options have an exercise price of $13.00 per share, are fully vested
and have a term of seven years. As of March 16, 1998, none of such options
granted in 1996 have been exercised other than the exercise in March 1998 by
Bruce M. Flohr of both the 1996 and 1997 grants for 1,500 shares each. See
discussion above under "Executive Compensation--Long-Term Incentive Plan" for a
description of the non-qualified LTIP options granted annually to the
Non-Employee Directors.
On December 8, 1994, the Board of Directors approved a compensation package
for Mr. Robert E. Harmon, in his capacity as Chairman of the Board effective
January 1, 1995. The Chairman of the Board is treated as a Non-Employee Director
for annual and director meeting fees. The defined duties of the Chairman include
the following: representing the Company at national trade association meetings;
assisting in lobbying efforts; assisting in overseas representation of the
Company; assisting the CEO in acquisitions; assisting in the development of
relationships with securities analysts and investors; assisting with sales and
promotional calls; providing advisory services to the CEO; and conducting all
Board meetings. The Chairman's annual fee, subject to review each year, was
approximately $79,000 for fiscal 1997 and will be approximately $79,000 for
fiscal 1998.
APPROVAL OF AN AMENDMENT TO THE ARTICLES OF INCORPORATION
REGARDING AN INCREASE IN THE NUMBER OF AUTHORIZED CAPITAL SHARES
On December 11, 1997, the Board of Directors of the Company recommended that
shareholder approval be sought for a proposed amendment to the Articles of
Incorporation of the Company to increase the number of authorized shares of
capital stock of the Company from 20,000,000 shares to 50,000,000 shares. The
Company had as of March 16, 1998, 10,521,189 shares of its common stock
outstanding and had 308,100 shares reserved to cover obligations to issue shares
in connection with outstanding options. The Company is proposing to increase its
authorized capital to provide additional shares for future acquisitions,
employee benefit plan needs and possible future stock splits or stock dividends.
In recent years, the Company has frequently used stock as part or all of the
consideration in its acquisitions. Although the Company has no major pending
acquisitions, Management and the Board of Directors wish to have sufficient
share capital authorized to be able to consider one or more significant
acquisitions using stock as consideration. The Board of Directors has not
previously adopted a rights plan and is not currently considering such a plan.
On February 27, 1998, the Company increased its number of outstanding shares of
Common Stock through a 3 for 2 stock split paid as a stock dividend. MANAGEMENT
AND THE BOARD OF DIRECTORS RECOMMEND VOTING TO APPROVE THE PROPOSED AMENDMENT.
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The affirmative vote of the holders of a majority of the Company's
outstanding common stock present and entitled to vote at the meeting is required
to approve the proposed amendment of the Articles of Incorporation to increase
the number of authorized capital shares.
APPROVAL OF AN AMENDMENT TO THE COMPANY'S 1996 LONG-TERM
INCENTIVE PLAN REGARDING AN INCREASE IN THE NUMBER OF SHARES
AVAILABLE UNDER THE PLAN AND AN EXTENSION OF THE TERM OF THE PLAN
GENERAL
On May 14, 1996, the Shareholders approved the adoption of the Harmon
Industries, Inc. 1996 Long-Term Incentive Plan (the "1996 Plan"). The purposes
of the 1996 Plan are (i) to align the interests of the Company's Shareholders
with those of the recipients of awards under the 1996 Plan by increasing the
proprietary interests of such recipients in the Company's growth and success and
(ii) to advance the interests of the Company by attracting and retaining
officers, employees and non-employee directors. The Board of Directors has
approved an Amendment to the 1996 Plan to increase the number of shares
available under the Plan and to extend the term of the Plan. The 1996 Plan, as
originally adopted, provided that the number of shares of common stock available
for grants of awards to officers, other employees and non-employee directors in
any calendar year will be 1.15% of the outstanding common stock as of January 1
of such year, beginning January 1, 1996, plus the number of shares which shall
become available for grants of awards under the 1996 Plan in subsequent years
but which shall not have become subject to such an award. After the January 1,
1998 increase (and as adjusted for the February 1998 3-for-2 stock split), the
Company had available for grant a total of 179,883 shares under the 1996 Plan.
As a result of recruitment plus plan participation for non-employee Board
members, executive officers and key employees, the anticipated need for 1998 is
for approximately 200,000 shares. Consequently, the Compensation Committee of
the Board of Directors has approved a proposed amendment to increase the
applicable percentage from 1.15% of outstanding stock on January 1 to 1.25% of
outstanding common stock on January 1, commencing January 1, 1999. The shortfall
for the remainder of 1998, if any, will be covered by the purchase of additional
shares on the open market, which is permitted under the terms of the 1996 Plan
up to a maximum of 120,000 shares.
Additionally, as originally adopted, the 1996 Plan became effective on May
31, 1996 and expires on May 31, 2001. The Compensation Committee of the Board of
Directors has proposed an amendment for Shareholder approval to extend the life
of the Plan from the current expiration date of May 31, 2001 to a new expiration
date of May 31, 2003.
Other than the amendments described above, no other changes will be made in
the 1996 Plan.
STOCKHOLDER VOTE REQUIRED AND BOARD OF DIRECTORS RECOMMENDATIONS
Unless otherwise instructed, the proxy holders will vote the proxies
received by them for approval of the amendments to the 1996 Plan as outlined
above. Approval of the amendments of the 1996 Plan requires the affirmative vote
of the majority of the shares of common stock present or represented by proxy at
the annual meeting. Abstentions and broker non-votes will not be counted as
votes cast. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF AN
AMENDMENT OF THE COMPANY'S 1996 LONG-TERM INCENTIVE PLAN TO INCREASE THE NUMBER
OF SHARES AVAILABLE AND TO EXTEND THE TERM OF THE PLAN AS DESCRIBED ABOVE.
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APPROVAL OF SELECTION OF AUDITORS
Management recommends voting to approve the selection of KPMG Peat Marwick
LLP, as Auditors for the Company for the 1998 fiscal year. This firm has served
continuously as Auditors for the Company since 1969.
A representative of KPMG Peat Marwick LLP will be present at the Annual
Meeting of Shareholders and will be available to make a statement, if he or she
desires to do so, and to answer appropriate questions asked by the shareholders.
SHAREHOLDER PROPOSALS-1999 MEETING
In the event any shareholder intends to present a proposal at the Annual
Meeting of Shareholders to be held in 1999, such proposal must be received by
the Company, in writing, on or before November 13, 1998, to be considered for
inclusion in the Company's next Proxy Statement. Shareholder proposals for
suggested nominees for director should be submitted to the Company's Director
Nomination and Compensation Committee on or before November 13, 1998.
OTHER MATTERS
Management is not aware of any other matters which may come before the
meeting. However, if any other matters properly come before the meeting, it is
the intention of the persons named in the accompanying form of proxy to vote the
proxy in accordance with their best judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
Robert E. Harmon
Chairman
April 1, 1998
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