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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, 1998
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
1600 NE CORONADO DRIVE, BLUE SPRINGS, MISSOURI 64014
Registrant's telephone number, including area code
(816) 229-3345
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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None
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Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of March 15, 1999, 10,741,964 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 $209,039,000.
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, 1998.
Item 7: Management's Discussion and Analysis of Pages 20 through 27 of the Annual Report
Financial Condition and Results of to Shareholders for the year ended
Operations. December 31, 1998.
Item 8: Financial Statements and Supplementary Pages 28 through 47 of the Annual Report
Data. to Shareholders for the year ended
December 31, 1998.
PART III
Item 10: Directors and Executive Officers of the Pages 3 through 6 of the Company's Proxy
Registrant. Statement dated April 1, 1999.
Item 11: Executive Compensation and Other Pages 7 through 16 of the Company's
Information. Proxy Statement dated April 1, 1999.
Item 12: Security Ownership of Certain Beneficial Pages 2 and 3 of the Company's Proxy
Owners and Management. Statement dated April 1, 1999.
Item 13: Certain Relationships and Related Page 6 (last paragraph of Director
Transactions. Nominees) and page 6 ("Certain
Transactions") of the Company's Proxy
Statement dated April 1, 1999.
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HARMON INDUSTRIES, INC.
ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
PART I
ITEM 1. BUSINESS
Harmon Industries, Inc. ("Harmon" or "the Company") is a leading supplier of
signal, inspection, train control and communications products, systems and
services to freight and transit railroads throughout the world. The Company
sells its products to Class I and short line freight railroads and to rail
transit systems. 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, train control and
communications 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
NORTH AMERICAN FREIGHT RAILROADS
The North American freight railroad industry includes U.S. and Canadian
Class I railroads, Mexican railroads and regional and short line railroads.
The industry is dominated by the nine railroads the Surface Transportation
Board 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 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 25% decrease in Class I employment levels from 1988 to 1997
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 22% reduction from 1988 to 1997 in the number
of Class I railroad freight cars in service required the 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
77% from 1988 to 1997. The Class I railroads have become more profitable despite
a 32% reduction (in constant 1988 dollars) from 1988 to 1997 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, 1998 EDITION, a
recognized industry source for information on Class I railroads.
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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 portion. The amount
of intermodal traffic has increased 50% from 1988 to 1997. 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 portion of the freight
transportation market. 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 1988 to 1997, the Class I railroads reduced their track miles by
19%, to approximately 173,000 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 1988 to 1997, capital expenditures by Class I
railroads per mile of track owned has increased from approximately $17,200 to
$36,300 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 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 541, with 34 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 are many of 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 the 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. In 1997, ISTEA was extended for six months through March 1998
pending agreement on a new, long-term transportation bill. This new bill, the
Transportation Equity Act for the 21(st) Century (TEA-21), was signed into law
in June 1998. TEA-21 is the largest infrastructure funding bill ever enacted in
the United States. It provides for up to $217 billion in expenditures over its
six year life. TEA-21 provides for an increase of approximately 55%, or $50
million, in the amount of funds dedicated annually to installing grade crossing
warning devices.
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.
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The Company has identified Canada and Mexico as areas for new or increased
business. In June 1997, Harmon acquired the remaining interest in Vale-Harmon
Enterprises, Ltd. ("Vale Harmon"), located near Montreal, Quebec, Canada, which
it previously did not own. Vale Harmon serves the freight and transit markets in
Canada. In 1998, Harmon established a wholly owned subsidiary in Mexico,
Industrias Harmon de Mexico, S.A. de C.V., to expand the relationship it has
with two customers arising from the recent concessions granted to operate
portions of a state owned rail in Mexico.
RAIL TRANSIT RAILROADS
The rail transit industry includes Amtrak and numerous existing and proposed
commuter and urban transit rail systems. Federal funding generally enhances the
development of such systems. TEA-21 includes $42 billion for transit projects of
which $36 billion is guaranteed. At the guaranteed level, this represents a 50%
increase over appropriated transit funding during the six years of ISTEA. If
fully funded, the increase is nearly 75%.
Harmon's participation in the expansion of existing or construction of new
rail transit systems generally requires a long selling cycle and frequently
results 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 the installation of equipment that
guards against human error. An example of the Company's 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 Bi-State Metro Link project in St. Louis, 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. In 1998, the Company was awarded the signal and train control
contract on the first extension of this system. 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 for reconstruction of the signal and
train control system for the Green Line elevated train. 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.
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.
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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 (AATC) system 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. In February 1998, Harmon was awarded, assuming
all options are exercised, the contract to complete the development of the full
AATC system and deploy it over a substantial portion of the BART system by the
end of 2001. Harmon intends to market this system aggressively in the transit
marketplace, both domestically and internationally. The first step in this
international effort has been an agreement with Nippon Signal of Japan to
license the AATC technology in Japan and jointly market AATC systems in the
Pacific Rim.
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 July 1996, Harmon acquired Vaughan Systems, Ltd., subsequently renamed
Vaughan Harmon Systems, Ltd. ("Vaughan Harmon"), located in the United Kingdom.
This acquisition established the first international manufacturing operations
for the Company. Vaughan Harmon 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. It has several
contracts with Railtrack, including one for the resignaling of the Cromer line
in Norfolk, England. This will be the first project in which Vaughan Harmon
products and Harmon products from the United States will be combined to provide
an integrated system to the customer.
In 1998, Harmon continued its international expansion by purchasing the
operating assets of its long-time Australian affiliate, Henkes-Harmon
Industries, Pty. Ltd., to establish a new wholly owned subsidiary, Harmon
Industries Australia, Pty. Ltd.
BUSINESS STRATEGY
Harmon's business strategy is to utilize its technological expertise,
ability to install turnkey systems, broad product lines, extensive sales network
and customer service orientation to provide high quality products and services
to its customers. Harmon plans to continue to expand and improve its product
lines and services to meet its customers' needs. Harmon expects that the
continued development of its product lines may be accomplished, in part, by
strategic acquisitions of product lines or companies that complement the
Company's current product lines. The Company actively pursues potential
acquisitions as part of this strategy. Internal development of new products will
continue, consistent with Harmon's desire to expand its product base.
The Company intends to improve its leadership position as a vendor to the
freight railroad industry by continuing to expand its long-standing
relationships with Class I railroads, continuing to explore opportunities with
short line railroads, developing new technologies to meet customer needs, and by
adding value through its engineering, installation and asset management services
capabilities. The Company has seen and expects to continue to see a shift in its
revenue mix from revenues generated strictly from the sale of its
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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 it can offer that 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 North American 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) in 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 five ISO
certificates which cover most of its domestic facilities. 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 seven
categories. TRAIN CONTROL PRODUCTS & 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; train describers and other train control systems. CROSSING
PRODUCTS & SYSTEMS include all Company products related to rail/highway crossing
warning systems including: motion detectors (the Company's PMD and HXP products,
among others); flashing lights and cantilevers; and the design, wiring and
installation of these products. ASSET MANAGEMENT SERVICES involve a
single-source, rapid delivery service for railroad components by warehousing
commonly used parts and equipment that are manufactured by the Company and other
vendors. TRAIN INSPECTION PRODUCTS & SYSTEMS include all Company products
related to monitoring a moving train as it passes by a train inspection site.
COMMUNICATION PRODUCTS & SYSTEMS include voice and data communications, security
and dispatching systems used in the transportation industry. 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 six categories.
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PROFILE OF CURRENT OPERATIONS
The Company's current products are summarized by product category in the
following table. The table shows yearly sales and percentages of total sales for
each of the past three years.
SALES BY PRODUCT OR SERVICE FUNCTION(1)
(DOLLARS IN THOUSANDS)
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YEARS ENDED DECEMBER 31,
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1996 1997 1998
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AMOUNT % AMOUNT % AMOUNT %
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Train Control Products & Systems............ $ 87,080 47.3% $ 101,624 47.4% $ 132,348 50.5%
Crossing Products & Systems................. 48,927 26.6% 55,598 25.9% 53,035 20.3%
Asset Management Services................... 22,217 12.1% 29,913 14.0% 34,928 13.3%
Train Inspection Products & Systems......... 12,906 7.0% 13,407 6.2% 16,312 6.2%
Communication Products & Systems............ 1,891 1.0% 655 0.3% 6,606 2.5%
Printed Wiring Boards....................... 5,249 2.9% 5,772 2.7% 5,220 2.0%
Other....................................... 5,598 3.1% 7,458 3.5% 13,547 5.2%
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Total................................... $ 183,868 100.0% $ 214,427 100.0% $ 261,996 100.0%
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(1) Sales volumes shown above 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 freight railroad and rail transit industries.
TRAIN CONTROL PRODUCTS & 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
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 some level of 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
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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 train
control system that uses a radio data network linking 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 AATC system will
allow reductions in headway between trains from 2.5 minutes to 90 seconds and
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 PRODUCTS & 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.
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
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offering in January 1998 with the acquisition of CSS, Inc., a provider of
installation and maintenance services to domestic freight railroads.
TRAIN INSPECTION PRODUCTS & 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 axle 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.
COMMUNICATION PRODUCTS & SYSTEMS include fiber optic communication networks,
tunnel and above ground radio systems, vehicle radio systems, passenger
emergency telephone systems, audio/visual passenger information systems, fire
and intrusion systems, closed circuit television, premise distribution, local
area networks and Supervisory Control and Data Acquisition (SCADA) systems. The
Company's October 1998 acquisitions of SESCO, Inc. and Seaboard Systems Co.,
Inc. significantly enhanced its ability to offer complete communications
solutions to its customers, particularly in the transit market.
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.
OTHER includes services such as contract engineering, repair, installation
and maintenance as well as the sale of miscellaneous products outside the
categories discussed above.
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 as railroads have sought more
cost-effective methods of controlling and monitoring train operations.
Frequently, a customer's technical staff works closely with the Company's staff
on the design of a system or component parts. The Company will continue to focus
on rapid response to customer needs in its introduction of new products. The
Company anticipates increasing its efforts and expenditures for product
development.
The Company continues to develop new products and new variations of
previously successful products, where market demands and competition 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) the
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
$6,331,000, $7,664,000 and $8,454,000 in the years ended December 31, 1996, 1997
and 1998, respectively, on research and development (R&D) activities related
either to the improvement of existing products or to the development of new
products. The AATC system, however, is being developed under a commercial
contract therefore most of its development costs are not considered R&D expense.
10
<PAGE>
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 R&D, 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 market: Class I, short line, rail transit and international.
The United States-based marketing organization is assisted by wholly owned
subsidiaries in the United Kingdom, Canada, Mexico and Australia. The Company
also utilizes foreign nationals to assist the Company's sales staff with sales
in other foreign markets.
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 $131.8 million at December
31, 1998. Approximately $95 million of these orders are expected to be filled in
1999 with the balance filled in 2000. The backlog of orders was approximately
$74.5 million at December 31, 1997, the majority of which were filled during
1998. 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
11
<PAGE>
training in the use and maintenance of the Company's products. These efforts are
important to maintain customer satisfaction and learn of customer needs, but do
not now directly generate significant revenue for the Company.
MANUFACTURING
Manufacturing consists of the assembly of component parts either purchased
from others or produced internally and the production of printed wiring boards.
The Company generally manufactures products in response to specific customer
orders and specifications and, as a result, does not maintain a significant
finished goods inventory. Furthermore, an increasing number of the products sold
by the Company are incorporated into a complete system that is assembled by the
Company and delivered as a package.
The Company's employees participate in the Total Quality System, working in
teams to improve processes and products. Harmon was one of the first vendors to
the railroad industry to institute a total quality program and considers its
program to be an important part of its continuing efforts to improve its
manufacturing process and products.
The Company is dependent upon a continuing supply, both domestic and
foreign, of some component parts and materials. The Company occasionally
experiences some delays in the availability of certain component parts and
materials, and in many cases suppliers require long lead times. In recent years,
there has been no significant interruption of the Company's business due to a
shortage of components or manufacturing materials.
EMPLOYEES
As of December 31, 1998, the Company had 1,662 full-time employees. There
were 1,161 employees in manufacturing, 212 in engineering, 190 in general and
administrative services and 99 in marketing and sales. In general, the Company
believes its relations with its employees are excellent. Approximately 14 of the
Company's employees are covered by a collective bargaining agreement.
12
<PAGE>
ITEM 2. PROPERTIES
The Company owns or leases an aggregate of approximately 800,000 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
Monterrey, Mexico.................... Assembly, storage and distribution of products for the railroad industry
Bayswater, Victoria, Australia....... Design and distribution of products for the railroad industry
Hingham, Massachusetts............... Administration, design, project management and installation of
communications systems for the transit industry
</TABLE>
In addition to these principal locations, the Company also owns or leases
various other office, engineering and warehouse facilities. 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
13
<PAGE>
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 market value of assets in this trust exceeded $585,000 at December
31, 1998.
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, 1997, Harmon filed a complaint in the
Federal District Court for the Western District of Missouri seeking judicial
review of the EAB's decision.
On August 25, 1998, the District Court entered its Order Reversing the Final
Decision of the Environmental Appeals Board. The District Court held that RCRA,
as well as Missouri law principles of res judicata, barred EPA from filing a
duplicative enforcement action after the violator has entered a final settlement
with an authorized State agency. The District Court rejected Harmon's argument
that EPA's penalty claim was barred by the applicable statute of limitations and
that the penalty should be reduced based on EPA's failure to properly consider
all relevant circumstances. Nevertheless, the effect of the District Court's
holding is to bar the EPA from collecting penalties from Harmon based on the
alleged violations.
On October 21, 1998, the EPA filed a Notice of Appeal in the United States
Court of Appeals for the Eight Circuit requesting the Appeals Court to reverse
the District Court's order setting aside the penalty against Harmon. On December
28, 1998, the EPA filed its brief in support of its appeal and on January 27,
1999, Harmon filed its responsive brief. The EPA filed its reply brief on
February 24, 1999. Harmon and the EPA have consented to have organizations
interested in the Appeals Court's ruling file amicus briefs stating their
various positions on the issues raised in this litigation. After the Court has
received briefs on the issues, it will set a time to hear oral argument.
Harmon intends to vigorously present its position in the Court of Appeals,
and is supported in its position by a number of amicus briefs. However, because
so few analogous cases have been disposed of by judicial decision, special legal
counsel cannot express an opinion as to the likelihood of Harmon ultimately
prevailing on appeal.
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.
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1998.
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 4, 1999 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
Knight Securities L.P.
Mayer & Schweitzer, Inc.
Sherwood Securities Corporation
The approximate number of holders of record for the Company's common stock
as of March 4, 1999 was 608.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk is limited to interest rate risk
associated with its variable rate credit facilities and foreign currency
exchange rate risk. The Company does not currently use, nor has it historically
used, derivative financial instruments to manage or reduce market risk.
At December 31, 1998, 78% of the Company's total indebtedness contained
fixed rates of interest. A 10% change in interest rates on the Company's
variable rate indebtedness would not have a significant impact on future
earnings.
The Company has operations in Great Britain, Canada, Australia and Mexico.
The functional currency for each of these operations is the respective local
currency. Based upon the amount of business in these countries during 1998, a
10% change in exchange rates would not have a material impact on future
earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference.
15
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosure as
described in Item 304 of Regulation S-K. There has been no change in the
Company's accountants within the preceding twenty-four months.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the officers and key employees of the Company.
This information should be read in connection with the Company's Proxy
Statement.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR THE LAST FIVE
INDIVIDUAL OFFICE AGE YEARS
- ------------------------- --------------------- --- ----------------------------------------
<S> <C> <C> <C>
Breshears, Ronald G...... VP-Human Resources 52 VP-Human Resources of the Company since
7/1/81.
Daniels, Richard A....... VP-Transit and 58 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.
Foudree, Charles M....... Executive VP-Finance, 54 Executive VP-Finance of the Company
and Secretary since 9/9/86. Secretary of the Company
since 2/2/82.
Harmon, Robert E......... Chairman of the Board 59 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 60 VP-Technology of the Company since
10/2/86.
John, James R............ VP-Services 50 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 51 VP-Domestic Sales of the Company since
2/1/93.
Kaiser, Lloyd T.......... Executive VP-Domestic 47 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.
Marberg, William P....... Executive VP-Systems 47 Executive VP-Systems Sales and Support
Sales and Support of the Company since 4/13/98. Prior to
that, President and Chief Executive
Office of Airsys ATM, Inc. since
December 1995. Prior to that, Vice
President-Air Traffic Control of
Unisys, Inc.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION FOR THE LAST FIVE
INDIVIDUAL OFFICE AGE YEARS
- ------------------------- --------------------- --- ----------------------------------------
<S> <C> <C> <C>
Olsson, Bjorn E.......... President and Chief 53 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...... Executive 47 Executive VP-Manufacturing since June
VP-Manufacturing 1998. Prior to that, 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 51 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 45 VP-Controller of the Company since
11/1/83.
Utterback, Jeffery J..... Vice President and 37 Vice President and General
General Manager-Riverside Operations of the
Manager-Riverside Company since June 1998. Prior to
Operations that, Assistant VP-Quality Systems of
the Company since 1/1/98. Prior to
that, Director-Quality Assurance since
1993.
</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.
17
<PAGE>
The following is a list of the Board of Directors of the Company:
<TABLE>
<CAPTION>
INDIVIDUAL AFFILIATION
- --------------------------------------------------------------- -------------------------------------------------
<S> <C>
Robert E. Harmon............................................... Chairman of the Board
Bruce M. Flohr................................................. Founder and Chairman Emeritus RailTex, Inc., San
Antonio, Texas
Charles M. Foudree............................................. Executive Vice President-Finance and Secretary
Rodney L. Gray................................................. Vice Chairman
Azurix, Houston, Texas
Herbert M. Kohn................................................ Attorney-at-Law
Bryan Cave LLP, 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................................................ Managing Partner
Jupiter Partners, LP, New York, New York
Judith C. Whittaker............................................ Vice President, General Counsel/Secretary
Hallmark Cards, Inc., Kansas City, Missouri
</TABLE>
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.
18
<PAGE>
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 1998 Annual
Report to Shareholders at the following pages:
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Independent Auditors' Report......................................................... 45
Consolidated Balance Sheets--December 31, 1998 and 1997.............................. 28-29
Consolidated Statements of Earnings--Years ended December 31, 1998, 1997 and 1996.... 30
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1998, 1997
and 1996........................................................................... 31
Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997 and
1996............................................................................... 32
Notes to Consolidated Financial Statements........................................... 33-44
</TABLE>
(a)(2) Financial Statement Schedules
Selected Financial Data--for the years ended December 31, 1998, 1997 and
1996, are attached hereto at the following pages:
<TABLE>
<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.
19
<PAGE>
(a)(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE(S)
- ----------- ----------------
<S> <C> <C>
3 (ii) Amended Bylaws........................................................................ 25 through 38
11 Computation of Per Share Earnings..................................................... 39
13 1998 Annual Report to Shareholders.................................................... 40 through 89
21 Listing of Subsidiaries............................................................... 90
23 Auditors' Consent..................................................................... 91
27 Financial Data Schedule............................................................... 92
99-1 Forward Looking Information........................................................... Incorporated by
reference to
page 44 of
Exhibit 13
N/A Notice of Annual Meeting and Proxy Statement dated April 1, 1999...................... 93 through 112
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended December 31,
1998.
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 19, 1999 By: /s/ BJORN E. OLSSON
------------------------------------------
Bjorn E. Olsson
PRESIDENT
Date: March 19, 1999 By: /s/ CHARLES M. FOUDREE
------------------------------------------
Charles M. Foudree
EXECUTIVE VICE PRESIDENT-FINANCE
Date: March 19, 1999 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 19, 1999
------------------------------------------
Bruce M. Flohr, DIRECTOR
By: /s/ CHARLES M. FOUDREE Date: March 19, 1999
------------------------------------------
Charles M. Foudree, DIRECTOR
By: /s/ RODNEY L. GRAY Date: March 19, 1999
------------------------------------------
Rodney L. Gray, DIRECTOR
By: /s/ ROBERT E. HARMON Date: March 19, 1999
------------------------------------------
Robert E. Harmon, DIRECTOR
By: /s/ HERBERT M. KOHN Date: March 19, 1999
------------------------------------------
Herbert M. Kohn, DIRECTOR
By: /s/ DOUGLASS WM. LIST Date: March 19, 1999
------------------------------------------
Douglass Wm. List, DIRECTOR
By: /s/ GERALD E. MYERS Date: March 19, 1999
------------------------------------------
Gerald E. Myers, DIRECTOR
By: /s/ BJORN E. OLSSON Date: March 19, 1999
------------------------------------------
Bjorn E. Olsson, DIRECTOR
By: /s/ JOHN A. SPRAGUE Date: March 19, 1999
------------------------------------------
John A. Sprague, DIRECTOR
By: /s/ JUDITH C. WHITTAKER Date: March 19, 1999
------------------------------------------
Judith C. Whittaker, DIRECTOR
</TABLE>
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Harmon Industries, Inc.:
Under date of February 10, 1999, we reported on the consolidated balance
sheets of Harmon Industries, Inc. and subsidiaries as of December 31, 1998 and
1997 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,
1998, as contained in the 1998 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 1998. 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 LLP
Kansas City, Missouri
February 10, 1999
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, 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
Year ended December 31, 1998:
Allowance for doubtful trade accounts receivable.......... $ 318 $ 59 $ (26) $ 351
Warranty reserve.......................................... $ 2,723 $ 217 $ (885) $ 2,055
</TABLE>
24
<PAGE>
As Amended December 10, 1998
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 two-fifths 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.
Page 26
<PAGE>
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
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 Director nominated for election as provided in
Article II, Section 13 and in accordance with Article III, Section 2 of these
Bylaws, and they may transact such other business as may be approved by the
Board of Directors or submitted by a shareholder for consideration pursuant to
Article II, Section 16 of these Bylaws; 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.
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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.
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.
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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 not less than 75% of the remaining Directors then
in office, 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 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
180 calendar days prior to the meeting. To be in proper written form, such
stockholder's notice must set forth or include (i) the name and address, as they
appear on the Corporation's books, of the stockholder giving the notice and of
the beneficial owner, if any, on whose behalf the nomination is made; (ii) a
representation that the stockholder giving the notice is a stockholder of record
of the Corporation entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting for such Director to nominate the person or
persons specified in the notice; (iii) the number of shares of stock of the
Corporation owned beneficially and of record by the stockholder giving the
notice and by the beneficial owner, if any, on whose behalf the nomination is
made; (iv) a description of all arrangements or understandings between or among
any of (A) the stockholder giving the notice, (B) the beneficial owner, if any,
on whose behalf the notice is given, (C) each nominee, and (D) any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder giving the notice; (v) such other
information regarding each nominee proposed by the stockholder giving the notice
as would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission had the nominee been
nominated, or intended to be nominated, by the Board; and (vi) the signed
consent of each nominee to serve as a Director of the Corporation if so elected.
At the request of the Board, any person nominated by the Board for election as a
Director must furnish to the Secretary that information required to be set forth
in a stockholder's notice of nomination which pertains to the nominee. The
presiding officer of the meeting for election of Directors will, if the facts
warrant, determine that a nomination was not made in accordance with the
procedures prescribed by this Bylaw 13, and if so determined, so declare to the
meeting and the defective nomination will be disregarded.
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(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 cause. The Shareholders shall not have the power at any regular meeting or
special meeting expressly called for that purpose to remove any director with
cause. "Cause" shall mean for purposes of this section, fraud involving the
Corporation, gross abuse of office amounting to a breach of trust or fiduciary
responsibility or failure of any Director to attend in person or telephonically
three consecutive regular meetings of the Board of Directors.
SECTION 16. ITEM SUBMITTED BY SHAREHOLDER FOR VOTING CONSIDERATION AT
SHAREHOLDERS MEETINGS.
(a) Submission of matters to a vote of the Shareholders at any regular or
special meeting of the Shareholders may be made by any shareholder who (i) is a
shareholder of record at the time of giving of notice provided for in this Bylaw
16, (ii) is entitled to vote on such matter at the meeting and (iii) complies
with the procedures set forth in this Bylaw 16. All such matters submitted by
shareholders for a vote at a special or annual meeting of shareholders must be
made pursuant to timely notice and proper written form to the Secretary as
required by this Bylaw 16.
(b) To be timely, a shareholder's notice must be delivered to or mailed
and received at the principal executive offices of the Corporation not less than
180 calendar days prior to the meeting. To be in proper written form, such
shareholder's notice must set forth or include (i) the name and address as they
appear on the Corporation's books, of the shareholder or shareholders giving the
notice and of the beneficial owner, if any, on whose behalf the proposal is
made; (ii) a representation that the shareholder giving the notice is a
shareholder of record of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting for approval of the items
submitted for vote; (iii) number of shares of stock of the Corporation owned
beneficially and of record by the shareholder or shareholders giving the notice
and by the beneficial owner, if any, on whose behalf the matter is submitted;
(iv) a description of all arrangements or understandings between or among any of
(A) the shareholder giving the notice, (B) the beneficial owner, if any, on
whose behalf the notice is given, and (C) any other person or persons (naming
such person or persons pursuant to which the matter is being submitted); (v) a
description or statement of the matter to be presented for a vote, together with
a brief description of the reasons for a vote for the proposed matter; and (vi)
such other information regarding such matter as may be required to be included
in a proxy statement filed pursuant to the proxy rules of the Securities and
Exchange Commission. The presiding officer of the meeting at which the matter is
to be considered will, if the facts warrant, determine that a proposal has not
been made in accordance with the procedures described by this Bylaw 16, and if
so,
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determine to so declare to the meeting and the proposed matter will be
disregarded.
SECTION 17. CONDUCT OF SHAREHOLDER'S MEETINGS, ADJOURNMENTS. The Chairman
of the Board of Directors or, in the absence of the Chairman of the Board of
Directors, the President of the Corporation, shall chair and conduct any annual
or special meeting of the shareholders. Such person acting as chair shall have
the authority to conduct the meeting for the purpose of transacting business on
behalf of the Corporation as provided in the notice of meeting and in these
Bylaws and shall also have the authority to determine whether matters submitted
for consideration at any such meeting have been submitted in accordance with the
provisions of these Bylaws. Such person chairing any meeting of the Shareholders
may adjourn the meeting to a specified place and future time not to exceed more
than 90 days from the date of such meeting without the necessity of a motion or
vote.
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 determined by the Board of Directors as set
forth in these Bylaws. It is specified that the Corporation shall have ten (10)
directors. Such number may be increased or decreased from time to time within
the above-mentioned limits by amendment of these Bylaws. Each director shall
hold office for the term for which he is elected or until his successor shall
have been duly elected and qualified.
The total number of directors shall be divided into three groups, with
each group containing one-third of the total, as near may be. At the first
annual shareholder's meeting at which the election of directors is to be
conducted following the adoption of this Bylaw, the Director Nomination and
Compensation Committee shall nominate three classes of directors, each class
containing one-third of the total as near as may be done and the classes shall
have terms of one year, two years and three years, respectively. At each annual
shareholder's meeting held thereafter, directors shall be chosen for a term of
three years, as the case may be, to succeed those whose terms expire.
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.
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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
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
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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, 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
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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 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
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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 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
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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 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
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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 37
<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 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 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 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
Page 38
<PAGE>
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.
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 39
<PAGE>
Exhibit 11
Harmon Industries, Inc.
Form 10-K
Computation of Per Share Earnings
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months ended December 31,
---------------------------------------------
---------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Basic:
Net earnings $ 3,520 $ 3,889
------------------- -------------------
------------------- -------------------
Weighted average shares outstanding 10,638 10,391
Shares representing unearned compensation (12) (12)
------------------- -------------------
Total 10,626 10,379
------------------- -------------------
------------------- -------------------
Basic earnings per share $ 0.33 $ 0.37
------------------- -------------------
------------------- -------------------
Diluted:
Net earnings $ 3,520 $ 3,889
------------------- -------------------
------------------- -------------------
Weighted average shares outstanding 10,638 10,391
Shares representing unearned compensation (12) (12)
Equivalent shares under option plans 148 88
------------------- -------------------
Total 10,774 10,467
------------------- -------------------
------------------- -------------------
Diluted earnings per share $ 0.33 $ 0.37
------------------- -------------------
------------------- -------------------
Twelve Months ended December 31,
---------------------------------------------
---------------------------------------------
1998 1997
---- ----
Basic:
Net earnings $ 13,402 $ 10,961
------------------- -------------------
------------------- -------------------
Weighted average shares outstanding 10,553 10,319
Shares representing unearned compensation (12) (6)
------------------- -------------------
Total 10,541 10,313
------------------- -------------------
------------------- -------------------
Basic earnings per share $ 1.27 $ 1.06
------------------- -------------------
------------------- -------------------
Diluted:
Net earnings $ 13,402 $ 10,961
------------------- -------------------
------------------- -------------------
Weighted average shares outstanding 10,553 10,319
Shares representing unearned compensation (12) (6)
Equivalent shares under option plans 143 61
------------------- -------------------
Total 10,684 10,374
------------------- -------------------
------------------- -------------------
Diluted earnings per share $ 1.25 $ 1.06
------------------- -------------------
------------------- -------------------
</TABLE>
Page 40
<PAGE>
HARMON
INDUSTRIES, INC.
[GRAPHIC]
ANNUAL REPORT 1998
<PAGE>
CORPORATE PROFILE
HARMON is a leading supplier of signal, inspection, train control and
communication products and systems to freight and transit railroads
throughout the world.
Harmon's design focus is 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 systems, voice and data
communications systems, asset management, installation and maintenance
services.
Harmon emphasizes engineering innovation and rapid response to customer
needs. Its products and services provide sophisticated and timely solutions
to signaling, communications and train control problems that impact the
railroad industry.
Harmon's technology base was greatly enhanced in 1997 when it obtained
exclusive rail transportation rights to a revolutionary spread spectrum radio
technology that was developed by the former Hughes Aircraft Company (now
Raytheon). This technology will provide the basis for a communication-based
train control system that will be marketed to rail systems in North America
and world wide.
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, Mexico, and Australia.
Harmon common stock trades on The Nasdaq Stock Market under the
symbol: hrmn. Its current annual dividend is 11 cents per share.
- --------------------------------------------
TABLE OF CONTENTS
Financial Highlights 1
Report to Shareholders 2
Year in Review 7
Selected Financial Data 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 20
Consolidated Financial Statements 28
Notes to Consolidated Financial
Statements 33
Investor Information 46
Corporate Officers and Directors 47
<PAGE>
1
[GRAPHIC]
ABOUT THE COVER
This year's cover illustration depicts Harmon's expanding business
internationally.
Last year, two of its key systems were certified for use on railroads in
Great Britain. This was a watershed achievement. It validates Harmon's
advanced technology, and its U.K. certification is expected to lead to
greater acceptance of Harmon products throughout Europe.
- -------------------------------------------------------------------------------
HARMON POSTED RECORD SALES FOR THE SEVENTH CONSECUTIVE YEAR AND RECORD
EARNINGS FOR THE THIRD CONSECUTIVE YEAR. THIS IS THE RESULT OF DEVELOPING NEW
TECHNOLOGY THAT HELPS TO MAKE RAILROADS MORE EFFICIENT, CAPITALIZING ON
MARKET CHANGES, MAKING COMPLEMENTARY ACQUISITIONS, AND RESPONDING QUICKLY AND
DECISIVELY TO CUSTOMER NEEDS.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE ITEMS AND NUMBER OF EMPLOYEES)
<TABLE>
<CAPTION>
OPERATING DATA
YEAR ENDED DECEMBER 31, 1998 1997 Change
<S> <C> <C> <C>
Net sales $ 265,219 $ 213,530 + 24.2%
Pretax income 21,049 17,583 + 19.7
Income taxes 7,647 6,622 + 15.5
Net earnings 13,402 10,961 + 22.3
Earnings per share (basic) 1.27 1.06 + 19.8
Earnings per share (diluted) 1.25 1.06 + 17.9
Dividends per share .11 .10 + 10.0
<CAPTION>
PERFORMANCE DATA
YEAR ENDED DECEMBER 31, 1998 1997 Change
<S> <C> <C> <C>
Return on sales (pretax) 7.9% 8.2% - 3.7%
Return on year-end equity 15.8% 15.7% + 0.6
Return on capital employed(1) 23.2% 23.8% - 2.5
<CAPTION>
YEAR-END DATA
AT DECEMBER 31, 1998 1997 Change
<S> <C> <C> <C>
Working capital $ 55,864 $ 50,323 + 11.0%
Interest-bearing long-term debt $ 19,540 $ 15,456 + 26.4
Approximate number of shareholders(2) 613 596 + 2.9
Number of employees 1,662 1,510 + 10.1
Outstanding shares (000s) 10,662 10,437 + 2.2
</TABLE>
(1) Return on capital employed is a measurement that promotes reduced asset
values relative to sales. It measures (for example) the efficacy of
borrowing money to purchase capital goods to reduce manufacturing costs.
The formula is: the sum of pretax 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 amount shown.
<PAGE>
2
[PHOTO]
Bjorn E. Olsson, President & Chief Executive Officer
REPORT TO SHAREHOLDERS
1998 was an outstanding year. It marked the seventh consecutive year of sales
and booking gains and the third consecutive year of increased net earnings.
Sales rose 24% last year to $265 million, an increase of nearly $52 million
over the 1997 level. These higher shipments drove net earnings up 22% to a
record $13.4 million, or $1.27 per share (basic), up from $1.06 per share for
1997.
Incoming orders rose even faster than sales. They increased 26% to
$289 million, $61 million greater than 1997 bookings. Each market's new
orders were the largest ever received in a single year.
RECEIPT of incoming orders accelerated greatly during the fourth quarter of
1998. They rose to $105 million, a new record for any quarter, and nearly
twice the amount we booked in the fourth quarter of 1997. As a result, we
finished 1998 with a record backlog of $132 million, 77% above the 1997
year-end level.
FREIGHT RAILROAD MARKET
Business remained exceptionally solid with our principal customers - the
North American freight railroads. Our sales to them were $221 million last
year, an increase of 22%. Incoming orders increased 10% over those of 1997 to
$219 million and comprised 76% of the $289 million we booked in new orders
last year.
The freight railroads continued their drive to improve their capacity
and efficiency, which our advanced signal and control systems provide.
Railroad mergers also helped our sales last year. The participants seek
products and systems that will help them coordinate their expanded rail
systems and improve their utilization of capacity.
In addition, the railroads continued to increase the amount of work
they outsource. They are finding that our asset management services component
materially reduces their total cost of ownership.
Last year asset management services billings comprised $35 million of
our freight sales. This sales figure, however, understates the full
contribution of this service organization as service project contracts
typically include additional orders for some Harmon products and systems as
well.
Cost savings are the catalyst for our increased service revenues. This
same principle now extends to single-source, multi-year supply contracts,
which the freight railroads are beginning to adopt. Harmon received three
last year, which will aggregate more than $70 million annually. Multi-year
contracts will enable us to work in close partnership with these customers to
uncover
<PAGE>
3
other areas of important cost savings. We plan to introduce this
partnering concept to other major railroads.
Finally, the Transportation Equity Act for the 21st Century (TEA-21),
which was signed into law last year, is expected to be of major assistance in
the sale of rail/highway grade crossing systems and products. The new Act
provides for a 55% increase in government funding of these projects over the
next six years.
A DECISIVE NEW TREND
The most significant trend affecting Harmon's future became evident last
year. Our non-freight orders soared. Rail transit bookings were $43 million,
up 229%; international orders were $27 million, up 60%. Growth of this
magnitude in a single year highlights the growth potential in these markets.
The $70 million in orders derived from these two markets is very
significant. That amount comprised 24% of all orders received by Harmon last
year, up from 13% in 1997, almost doubling its contribution to total bookings
in one year.
Moreover, $70 million is nearly equal to our entire sales for 1991. In
effect, during the past seven years we have entered two markets largely from
the ground up and built them to a size that closely matches our total 1991
output. And we did this without compromising our service to our traditional
core market, the North American freight railroad community, which tripled
their business with us since 1991.
VALIDATED STRATEGY
The impressive sales gains on all three fronts confirm that the long-term
growth strategy we began in 1993 is living up to expectations.
That strategy was to develop two other markets - rail transit and
international - while simultaneously continuing to expand our traditional
business - the North American freight railroads. That strategy has proved
highly effective.
We needed to do two things simultaneously. We had to build internal capacity
to have more products and services to offer our present customers, and we had
to develop new customers. We did this piece by piece over a five-year period
beginning in early 1994. We nearly doubled our research and development
efforts and expanded our marketing and sales forces. We hired additional
engineers, built new engineering offices, added new test equipment, and built
new manufacturing facilities.
Each aspect involved a considerable investment. Yet by tight control of
expenses and insistence on meeting schedules, the cost of those investments
was absorbed and more than offset by the consistent gains in revenues and
earnings that followed.
[CHART]
<TABLE>
<CAPTION>
Gross Sales
($ in millions)
<S> <C>
94 119
95 136
96 184
97 214
98 262
</TABLE>
[CHART]
<TABLE>
<CAPTION>
Net Earnings
($ in millions)
<S> <C>
94 7.6
95 6.9
96 9.3
97 11.0
98 13.4
</TABLE>
ACQUISITIONS
Acquisitions of companies and products also occupy a pivotal role in our
strategy. We look for companies with complementary technologies and products
that add market potential so that in future years we could obtain a larger
share of freight railroad and transit markets.
To that end, we acquired 11 companies in the past five years as
<PAGE>
4
well as several exciting technologies. For example, in 1997 we secured a
license for the rail transportation application of a very sophisticated
wireless data communication network from Raytheon, which it had built for the
military. This radio is key to our revolutionary Advanced Automatic Train
Control (AATC) system, which we believe is the most advanced in the world.
We redesigned the military version radio last year to one using
commercially available components. It is now far less costly to build, which
enhances its potential for commercial use.
In 1996, we acquired Vaughan Harmon Systems, Ltd. It is a premier railroad
software developer in the U.K., and it is also a market leader in the
manufacture of train describers, passenger information and modular control
systems that control many passenger and commuter trains in the U.K. To date,
this acquisition has produced substantial new business, chiefly with Railtrack,
which is aggressively seeking new technology for its planned upgrades. Vaughan
Harmon provides us entry into Britain and the European continent. Through them,
we were able to gain major exposure of our products and systems to the British
rail market last year. In December, 1998, Railtrack awarded us a $12 million
contract for our micro-processor based interlocking and level control systems.
This contract has great significance. Ours was the first new technology to
receive initial approval from Railtrack. Permanent approval is pending. Not only
did our products pass rigorous safety and operating tests, it was also confirmed
that our technology is highly cost effective, which is a growing requirement in
most of Europe. The demonstration and test phase is over. With Railtrack's
initial adoption of our technology, other railroads will undoubtedly now take a
much closer look at our technology.
We made three acquisitions in 1998. The largest was SES CO. It provides
complete communications, security and dispatching systems for the
transportation industry. Its forte is an ability to integrate communication
systems used in transportation and other commercial operations into
efficient, reliable functioning systems. In essence, SES CO enables us to
bring added value to our customers, which should help us become even more
competitive.
Acquisitions continue. On March 2, 1999, we signed a letter of intent
to acquire the majority control of Angiolo Siliani S.p.A. and Siliani
Elettronica ed Impianti S.p.A. of Florence, Italy (Siliani). Siliani makes
equipment and systems for signaling, train control and rolling stock. It is a
leader in switch point machines for both standard and high-speed lines,
equipment, interlockings, and electromechanical devices for locomotives
serving the Italian rail market.
Taken as a whole, each acquisition added a service, product or
technology that we previously had to purchase elsewhere, or opens a new
market area. Collectively, we are now able to offer a more complete line of
products and services to our customers.
[CHART]
<TABLE>
<CAPTION>
Backlog
(in millions)
<S> <C>
94 44.6
95 49.1
96 59.4
97 74.5
98 131.8
</TABLE>
[CHART]
<TABLE>
<CAPTION>
Return on Capital
Employed
<S> <C>
94 34%
95 22%
96 26%
97 24%
98 23%
</TABLE>
[CHART]
<TABLE>
<CAPTION>
Price Range of Stock
<S> <C>
94 $11.00-$16.17
95 $8.92-$13.67
96 $8.00-$13.00
97 $11.00-$19.67
98 $16.83-$26.50
</TABLE>
<PAGE>
5
RAIL TRANSIT EXPANSION
In 1993, rail transit sales were $5 million. Five years later they totaled
$25 million. Even more important, new orders in 1998 amounted to $43 million.
They comprised major contracts with five rail transit authorities - one new
customer and four for which we did prior work. At 1998 year-end our rail
transit backlog was $71 million versus $16 million at the end of 1993. This
backlog is expected to increase further as we submitted the best bid on
several other projects, amounting to $23 million.
RAIL TRANSIT is experiencing a major renewal in the U.S. There are more
projects now in planning than at any other time in this decade. Many are
expected to be let for bids in 1999.
Most important, government funding has increased substantially. Last
year, the same tea-21 bill that provided increased funding for rail/highway
grade crossings allocated even more funds for the rail transit industry. It
provided for a minimum 50% (and potentially 75%) increase in funding for
transit projects over the next six years. We anticipate this will be the
catalyst that moves many pending projects from the drawing boards and
planning stages to bids that lead to construction contracts.
INTERNATIONAL GROWTH
INTERNATIONALLY, we began to gain momentum in 1995 when we booked orders for
$6.5 million that year. By 1998, orders had swelled to $27 million, and we
were doing sizable business in Britain, Brazil, China and Australia.
Being a player on the international rail scene is critical to the
long-term prosperity of Harmon. This is where our greatest opportunities will
be found.
First, the international market is estimated to be eight times larger
than the North American freight and rail transit markets combined - roughly
$4 to $5 billion annually.
Second, our technology is very cost effective. It delivers greater
usage per rail mile and a lower cost of operation than older, traditional
systems. With railroad privatization waves presently sweeping Europe, the
incentive to operate rail systems more efficiently has increased markedly.
Third, there are more, massive upgrade projects underway or in the
planning stages in Europe, Asia and South America than anything we have ever
seen before. And we now have the technology, systems and products that make
our participation a distinct possibility.
U.K.-based Railtrack, for example, has a $4 billion, 10-year program to
invest in signal and train control products and systems. In addition, the
London underground will be privatized in about a year. Estimated capital
expenditures for upgrades to its signal and train control system are in
excess of $11 billion. The London project is particularly interesting because
communication-based train control may well be the best solution, and our AATC
is the most advanced in the world.
The Italian railroads recently proposed a ten-year capital expenditure
plan of $44 billion - half for a high speed train system, and half to upgrade
their existing systems, which makes our pending acquisition of the majority
control of Siliani especially timely.
Again, privatizations are the catalyst for railroad refurbishments
throughout Mexico. As a result, we opened a subsidiary there last year to
handle the sizable increases in business we are now experiencing in that
country. Also, we signed an agreement with Japan's Nippon Signal Co. Ltd. to
collaborate on the worldwide implementation of our revolutionary AATC System.
We will sublicense our AATC technology to Nippon Signal for installations in
Asia. Nippon Signal and Harmon will join together to build a common AATC
platform that will be marketed world wide.
CONCLUSION
I am delighted with our 1998 performance and excited about the prospects for
1999. The economy is very strong. Our year-end record backlog of $132 million
has been subsequently strengthened by the receipt of several significant
contracts. Domestic mergers, which drive the sales of many products, continue
at a rapid pace. Rail transit and international business offer promise of
substantially increased business in 1999.
/s/ Bjorn E. Olsson
Bjorn E. Olsson
President & Chief Executive Officer
Blue Springs, MO
March 9, 1999
<PAGE>
6
[PHOTO]
Burlington Northern Santa Fe Railway Co. awarded Harmon a three-year contract
to provide materials integration services. These services will be interfaced
with BNSF's engineering offices and construction forces in the field. Harmon
will purchase materials, coordinate material movement logistics and ship to
job sites on a just-in-time basis from its three warehouses in the U.S.
Harmon will be the exclusive provider of its VHLC interlockings for the next
three years and its Electro Code track circuit equipment through 1999.
<PAGE>
7
- -------------------------------------------------------------------------------
SALES TO NORTH AMERICAN FREIGHT RAILROADS ROSE 22% IN 1998 - THE COMBINATION OF
A STRONG ECONOMY AND THE STRENGTH OF HARMON'S PRODUCTS.
[CHART]
<TABLE>
<CAPTION>
Gross Sales - 1998
$ in millions
<S> <C>
North American Freight $220.6 (84.2%)
North American Transit $25.5 (9.7%)
International $15.9 (6.1%)
------------
$262.0
</TABLE>
YEAR IN REVIEW
NORTH AMERICAN
FREIGHT
-------
HARMON CONTINUED ITS MARKET PENETRATION OF THE SIGNAL AND CONTROL SECTOR OF
THE FREIGHT RAILROAD INDUSTRY DURING 1998. THE PAST YEAR'S RECORD SALES AND
NEW ORDERS REFLECT A VIBRANT ECONOMY THAT FOSTERED INCREASED CAPITAL GOODS
PURCHASES BY FREIGHT CARRIERS AND HARMON'S CONTINUED DEVELOPMENT OF
TECHNOLOGICALLY-ADVANCED SYSTEMS, PRODUCTS, AND SERVICES.
BUSINESS from our North American freight railroad customers was excellent in
1998. Sales gained 22% to $221 million from $180 million in 1997. New orders
booked in 1998 rose some $20 million to $219 million from $199 million in
1997.
The overall strength of the economy last year aided our sales to freight
carriers. Many enjoyed record car loadings. This general prosperity enabled
them to press forward with their sizable capital investment programs, many of
which are dedicated to increasing operating efficiency, particularly among
merged railroads as they seek to optimize capacity on their combined rail
systems. We continued to benefit from their programs as so many of our
systems, products and services help provide major increases in efficiency and
capacity.
Included among product sales was a two-year agreement for Ultra Cab II
equipment for installation on the latest models of ac traction locomotives.
Several other railroads have sections of line equipped for cab signal
operation, which requires compatible equipment on their locomotives.
Sales of rail/highway grade crossing equipment and systems declined 4.6% last
year to $53.0 million. Sales of these products, which include our hxp-3
detection and control equipment, should increase in 1999 largely because of
the 1998 enactment of the Transportation Equity Act for the 21st Century
(TEA-21). The new bill increased the level of federal funding over the next
five years by 55% for warning systems at rail/highway grade crossings. Thus,
the opportunity for increased sales from these markets is substantial.
Our business in Mexico continues to grow. As a consequence, we created a
Mexican subsidiary, Industrias Harmon de Mexico, S.A. de C.V. to increase our
share of the expanding Mexican rail market. Based in Monterrey, this Harmon
subsidiary will handle sales and support of our growing Mexican customer base.
<PAGE>
8
[PHOTO]
1. Upon completion of a $58 million two-year project for CSX Corporation last
year, Harmon received a five-year contract to supply its VHLC racks as part
of CSX's program to eliminate its pole lines, replacing them with Harmon
coded track equipment and a radio-based supervisory control system.
[PHOTO]
2. Conrail is scheduled to be merged into two other railroads this June, which
should spur additional sales of Harmon's efficiency- and capacity-enhancing
signal and control systems.
[PHOTO]
3. Harmon's asset management services group increased its revenues from $10.2
million in 1993 to $34.9 million in 1998 principally by expanding its
services from chiefly an alternate customer warehousing operation in 1993 to
total project management by 1998.
<PAGE>
9
- -------------------------------------------------------------------------------
OVERALL BOOKINGS IN 1998 RAN 26.5% AHEAD OF 1997 AT $289 MILLION VERSUS $229
MILLION, RAISING THE CORPORATE YEAR-END BACKLOG 77% TO $132 MILLION.
[CHART]
<TABLE>
<CAPTION>
ORDER BOOKINGS - 1998
$ IN MILLIONS
<S> <C> <C>
North American Freight $219.3 (75.8%)
North American Transit $42.5 (14.7%)
International $27.4 (9.5%)
------
$289.2
</TABLE>
Our timing was excellent. Last July we booked an $8 million order from
Mexico's TFM railroad to install a centralized traffic control system for
freight rail traffic between Monterrey and Nuevo Laredo, Mexico. The project
will use many Harmon products, including its VHLC and Electro Code track
circuits.
Of the $221 million in sales to North American freight carriers last year,
service revenues comprised $34.9 million, up 17% from the previous year. A
major factor driving our growth within the freight sector is the growing
acceptance of our service concept, which has expanded greatly since inception
in 1991 as an alternate warehouse facility. In addition to warehousing, we
now provide inventory control, materials management, subassemblies, equipment
maintenance, delivery of containerized, pre-assembled components, on-site
construction and project management. Customers are discovering that these
services materially lower their total costs of ownership, thereby reducing
their overall costs - a major goal of every railroad.
SHORTLY after the close of 1998, we signed a three-year contract with the
Burlington Northern Santa Fe Railway Co. to provide materials integration
services. These services will include interfacing with that railroad's
engineering offices and construction forces in the field. Harmon will
purchase materials, coordinate material movement logistics and ship to job
sites on a just-in-time basis from its three warehouses in the U.S. Harmon
will be the exclusive provider of its VHLC interlockings for the next three
years and its Electro Code track circuit equipment throughout 1999.
Further, superior on-time and on-budget performance brought us even more
business. Upon completion of a $58 million turnkey project last year to
expand CSX Transportation, Inc.'s capacity in the Midwest, the largest and
most extensive project ever undertaken by Harmon, we were awarded a five-year
contract from that same railroad to supply our VHLC racks as part of that
railroad's program to eliminate its pole lines, substituting our coded track
equipment and a radio-based supervisory control system in their place.
RAILROADS are now seeking single-source, multi-year contracts as a way to
reduce costs. Three of these contracts we signed last year should yield more
than $70 million in annual sales over the next several years. We expect to
build on our multi-year service contracts by providing similar services to
other railroads -in effect, providing a cost-effective labor and materials
management source we believe will become commonplace in the years ahead.
<PAGE>
10
[PHOTO]
1. We are presently in the development phase of a contract to provide our
Advanced Automatic Train Control system for BART, the transit authority
serving the San Francisco Bay Area. If successful, the value of the
implementation phase will be around $45 million.
[PHOTO]
2. Rail transit is a major source of passenger transportation in New Jersey.
Last year we completed a $17.6 million contract for the New Jersey Transit
Authority and were the low bidder on an $11.6 million contract for the Newark
City Subway.
[PHOTO]
3. The Denver Light Rail System awarded us a $3.5 million contract last
year to furnish and install a signal system on its line extension to
Littleton, co.
[PHOTO]
4. Our subsidiary, SES CO, presently is working on a $6.5 million subcontract
with the Dallas dart light rail system.
<PAGE>
11
- -------------------------------------------------------------------------------
HARMON'S NORTH AMERICAN RAIL TRANSIT BUSINESS LAST YEAR WAS ITS BEST TO
DATE - $25.5 MILLION IN BILLINGS AND $42.5 MILLION IN NEW CONTRACTS.
YEAR IN REVIEW
NORTH AMERICAN
RAIL TRANSIT
------------
NORTH American rail transit revenues increased 70% to $25.5 million in 1998.
Incoming orders rose 229% to $42.5 million from $12.9 million booked in 1997.
In 1999, the industry is contemplating more new projects and upgrades to
existing properties than at any other time in the previous ten years. These
new projects encompass signaling, communications and train control
requirements with an estimated value of over $200 million.
These new projects are particularly timely as the TEA-21 federal
appropriations bill authorized a funding increase for transit projects that
is 50% to 75% greater than the previous funding bill, which expired last year.
During 1998, our billings were primarily from contracts awarded in 1996-1998.
They included signal and train control installations for the New Jersey
Transit Authority, grade crossings, interlockings and block signals for the
Utah Transit Authority, which is expanding its line for the upcoming Winter
Olympic Games, and the first phase of a major project with the Bay Area Rapid
Transit District (BART) in San Francisco.
The BART project involves implementation of a revolutionary, highly
cost-effective, advanced automatic train control system (AATC). AATC is based
on an extremely reliable and completely wireless data radio network, which
was originally developed for the U.S. military by the former Hughes Aircraft
Corporation (now Raytheon).
The radio can accurately determine the position of trains without using
conventional track circuitry. When completed in 2001, AATC will enable BART
to substantially increase system capacity by reducing headways between trains
to less than 90 seconds. It will also help eliminate the potential need for
another tunnel under San Francisco Bay.
Sales of communication products and systems soared to $6.6 million in 1998
from $655,000 in 1997. The gain was due primarily to our acquisition of SES
CO last year. Its ability to link a variety of communication devices into
reliable functioning systems obtained several contracts for us in 1998. The
SES CO acquisition greatly expands our range of communication products for
transit applications.
WE received a $13.6 million contract for a signal and control system for a
17.5-mile extension of the St. Louis Metrolink. We also received a separate
contract to supply our carborne equipment for new vehicles needed for this
project. SES CO, which we acquired last year, received a $4.7 million award
from SEPTA for audio/visual PA systems and passenger information
improvements. We were awarded a $4.2 million contract to furnish and install
grade crossing warnings systems on a new commuter rail line that will restore
passenger service between Charlotte and Burlington, VT. Denver's Light Rail
system awarded us a $3.5 million contract to furnish and install a signal
system on its line extension to Littleton, CO.
IN addition, Harmon and SES CO were the apparent low bidders on two projects
with the Newark City Subway (NCS). We bid $11.6 million to install our
Automatic Train Control (ATC) system over a 4.2-mile, 11-station NCS network.
The ATC system is comprised of our VHLC vital processor interlockings,
electronic audio frequency track circuits and highway crossing warnings
systems. Our subsidiary, SES CO, will provide a fiber optic communications
network for this project. Also, SES CO submitted the lowest bid of $6.9
million to install multi-disciplined communications and controls for the St.
Louis Metrolink extension.
Harmon's share of the rail transit business continues to expand - in part
because of its advanced technology but also because its reputation for
superior performance continues to grow.
<PAGE>
12
[PHOTO]
1. Brazilian mining railroad CVRD last year awarded us a $2.5 million order
in U.S. funds to replace the on-board portion of its automatic train control
system with our Ultra Cab II.
[PHOTO]
2. Last July we booked an $8 million order from Mexico's TFM railroad to
install a centralized traffic control system for freight rail traffic between
Monterrey and Nuevo Laredo, Mexico.
[MAP]
3. Major upgrades to rail systems in Mexico are occurring following
privatization of railroads in that country.
<PAGE>
13
- -------------------------------------------------------------------------------
Harmon's international business gained momentum last year as important
contracts were secured in England and Brazil.
YEAR IN REVIEW
INTERNATIONAL
-------------
OUR INTERNATIONAL business showed a marked improvement last year. Although
revenues were down 9% on the year at $15.9 million, incoming orders more than
made up for that shortfall, which was more a matter of contract delays than
an actual downturn in business. New orders rose 60% last year to a record
$27.4 million, a gain of more than $10 million.
We completed the first phase of a multi-million dollar signal and train
control project in England with Railtrack last December. Our subsidiary,
Vaughan Harmon, was then awarded a $12.5 million contract to replace the
signal system on the Cromer Branch Line in Norfolk, England. This is the
breakthrough we have long awaited. It introduces our microprocessor-based
interlocking and level crossing control systems into Europe for the first
time.
Vaughan Harmon also received a second award from Railtrack last year to
replace its train describer at Clapham Junction, which controls all train
movements from London's Victoria Station for trains bound for Brighton and
the southeast coast, including part of the route used by Eurostar trains to
Belgium and France. This is the largest train describer yet installed for
Railtrack by Vaughan Harmon. Coupled with earlier installations at London
Bridge and Dartford by this subsidiary, our systems now form the heart of
London's railway control.
Vaughan Harmon was also awarded a contract to supply a modular signaling
control system for Irish Rail. The new system is part of a mini-centralized
traffic control project to resignal a number of important branch lines
throughout Ireland. It will run alongside the current system, which presently
controls Dublin suburban traffic. Upon completion, all suburban lines will be
able to be controlled by a single signalman.
In Brazil we received a contract last October for $2.5 million (in U.S.
funds) to replace the on-board portion of Cia Vale Do Rio Doce's (CVRD)
automatic train control system with our Ultra Cab II. Our system will enable
CVRD to add a communications-based operation system at a later date, thereby
expanding its usefulness when its needs dictate.
We also see greater opportunities developing in Australia and Asia. It was
for this reason that we purchased the assets of our former sales affiliate
and created our own sales and service subsidiary, Harmon Industries
Australia, Pty. Ltd. in Bayswater, Australia.
Having a Harmon-owned and operated company in Australia enables us to provide
a higher level of sales support and service than previously. It also gives a
broader base from which to deepen and expand our business in that part of the
world.
<PAGE>
14
[PHOTO]
1. Final inspection of Harmon's Hot Box Detector system at Riverside.
[PHOTO]
2. Harmon's new Electro Code V provides many new features including easier
setup procedures.
[PHOTO]
3. Hot Box Detector systems are subjected to complete system set up and
calibration before shipment to customer sites.
<PAGE>
15
- -------------------------------------------------------------------------------
HARMON INVESTED $32 MILLION IN THE PAST FIVE YEARS TO DEVELOP NEW PRODUCTS AND
SYSTEMS. THEY ACCOUNTED FOR A SUBSTANTIAL PORTION OF THE NEW ORDERS BOOKED LAST
YEAR, WHICH ILLUSTRATES THE IMPORTANCE OF DEVELOPING NEW PRODUCTS AND THE
RETURNS R&D DOLLARS PROVIDE.
YEAR IN REVIEW
RESEARCH & DEVELOPMENT
[CHART]
<TABLE>
<CAPTION>
R&D EXPENDITURES
$ IN MILLIONS
<S> <C>
96 $6.33
97 $7.66
98 $8.45
</TABLE>
In 1998, the development of new products and systems continued to be a
primary focus of Harmon's R&D efforts. Several new products completed
development and there was considerable effort expended to increase Harmon's
systems development capability.
Work was substantially completed on our new Electro Code V track circuit
product, which offers many performance advantages over our predecessor
Electro Code IV model. Surface mount technology was used in this upgrade
which provides reduced installation and maintenance costs for the user.
Earlier Electro Code versions required two technicians for field installation
while the Electro Code V requires only a single technician. Sales of Electro
Code V will begin in early 1999.
We also made substantial progress in our next generation hot box detector
system. This next generation system was also designed using surface mount
technology which enabled Harmon to significantly increase the reliability of
the system while at the same time reducing the cost of ownership for the
user. Sales of these next generation hot box detector systems will also begin
in 1999.
As part of our efforts to expand into the international market, Harmon began
a series of upgrades of its standard products to make them suitable for use
in that market. Among these was an upgrade to the Vital Harmon Logic
Controller (VHLC) to enable it to control railroad signal lamps with higher
voltage AC power as well as traditional low volt DC. This upgrade will be
implemented in the Cromer project in the United Kingdom in 1999 and should
have application in many other countries as well. We also obtained CE Mark
certification for our VHLC and HXP-3. This is a European Community product
certification roughly comparable to a UL designation in the U.S. and is
expected to materially increase the acceptance of our products throughout
Europe.
As Harmon has engaged in larger systems projects like the BART project, we
have seen the need to improve the processes we use to develop our products
and systems. In 1998 we began a multi-year effort to improve our hardware,
software and systems development processes. Our software process is being
modified to meet the stringent demands of the industry recognized Software
Capability Maturity Model developed by the Software Engineering Institute. We
believe these changes will substantially decrease the cost and time needed to
develop the software used in Harmon products and systems. Similar efforts are
underway in the hardware and systems areas and will continue in 1999.
Investments for research and development are budgeted at $12.0 million for
1999 versus $8.5 million expended in 1998 and $7.7 million in 1997. With
these investments, Harmon will be in an even better position to meet the
needs of its existing customers and to gain new ones.
<PAGE>
16
[PHOTO]
The traffic control center at the Dallas Area Rapid Transit (DART) system.
The lighted display, which shows the operation of all dart trains, was
designed by SES CO, which Harmon acquired in 1998.
<PAGE>
17
- -------------------------------------------------------------------------------
HARMON MADE THREE ACQUISITIONS LAST YEAR. ALL WERE COMPLEMENTARY TO ITS
PRINCIPAL BUSINESS, EXPANDING ITS CAPABILITIES AND INCREASING ITS COMPETITIVE
POSITION.
YEAR IN REVIEW
ACQUISITIONS
------------
HARMON acquired three companies last year. In January, 1998, we purchased
CSS, Inc. of Delphi, Indiana. CSS operates in a seven-state area throughout
the Midwest and Florida. CSS installs and maintains products and equipment
used by railroads, primarily at grade crossings on short-line and regional
railroads. This acquisition adds equipment maintenance as well as additional
installation capabilities to Harmon's railroad service operation.
Last October we finalized the purchase of SES CO., inc. and a related
company, which are headquartered in Hingham, Massachusetts. SES CO is a
leader in railroad communications, particularly in rail transit applications.
It integrates communication, detection and monitoring equipment of many
manufacturers into functional systems. Its capabilities extend to fiber optic
networks, tunnel and above-ground radio systems, vehicle radio systems,
passenger emergency telephone systems, audio/visual passenger information
systems, fire alarm systems, closed circuit tv, local area networks and
Supervisory Control and Data Acquisition (SCADA) systems.
SES CO provides Harmon with a broader range of systems design, manufacturing
and construction capabilities, which will increase Harmon's competitive
position whenever contracts are put up for bid.
When SES CO was acquired it brought with it several important rail transit
contracts. Subsequent to its acquisition, SES CO has been the successful
bidder on contracts totalling nearly $18 million in Dallas, St. Louis and
Philadelphia.
We also established a wholly-owned sales and service subsidiary last year in
Bayswater, Australia, by purchasing the assets of a former affiliate. Harmon
Industries Australia, Pty. Ltd. strengthens our position in Australia and
increases our ability to expand our business in that part of the world.
Our March 2, 1999, letter of intent to acquire the majority control of
Angiolo Siliani S.p.A. and Siliani Elettronica ed Impianti S.p.A. of
Florence, Italy (Siliani) is expected to be of substantial assistance in
acquiring European business. Siliani makes equipment and systems for
signaling, train control and rolling stock. It is a leader in switch point
machines for both standard and high-speed lines, equipment, interlockings,
and electromechanical devices for locomotives serving the Italian rail market.
The pending Siliani acquisition may also prove very timely as the Italian
railroads recently proposed a ten-year capital expenditure plan of $44
billion -half for a high speed train system, and half to upgrade their
existing systems.
Harmon is presently evaluating several additional acquisition opportunities.
Each would expand and complement our core business.
<PAGE>
18 19
SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1998 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
NET SALES $265,219 $213,530 $175,440 $136,780 $119,703 $99,295 $81,899
COST OF SALES 200,478 156,224 126,997 96,094 81,023 65,716 54,271
RESEARCH AND DEVELOPMENT EXPENDITURES 8,454 7,664 6,331 5,218 4,561 3,442 3,541
------------------------------------------------------------------------
GROSS PROFIT 56,287 49,642 42,112 35,468 34,119 30,137 24,087
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 33,415 30,298 25,990 23,200 21,176 18,558 15,646
OTHER OPERATING EXPENSES (INCOME) 664 964 544 481 44 114 137
------------------------------------------------------------------------
OPERATING INCOME 22,208 18,380 15,578 11,787 12,899 11,465 8,304
OTHER EXPENSES 1,159 797 473 607 214 388 1,228
------------------------------------------------------------------------
PRE-TAX EARNINGS (CONTINUING OPERATIONS) 21,049 17,583 15,105 11,180 12,685 11,077 7,076
INCOME TAXES 7,647 6,622 5,775 4,294 5,046 4,193 2,498
------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 13,402 10,961 9,330 6,886 7,639 6,884 4,578
GAIN (LOSS) FROM DISCONTINUED OPERATIONS -- -- -- -- -- -- 165
USE OF NET OPERATING LOSS CARRYFORWARD -- -- -- -- -- -- 273
------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 13,402 $ 10,961 $ 9,330 $ 6,886 $ 7,639 $ 6,884 $ 5,016
------------------------------------------------------------------------
------------------------------------------------------------------------
EFFECTIVE TAX RATE - CONTINUING OPERATIONS 36.3% 37.7% 38.2% 38.4% 39.8% 37.9% 35.3%
RETURN ON SALES - CONTINUING OPERATIONS 5.1% 5.1% 5.3% 5.0% 6.4% 6.9% 5.6%
RETURN ON EQUITY - CONTINUING OPERATIONS 15.8% 15.7% 16.1% 14.0% 17.7% 20.8% 30.1%
RETURN ON EQUITY - TOTAL 15.8% 15.7% 16.1% 14.0% 17.7% 20.8% 33.0%
WEIGHTED AVERAGE SHARES (000S) - BASIC* 10,541 10,313 10,217 10,187 9,649 8,948 7,672
PER SHARE DATA*
EARNINGS FROM CONTINUING OPERATIONS - BASIC $ 1.27 $ 1.06 $ .91 $ .68 $ .79 $ .77 $ .60
NET EARNINGS (LOSS) - BASIC 1.27 1.06 .91 .68 .79 .77 .65
CASH DIVIDENDS .11 .10 .10 .10 .10 -- --
BOOK VALUE 7.97 6.68 5.66 4.82 4.27 3.49 1.88
PRICE/EARNINGS RATIO RANGE - BASIC 13.2-20.8 10.3-18.5 8.8-14.2 13.2-20.2 13.9-20.4 10.1-20.1 3.4-13.0 2
OTHER DATA AT YEAR-END
WORKING CAPITAL $ 55,864 $ 50,323 $ 33,629 $ 35,014 $ 21,670 $20,790 $10,740
TOTAL ASSETS 162,853 135,769 104,677 86,845 68,395 53,000 38,488
LONG-TERM DEBT 19,540 15,456 3,412 12,090 733 439 4,898
STOCKHOLDERS' EQUITY 84,958 69,762 57,939 49,232 43,063 33,086 15,197
CURRENT RATIO 2.05:1 2.09:1 1.85:1 2.60:1 2.03:1 2.28:1 1.72:1
QUICK ASSETS RATIO 1.01:1 1.12:1 1.01:1 1.16:1 1.03:1 1.32:1 .87:1
LIABILITIES TO EQUITY RATIO .92:1 .95:1 .81:1 .76:1 .59:1 .60:1 1.53:1
CAPITAL ADDITIONS (CONTINUING OPERATIONS) 8,271 10,475 6,371 5,532 3,242 3,189 2,154
CAPITAL ADDITIONS (TOTAL) 8,271 10,475 6,371 5,532 3,242 3,189 2,154
DEPRECIATION & AMORTIZATION (CONTINUING OPERATIONS) 7,186 5,639 5,004 3,906 2,621 2,121 1,936
DEPRECIATION & AMORTIZATION (TOTAL) 7,186 5,639 5,004 3,906 2,621 2,121 1,936
OUTSTANDING SHARES (000S)* 10,662 10,437 10,244 10,208 10,092 9,493 8,075
<CAPTION>
FIVE-YEAR TEN-YEAR
COMPOUND COMPOUND
YEARS ENDED DECEMBER 31 1991 1990 1989 1988 GROWTH GROWTH
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
NET SALES $ 70,934 $ 72,707 $ 70,154 $ 64,558 +22% +15%
COST OF SALES 45,536 47,478 46,377 42,044
RESEARCH AND DEVELOPMENT EXPENDITURES 4,000 3,414 3,200 3,669
--------------------------------------------
GROSS PROFIT 21,398 21,815 20,577 18,845 +13% +12%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,550 14,427 13,186 11,965
OTHER OPERATING EXPENSES (INCOME) 1,122 762 (263) (27)
--------------------------------------------
OPERATING INCOME 6,726 6,626 7,654 6,907 +14% +12%
OTHER EXPENSES 2,118 1,504 1,244 1,301
--------------------------------------------
PRE-TAX EARNINGS (CONTINUING OPERATIONS) 4,608 5,122 6,410 5,606 +14% +14%
INCOME TAXES 1,688 2,022 2,506 2,100
--------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 2,920 3,100 3,904 3,506 +14% +14%
GAIN (LOSS) FROM DISCONTINUED OPERATIONS (2,492) (12,306) (2,744) (1,020)
USE OF NET OPERATING LOSS CARRYFORWARD 395 -- -- --
--------------------------------------------
NET EARNINGS (LOSS) $ 823 $ (9,206) $ 1,160 $ 2,486 +14% +18%
--------------------------------------------
--------------------------------------------
EFFECTIVE TAX RATE - CONTINUING OPERATIONS 36.6% 39.5% 39.1% 37.5%
RETURN ON SALES - CONTINUING OPERATIONS 4.1% 4.3% 5.6% 5.4%
RETURN ON EQUITY - CONTINUING OPERATIONS 39.6% 53.9% 26.5% 25.9%
RETURN ON EQUITY - TOTAL 11.2% (160.2%) 7.9% 18.3%
WEIGHTED AVERAGE SHARES (000S) - BASIC* 7,490 7,084 6,948 6,720
PER SHARE DATA*
EARNINGS FROM CONTINUING OPERATIONS - BASIC $ .39 $ .44 $ .56 $ .52 +11% + 9%
NET EARNINGS (LOSS) - BASIC .11 (1.30) .17 .37 +11% +13%
CASH DIVIDENDS -- .042 .083 .083
BOOK VALUE .98 .80 2.13 2.02 +18% +15%
PRICE/EARNINGS RATIO RANGE - BASIC 1.2-44.0 N/A 23.0-34.9 9.5-14.6
OTHER DATA AT YEAR-END
WORKING CAPITAL $ 9,660 $ 7,955 $ 14,444 $ 7,037 +22% +23%
TOTAL ASSETS 36,575 41,408 48,082 42,948 +25% +14%
LONG-TERM DEBT 11,915 17,220 17,688 12,139
STOCKHOLDERS' EQUITY 7,377 5,747 14,756 13,557 +21% +20%
CURRENT RATIO 1.71:1 1.49:1 2.08:1 1.45:1
QUICK ASSETS RATIO .76:1 .66:1 .84:1 .60:1
LIABILITIES TO EQUITY RATIO 3.96:1 6.21:1 2.26:1 2.17:1
CAPITAL ADDITIONS (CONTINUING OPERATIONS) 1,098 2,187 2,236 1,830
CAPITAL ADDITIONS (TOTAL) 1,098 4,521 4,589 9,886
DEPRECIATION & AMORTIZATION (CONTINUING OPERATIONS) 2,022 2,410 2,373 2,541
DEPRECIATION & AMORTIZATION (TOTAL) 2,022 3,511 3,185 2,834
OUTSTANDING SHARES (000S)* 7,497 7,185 6,942 6,717
</TABLE>
* Adjusted for three-for-two stock split in February 1998.
<PAGE>
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
OVERVIEW
During the past five years, Harmon's sales have increased at an average
compound rate of 22% per year. The North American freight railroads are its
largest market, accounting for 84% of Harmon's sales in 1998. Business with
North American freight railroads has been excellent in recent years. This is
due principally to their increased demand for advanced signal and control
systems that maximize the capacity and efficiency of their rail systems, a
major consideration due to various rail mergers and railroad privatizations
in recent years. In addition, demand for Harmon's purchasing, materials
management, and project management services continues to grow rapidly. These
services fill an increasing need in the railroad industry as it continues to
outsource functions it previously performed internally. International
business (chiefly, Britain, the European continent, South America, Asia and
Australia) has grown materially in recent years. Finally, the new
construction portion of the North American rail transit market, which Harmon
entered in 1991, is entering a major growth cycle. Contract awards for Harmon
and its subsidiaries amounted to $43 million in 1998 compared to $5 million
in 1991.
Growth has been aided also by acquisitions of businesses and/or product
lines that fit Harmon's core business. In 1998, Harmon acquired the following
companies: CSS, Inc. of Delphi, IN, and SES CO, Inc. and its sister company,
Seaboard Systems, Inc., of Hingham, MA. CSS installs and maintains products
and equipment used by railroads, primarily at grade crossings. This
acquisition adds equipment maintenance as well as additional installation
capabilities to Harmon's railroad service operation. SES CO is a world-wide
leader in railroad communications, particularly in rail transit applications.
It integrates communication, detection and monitoring equipment of many
manufacturers into functional systems. At year-end 1998, SES CO had a $43.5
million backlog. Also in 1998, Harmon acquired the assets of its long-time
Australian affiliate, turning it into a wholly-owned subsidiary in that
country. Harmon also created a new subsidiary operation in Mexico to capture
expanding business opportunities in that country. In 1997, Harmon acquired
Devtronics, Inc., which makes recorders and remote maintenance monitoring
equipment that offer substantial savings to railroads. In 1996 Harmon
acquired United Kingdom-based Vaughan Systems Ltd. (since renamed Vaughan
Harmon Enterprises Ltd.). It was a strategic acquisition to increase Harmon's
sales in Europe. It 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. In 1997,
Harmon acquired a remaining majority interest in Vale Harmon Enterprises,
Ltd. In 1996, Harmon acquired two railroad contract-engineering firms, which
provided a significant gain in engineering resources.
- -------------------------------------------------------------------------------
PROFILE OF CURRENT OPERATIONS
The Company's sales are summarized by product category in the table on page
21. The table 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 Products and 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 Products and 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. A system to remotely monitor rail/highway
crossing systems is under development.
Asset Management Services is a single-source, rapid delivery/and or
installation of railroad components. 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.
<PAGE>
21
Train Inspection Products and 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.
Communications Products and Systems include products and systems used to
provide voice and data communications for rail systems. These include
conventional and fiber optic networks, tunnel and above ground radio systems,
passenger emergency telephone systems, audio/visual passenger information
systems, fire alarm systems, closed circuit tv, local area networks and
Supervisory Control and Data Acquisition (SCADA) systems.
Printed Wiring Boards include production of customer-designed printed
wiring boards for shipment to other electronics manufacturers. Other
sales include products that do not fit readily into the other six categories.
SALES BY PRODUCT OR SERVICE FUNCTION*
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT %
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TRAIN CONTROL PRODUCTS & SYSTEMS $ 132,348 50.5% $101,624 47.4% $ 87,080 47.4%
CROSSING PRODUCTS & SYSTEMS 53,035 20.2% 55,598 25.9% 48,927 26.6%
ASSET MANAGEMENT SERVICES 34,928 13.3% 29,913 14.0% 22,217 12.1%
TRAIN INSPECTION PRODUCTS & SYSTEMS 16,312 6.2% 13,407 6.3% 12,906 7.0%
COMMUNICATIONS PRODUCTS & SYSTEMS 6,606 2.5% 655 0.3% 1,891 1.0%
PRINTED WIRING BOARDS 5,220 2.0% 5,772 2.7% 5,249 2.9%
OTHER 13,547 5.2% 7,458 3.5% 5,598 3.0%
-------------------------------------------------------------------------------------------------
TOTAL $ 261,996 100.0% $214,427 100.0% $ 183,868 100.0%
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</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 figures in this table and those presented in
the Consolidated Statements of Earnings. The differences do not
affect the validity of the discussion and analysis.
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996.
Harmon achieved record sales and earnings in 1998. Net sales increased 24% to
$265.2 million compared with $213.5 million in 1997 and $175.4 million for
1996. Net earnings for 1998 set records for the third consecutive year,
increasing 22.3% to $13.4 million ($1.25 per share-diluted) compared with
$11.0 million ($1.06 per share-diluted) for 1997, and $9.3 million for 1996
($0.91 per share-diluted). The increase in earnings from 1996 to 1998 was due
chiefly to substantially higher sales levels each year. Return on equity was
15.8% for 1998 compared with 15.7% for 1997 and 16.1% for 1996. Return on
capital employed was 23.2% in 1998 compared with 23.8% in 1997 and 25.9% in
1996.
SALES ANALYSIS. Harmon's continuing strengths in signal and train control
products and systems, train inspection products and systems, asset management
services and new acquisitions offering communication products and systems were
the principal reasons its 1998 sales reached a record $265.2 million. Thus, 1998
sales were $51.7 million above those of 1997 and $89.8 million higher those of
1996.
Throughout 1998, 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 larger suppliers that
have broad-based product lines, meaningful research and engineering support,
and strong service capabilities. In addition, in 1998, several railroads
began to enter into long-term supplier contracts to obtain price concessions
for their larger and longer-term orders. These trends benefited Harmon in
1998.
<PAGE>
22
Sales of train control systems and products increased $30.7 million to
$132.3 million; sales of asset management services were up $5.0 million to
$34.9 million; sales of train inspection systems and products rose $2.9
million, communication products and system sales gained $6 million, and sales
of other miscellaneous products rose $6.1 million to $13.5 million. Lower
sales were posted by crossing products and systems, which were off 4.6% at
$53 million, and printed wiring boards, which slipped 9.6% to $5.2 million.
The increase in train control systems and products sales is chiefly the
result of increased orders from recently-merged railroads and continued
strong sales of Harmon's Ultra Cab units. The sales gain in asset management
services reflects an increased continuation toward outsourcing among domestic
freight railroads and an expansion in Harmon's material management contracts.
The gain in communication products and system sales is due primarily to the
1998 acquisition of SES CO. The increase in train inspection sales is due
chiefly to the 1997 Devtronics acquisition and increased business in Mexico.
The decrease in crossing system sales primarily reflects timing differences
in shipments between 1998 and 1997, and the decrease in printed wiring board
sales reflects reduced demand industry-wide.
Orders booked in 1998 were a record $289.2 million, a 26.5% gain over
the $228.6 million booked 1997 and 54.2% better than the $187.5 million
booked in 1996. Freight orders were $219 million; rail transit, $43 million;
and international, $27 million. At 1998 year-end, Harmon's backlog was a
record $132 million, of which approximately $95 million is expected to ship
in 1999. Approximately 30% ($39 million) of the backlog was North American
freight related; 16% ($22 million) related to international business (chiefly
Great Britain and Brazil), and 54% ($71 million) related to North American
rail transit. The backlog soared late in the year as Harmon added $30.5
million in rail transit orders and $20.1 million in international business
during the fourth quarter of 1998.
The table below 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.
<TABLE>
<CAPTION>
OPERATING SUMMARY PERCENTAGE OF NET SALES PERCENTAGE OF CHANGE
-----------------------------------------------------------
YEARS ENDED DECEMBER 31, 1998 1997 1996
OVER OVER OVER
1998 1997 1996 1997 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 24.2% 21.7% 28.3%
COST OF SALES 75.6% 73.2% 72.4% 28.3% 23.0% 32.2%
RESEARCH AND DEVELOPMENT 3.2% 3.6% 3.6% 10.3% 21.1% 21.3%
GROSS PROFIT 21.2% 23.2% 24.0% 13.4% 17.9% 18.7%
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 12.6% 14.2% 14.8% 10.3% 16.6% 12.0%
OTHER, NET 0.3% 0.4% 0.3% (31.1)% 77.2% 13.1%
OPERATING INCOME 8.3% 8.6% 8.9% 20.8% 18.0% 32.2%
OTHER EXPENSES 0.4% 0.4% 0.3% 45.4% 68.5% (22.1)%
EARNINGS BEFORE INCOME TAXES 7.9% 8.2% 8.6% 19.7% 16.4% 35.1%
INCOME TAXES 2.9% 3.1% 3.3% 15.5% 14.7% 34.5%
NET EARNINGS 5.0% 5.1% 5.3% 22.3% 17.5% 35.5%
</TABLE>
The market for the majority of the Company's products is largely
dependent on the financial condition of the railroad industry, the trend of
the general economy, individual railroads' budgets for capital expenditures
and repairs and maintenance, and the Company's reputation for reliable and
cost-effective products. At year-end 1998, the freight railroad industry was
enjoying good market conditions. It is estimated that 1999 capital
expenditure budgets will be at or above 1998 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 also remained merger
minded, which historically has reduced capital spending while mergers were
pending and increased spending after they were completed.
<PAGE>
23
The market for the Company's signal and control systems is influenced
by all of the factors listed above plus one other element-the level of
activity by the railroads in authorizing grade crossing warning system
improvements. These latter improvements receive up to 80% federal support.
The Transportation Equity Act for the 21st Century (tea-21) was passed in
1998. It increased funding to $217 billion over the next six years, which
resulted in a 55% increase for rail/highway grade crossing installations and
at least a 50% increase for transit projects. These increases are an
extremely positive development for the sale of our products and systems.
GROSS PROFIT. Gross profit as a percent of sales declined to 21.2% for 1998
as compared with 23.2% for 1997 and 24.0% for 1996 . The declines in 1998 and
1997 reflect a continuing 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
$58 million upgrade project for a Class I railroad, which commenced in 1997
and was completed in 1998, added substantially to the sale of Harmon products
and systems in 1997 and 1998, but the upgrade project also contained sizable
amounts of "pass-through" business that provide only modest profit margins.
In addition, profit margins were under additional pressure during the past
two years because of Harmon capacity expansions in 1997.
Traditionally, declining profit margins have negative con-notations.
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 philosophy. Standing
alone, it is a low margin, narrowly 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 out-source their asset management, maintenance and line
upgrade projects.
RESEARCH AND DEVELOPMENT. Research and development expenditures increased
$790,000 in 1998 and $1.3 million in 1997, which illustrates Harmon's ongoing
commitment to incorporating new technology into its products. The increase in
1998 relates to product development on Harmon's Electro Code 5, advanced
train control systems, new technology for communication systems, and carborne
products. During the 1998 fourth quarter, R&D expenses decreased as some
engineering costs were charged directly to customer orders. In 1997, the
increase was related 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
to several prospective buyers. Although R&D expenditures were up in absolute
dollar terms in 1998 and 1997, as a percent of sales they declined because of
the sales increase in 1998.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (SG&A) for 1998 were $33.4 million as compared with
$30.3 million in 1997, an increase of 10.3% on a sales gain of 24% from 1997
to 1998, 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 fifth consecutive year-to 12.6% of sales from 14.2% in 1997 and 14.8%
in 1996. This down-ward 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 is the result of inflation, higher
overall personnel-related expenses, commissions on higher sales volume,
converting and upgrading Harmon's operating systems, and added SG&A expenses
for acquisitions made in the past several years. In 1997, the company also
incurred an additional $1.5 million in certain other SG&A expenses, chiefly,
costs related to employee recruiting as well as legal and outside computer
consulting services.
AMORTIZATION EXPENSES. Amortization expenses increased 48.1 % from 1997 to
1998 and 18.7% from 1996 to 1997. The increases are the result of
acquisitions made during 1998 and 1997.
MISCELLANEOUS INCOME - Net. Miscellaneous income advanced $303,000 over that
of 1997. The difference resulted from increases in purchase discounts, gains
on disposal of certain assets, and a variety of other transactions, which
collectively accounted for the positive gains in 1998 compared with 1997.
Changes between 1997 and 1996 were insignificant.
<PAGE>
24
INTEREST INCOME AND EXPENSE. Interest expense was $1,555,000 in 1998,
$1,219,000 in 1997 and $724,000 in 1996. The increase in 1998 over 1997
reflected higher average borrowings to finance increased working capital and
acquisitions and a full year of interest on senior notes in 1998 versus a
partial year in 1997. The increase in 1997 over 1996 was the result of
interest on a January, 1997 private placement of $15 million in senior
unsecured notes. Investment income was greater in 1997 than in 1998 or 1996
because the proceeds from the $15 million private placement were invested
during the first half of 1997. Subsequently, 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 36.3% in 1998
compared with 37.7% in 1997 and 38.2% in 1996. The tax rate in 1998 was lower
than in 1997 because of increased benefit for our Foreign Sales Corporation
and a reduced effective tax rate in the Company's state of incorporation from
tax refunds arising under recent legislation. The tax rate in 1997 was lower
than in 1996 because of United Kingdom net operating loss usage applied in
1997.
- -------------------------------------------------------------------------------
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 1996, and negligible in 1997 and 1998. 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 avail-able products through internal development and
acquire products or companies in the railroad supply industry that will
expand Harmon's product or service offerings.
- -------------------------------------------------------------------------------
LIQUIDITY, CASH FLOW AND CAPITAL RESOURCES
The Company concluded 1998 with a very strong balance sheet. Total assets
were $162.9 million, up $27.1 million. Stock-holders' equity rose to $85.0
million ($7.97 per share) from $69.8 million ($6.68 per share). Working
capital was $55.9 million, which produced a current ratio of 2.05:1 compared
to 2.09:1 a year earlier. Interest-bearing long-term debt was up $4.1 million
at $19.5 million as a result of making acquisitions in 1998. Accounts
receivable were up $7.2 million principally because of added sales volume
derived from our acquired companies. The Company completed a new, $75
million line of credit in September, 1998. The new line, which carries lower
interest rates than our previous line, provides $40 million for working
capital and $35 million for acquisitions. The expanded line gives Harmon
added financial strength to meet its strategic objectives over the next
several years. At December 31, 1998, availability under the Company's new
credit line was $68.5 million, with borrowings of $4.2 million against it.
Capital expenditures for 1999 are budgeted at $17.5 million, roughly $3.0
million higher than the capital expenditure budget for 1998. Traditionally,
the Company spends less on capital expenditures than it actually budgets.
The Company believes cash flow from operations and borrowings under the new
line of credit will provide sufficient funds for both its capital expenditure
and acquisition programs.
- -------------------------------------------------------------------------------
1999 OUTLOOK
On balance, the outlook for 1999 is excellent. Positive aspects are:
increased bookings in January, 1999, which added to our record 1998 year-end
backlog of $13i.8 million, up $57.3 million from the year earlier backlog of
$74.5 million; recent and upcoming railroad mergers, which typically result
in railroad purchases of efficiency-enhancing systems and products of a type
that Harmon makes; a trend toward sole-source, multi-year supplier
arrangements under which Harmon secured several major contracts in 1998; and
substantially increased funding for rail transit projects and rail/highway
crossing protection installations under the 1998-enacted tea 21 legislation.
Other positives include the possibility of substantial
<PAGE>
25
additional rail transit business as Harmon was the low bidder on several
contracts; the possibility of obtaining even more rail transit contracts in
1999 as signal and control portions with communications-based train control
technology are expected to be put up for bid in 1999. Finally, upgrading and
privatization of railroads in Mexico is continuing; more railroads are
becoming interested in outsourcing; international sales opportunities are
increasing, particularly because of the expanding business relationship
between Harmon's British-based subsidiary (Vaughan Harmon Systems Ltd.) and
British Railtrack; and an opportunity to gain a greater portion of future
rail transit contracts, owing to SES CO's added technical capabilities and
its excellent reputation within the rail transit industry.
Despite the many positives for Harmon, there are several potential
negatives as well. First, we are getting increased price pressure from major
customers, particularly from those granting long-term supplier contracts.
Second, we are seeing heightened price competition in the markets of our
higher margin products. Third, competition is increasing in two areas: on the
domestic front as well as from huge European conglomerates. Fourth, potential
problems may be encountered with y2k compliance issues, which are outlined
below. Finally, although we expect a record year for sales in 1999, our first
quarter sales and earnings will be weak-not because of a lack of business but
rather because we obtained several contracts in the fourth quarter of 1998
that are not expected to reach the applicable milestones before any
proportionate profit can be booked. Thus, we expect our greater gains will
occur as the year unfolds.
- -------------------------------------------------------------------------------
OTHER
There are no recently issued accounting pronouncements which have not been
implemented that would have a significant effect on the Company's financial
statements.
- -------------------------------------------------------------------------------
THE EURO
There was no impact on Harmon as a result of the January 1999 implementation
of the new common European currency, the euro. Our current European presence
is largely confined to the United Kingdom, which is not a participant in the
first implementation of the euro. Virtually all sales by our UK subsidiary
are to UK customers and are denominated in pounds sterling. Sales by our U.S.
operations to European customers to date have typically been denominated in
U.S. dollars.
- -------------------------------------------------------------------------------
YEAR 2000 ISSUE
"Year 2000 Issue" or "y2k" refers to the practice in many existing computer
programs that uses only the last two digits when designating a year.
Therefore, these programs cannot distinguish a year that begins with 19 from
a year that begins with 20. If not corrected, many computer applications
could fail or create erroneous results beginning January 1, 2000.
BACKGROUND--
In 1997, the Company's Management Information Systems Steering Team developed
a long-range plan to consolidate substantially all of its domestic operations
onto a single computer operating system. The software vendor chosen was the
one that currently supplies the largest of the Company's three primary
operating systems. The benefits of this consolidation are increased
efficiency and uniformity throughout the Company, particularly in the areas
of manufacturing, inventory management and engineering, as well as achieving
y2k compliance.
READINESS--
PROJECT MANAGEMENT. To properly manage and coordinate the Company's y2k
efforts, the Management Information Systems Steering Team, using a formal
team structure, appointed a project leader who supervises various
sub-teams responsible for y2k compliance in the following areas:
OPERATING SYSTEMS. To complete the consolidation discussed above, the
Company completed one systems upgrade and will perform two systems
conversions. The upgrade, which affected the largest portion of the
Company's business, was successfully completed at the end of the third
quarter 1998. The conversions of the
<PAGE>
26
remaining two systems are scheduled for 1999. An inventory of
workstation hardware identified over 300 personal computers that
require installation of y2k compliant systems boards. These boards are
being installed in 1999.
CUSTOMERS. A review by the Company of the products it sells has thus far
identified a minimal number of areas of y2k non-compliance. One area
involves a vendor-supplied operating system. The Company is currently
awaiting a proposed solution from the manufacturer. An installed base of
fewer than ten is affected by this issue. All customers have been informed
of this problem and are being kept up-to-date with the progress. Another
potential issue involves a clock chip that the Company has been informed
is not y2k compliant. The Company is conducting a review to determine if
and when this component may have been used in any of its products. The
Company believes that none of the y2k issues described above, if not
corrected, would jeopardize the systems of any of its customers or the
safety of the public at large. While final action plans are not yet
complete, the Company does not believe the costs necessary to achieve y2k
compliance for its products will be material to the Company's financial
statements on a consolidated basis.
VENDORS. The Company is nearing completion of a survey of all significant
vendors to determine if the Company's operations could be materially
impacted by the failure of key vendors to achieve y2k compliance. The next
step is to determine which vendor responses require follow-up or audit.
MISCELLANEOUS. The Company is presently testing manufacturing and
production equipment, telephone systems, security systems, and other
peripheral devices associated with the Company's facilities for y2k
compliance.
COSTS-
As discussed above, y2k compliance is one of two benefits achieved by the
Company's upgrade and conversion efforts. While the Company is monitoring the
costs of these projects against established budgets, it is not possible to
allocate these costs between the two objectives; the benefits of a common
operating system and the requirement for y2k compliance. The Company incurred
operating expenses of approximately $1.1 million in 1998 and has budgeted
operating expenses of $1.1 million in 1999. These costs will be funded by
cash flow from operations.
RISKS-
The Company's primary y2k risks are in the timing of the conversions planned
for 1999 and the potential for failure of key vendors to achieve y2k
compliance. Operations of the Company's Lee's Summit, MO and Riverside, CA
locations could be impacted if those conversions are not completed by the
time it is necessary to enter dates beyond December 31, 1999. The Company
believes the impact of y2k non-compliance at these locations would be limited
to decreased productivity and the substitution of manual processes for
certain automated ordering and planning processes. The evaluation of the
Company's exposure resulting from non-compliance by key vendors is in process
and the impact, if any, is therefore not yet known.
CONTINGENCY PLANS-
The Company is upgrading the operating system at its Riverside, CA location
to be y2k compliant to minimize the chance of any disruptions in production
if the conversion of that location to the chosen common operating system is
delayed. The Company is also identifying alternative suppliers for certain
critical components.
<PAGE>
27
- -------------------------------------------------------------------------------
FOURTH QUARTER RESULTS
Sales for Harmon's 1998 fourth quarter were $73.2 million compared with $73.8
million for fourth quarter sales of 1997. Cost of sales as a percentage of
sales was 75.7% compared with 74.4% in 1997. The difference between the two
years reflects greater shipments of lower margin products in 1998. In 1997, a
sizable portion of Harmon's fourth quarter revenues were comprised of
Harmon-manufactured goods, which traditionally carry higher margins. Although
shipments were fractionally lower in the 1998 fourth quarter, overall
business was extremely strong. New orders written during the fourth quarter
of 1998 were $105 million, a record level for any quarter.
Net earnings for the 1998 fourth quarter were $3.5 million, or $0.33 per
share - diluted, compared with $3.9 million, or $0.37 per share, for the
1997 fourth quarter.
- -------------------------------------------------------------------------------
QUARTERLY CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
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 $ 60,558 $73,705 $ 57,754 $73,202 $35,988 $ 47,621 $56,125 $73,796
COST OF SALES 46,014 55,324 43,749 55,392 26,196 33,607 41,512 54,909
R&D EXPENDITURES 2,107 2,376 2,103 1,867 1,602 1,809 1,758 2,496
------------------------------------------------------------------------------
GROSS PROFIT 12,437 16,005 11,902 15,943 8,190 12,205 12,855 16,391
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,540 8,426 7,783 9,665 5,847 6,687 8,228 9,534
AMORTIZATION 217 217 234 365 160 166 178 192
MISCELLANEOUS (INCOME)
EXPENSE-NET 10 (27) (188) (163) (23) 281 (4) 13
------------------------------------------------------------------------------
OPERATING INCOME 4,670 7,389 4,073 6,076 2,206 5,071 4,453 6,652
INVESTMENT INCOME 36 75 98 187 138 176 67 41
INTEREST EXPENSE 304 352 304 594 124 428 333 334
------------------------------------------------------------------------------
EARNINGS BEFORE
INCOME TAXES 4,402 7,112 3,867 5,669 2,220 4,819 4,187 6,359
INCOME TAXES 1,590 2,510 1,399 2,149 772 1,832 1,548 2,470
------------------------------------------------------------------------------
NET EARNINGS $ 2,812 $ 4,602 $ 2,468 $ 3,520 $ 1,448 $ 2,987 $ 2,639 $ 3,889
------------------------------------------------------------------------------
------------------------------------------------------------------------------
EARNINGS PER COMMON
SHARE - DILUTED $ 0.27 $ 0.43 $ 0.23 $ 0.33 $ 0.14 $ 0.29 $ 0.25 $ 0.37
WEIGHTED AVERAGE
SHARES - DILUTED 10,608 10,685 10,666 10,774 10,304 10,335 10,392 10,467
</TABLE>
Quarterly per share amounts may not add to annual amounts due to the
timing of net earnings and changes in common stock equivalents during each
year.
<PAGE>
28
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
At December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,669 $ 6,748
Trade receivables, less allowance for doubtful accounts
of $351 in 1998 and $318 in 1997 52,229 45,001
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 2) 9,649 2,850
Inventories:
Work in process 6,372 6,171
Raw materials and supplies 36,640 32,894
---------------------------
43,012 39,065
Income tax receivable 597 -
Deferred tax asset (note 4) 587 2,215
Prepaid expenses and other current assets 1,301 473
---------------------------
Total current assets 109,044 96,352
---------------------------
Property, plant and equipment, at cost (note 3):
Land 465 465
Buildings 11,671 11,363
Machinery and equipment 18,830 16,319
Office furniture and equipment 25,246 20,671
Transportation equipment 1,709 1,393
Leasehold improvements 3,938 3,120
---------------------------
61,859 53,331
Less accumulated depreciation and amortization 35,284 29,302
---------------------------
Net property, plant and equipment 26,575 24,029
Deferred tax asset (note 4) 654 414
Cost in excess of fair value of net assets acquired, net of accumulated
amortization of $4,212 in 1998 and $3,180 in 1997 (note 11) 17,327 8,766
Deferred compensation asset (note 6) 6,839 5,807
Other assets 2,414 401
----------------------------
$ 162,853 $ 135,769
----------------------------
----------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
29
<TABLE>
<CAPTION>
At December 31, 1998 1997
- -------------------------------------------------------------------------------------------------------------------- 29
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Current debt installments (note 3) $ 280 $ 1,162
Accounts payable 16,415 21,554
Accrued payroll, bonus and employee
benefit plan contributions (note 6) 13,342 11,893
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 2) 17,493 5,677
Other accrued liabilities 5,650 5,177
Current tax liability - 566
----------------------------
Total current liabilities 53,180 46,029
----------------------------
Deferred compensation liability (note 6) 5,175 4,522
Long-term debt (note 3) 19,540 15,456
----------------------------
Total liabilities 77,895 66,007
Stockholders' equity (notes 3, 6, 7 and 11):
Common stock of $.25 par value; authorized 50,000,000 shares,
issued 10,662,400 shares in 1998 and 10,437,369 shares in 1997 2,666 2,609
Additional paid-in capital 27,457 24,514
Foreign currency translation 127 104
Unearned compensation (287) (224)
Retained earnings 54,995 42,759
----------------------------
Total stockholders' equity 84,958 69,762
Commitments and contingencies (notes 6 and 10)
----------------------------
$ 162,853 $ 135,769
----------------------------
----------------------------
</TABLE>
<PAGE>
30
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 265,219 $ 213,530 $ 175,440
Cost of sales 200,478 156,224 126,997
Research and development expenditures 8,454 7,664 6,331
----------------------------------------------
Gross profit 56,287 49,642 42,112
----------------------------------------------
Selling, general and administrative expenses 33,415 30,298 25,990
Amortization of cost in excess of fair value
of net assets acquired (note 11) 1,032 697 587
Equity in net loss of affiliate (note 8) - 330 -
Miscellaneous income - net 368 63 43
----------------------------------------------
Operating income 22,208 18,380 15,578
Interest expense 1,555 1,219 724
Investment income 396 422 251
----------------------------------------------
Earnings before income taxes 21,049 17,583 15,105
Income tax expense (benefit) (note 4):
Current 6,259 6,876 6,945
Deferred 1,388 (254) (1,170)
----------------------------------------------
7,647 6,622 5,775
----------------------------------------------
Net earnings $ 13,402 $ 10,961 $ 9,330
----------------------------------------------
----------------------------------------------
Basic earnings per common share $ 1.27 $ 1.06 $ 0.91
Diluted earnings per common share $ 1.25 $ 1.06 $ 0.91
----------------------------------------------
----------------------------------------------
Weighted average shares used in computation (000s)
Basic earnings per common share 10,541 10,313 10,217
Diluted earnings per common share 10,684 10,374 10,268
----------------------------------------------
----------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN TOTAL COMPRE-
COMMON PAID-IN CURRENCY UNEARNED RETAINED STOCKHOLDERS' HENSIVE
STOCK CAPITAL TRANSLATION COMPENSATION EARNINGS EQUITY INCOME
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $2,553 $ 22,152 $ - $ - $ 24,527 $ 49,232
Net earnings - - - - 9,330 9,330 $ 9,330
Foreign currency translation - - 203 - - 203 203
-------
Comprehensive income - - - - - - 9,533
-------
-------
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
-------------------------------------------------------------------
Balance at December 31, 1996 2,561 22,340 203 - 32,835 57,939
-------------------------------------------------------------------
-------------------------------------------------------------------
Net earnings - - - - 10,961 10,961 10,961
Foreign currency translation - - (99) - - (99) (99)
-------
Comprehensive income - - - - - - 10,862
-------
-------
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
-------------------------------------------------------------------
Balance at December 31, 1997 2,609 24,514 104 (224) 42,759 69,762
-------------------------------------------------------------------
-------------------------------------------------------------------
Net earnings - - - - 13,402 13,402 13,402
Foreign currency translation - - 23 - - 23 23
-------
Comprehensive income - - - - - - $13,425
-------
-------
Cash dividends paid ($0.11 per share) - - - - (1,166) (1,166)
Common stock issued (notes 6, 7 and 11):
Acquisitions of businesses 44 2,114 - - - 2,158
Deferred compensation 2 184 - (63) - 123
Stock options and other 11 645 - - - 656
-------------------------------------------------------------------
Balance at December 31, 1998 $2,666 $ 27,457 $ 127 $ (287) $ 54,995 $ 84,958
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings $13,402 $10,961 $ 9,330
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 7,186 5,639 5,004
Loss (gain) on sale of property, plant and equipment 20 45 (5)
Deferred tax expense (benefit) - (254) (1,170)
Earned stock compensation 122 137 -
Equity in net loss of affiliate - 330 -
Changes in assets and liabilities, net of acquisitions of businesses:
Trade receivables 4,666 (3,900) (13,740)
Inventories (3,414) (11,677) (1,060)
Estimated costs, earnings and billings on contracts (3,387) (1,371) 7,381
Prepaid expenses and other current assets (319) 2,454 (360)
Current income taxes receivable 340 - -
Accounts payable (6,745) 5,209 3,345
Accrued payroll and benefits (130) 911 4,000
Other liabilities 473 (995) 5,007
Other deferred liabilities 653 597 371
--------------------------------------
Total adjustments (535) (2,875) 8,773
--------------------------------------
Net cash provided by operating activities 12,867 8,086 18,103
--------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (8,271) (10,475) (6,371)
Acquisitions of businesses (8,487) (196) (2,146)
Proceeds from sale of property, plant and equipment 49 29 46
Deferred compensation, net (1,032) (809) (1,339)
Other investing activities (2,013) (358) 1,584
--------------------------------------
Net cash used in investing activities (19,754) (11,809) (8,226)
--------------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock 542 501 46
Cash dividends (1,166) (1,037) (1,022)
Proceeds from issuance of long-term debt - 15,000 -
Borrowings under line of credit agreements 60,126 52,370 46,530
Repayments under line of credit agreements (56,514) (55,293) (55,165)
Principal payments of long-term debt (1,203) (971) (469)
--------------------------------------
Net cash provided by (used in) financing activities 1,785 10,570 (10,080)
--------------------------------------
Foreign currency translation 23 (99) 203
--------------------------------------
Net increase (decrease) in cash and cash equivalents (5,079) 6,748 -
Cash and cash equivalents at beginning of year 6,748 - -
--------------------------------------
Cash and cash equivalents at end of year $ 1,669 $ 6,748 $ -
--------------------------------------
--------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 1,442 $ 884 $ 690
Income taxes $ 8,570 $ 6,635 $ 6,019
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
33
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), CSS Inc. (CSS), Harmon
Industries Australia PTY LTD (Harmon Australia), Seaboard Systems Co., Inc.
(Seaboard), SES CO., Inc. (SESCO), Industrias Harmon De Mexico, S.A. De
C.V. (Harmon de Mexico) 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 communications
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 twenty 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.
<PAGE>
34
COMPREHENSIVE INCOME. In June 1997, the Financial Accounting Standards
Board issued Statement No. 130, "Reporting Comprehensive Income" which
establishes rules for the reporting of comprehensive income and its
components. Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the Statement of
Stockholders' Equity. The adoption of Statement No. 130 had no impact on
total stockholders' equity.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities in foreign currencies are
translated into dollars at the rates prevailing at the balance sheet date.
Revenues and expenses are translated at average rates for the year. The net
exchange differences resulting from these translations are reported in
stockholders' equity, net of tax effects.
STATEMENT OF CASH FLOWS. For purposes of the statement of cash flows, the
Company considers all investments purchased with a maturity of three months or
less to be cash equivalents.
RESEARCH AND DEVELOPMENT. Costs incurred in the creation 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. Basic earnings per common share 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
earnings per common share 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, 1998, 1997 and 1996 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, 1998, 1997 and 1996 the denominator used in
computing basic earnings per share represents the weighted average number of
common shares outstanding (10,553,000 shares-1998, 10,319,000 shares-1997,
10,217,000 shares-1996), reduced by the weighted average number of shares of
nonvested stock (12,000 shares - 1998, 6,000 shares - 1997) 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 (10,541,000
shares-1998, 10,313,000 shares-1997, 10,217,000 shares-1996) 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 (143,000 shares-1998, 61,000
shares-1997, 51,000 shares-1996).
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.
<PAGE>
35
ENVIRONMENTAL REMEDIATION LIABILITIES. 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.
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, 1998:
Costs and estimated earnings $ 30,374 $ 121,701 $ 152,075
Billings 20,725 139,194 159,919
-------------------------------------------
$ 9,649 $ (17,493) $ (7,844)
-------------------------------------------
-------------------------------------------
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)
-------------------------------------------
-------------------------------------------
</TABLE>
Balances billed, but not paid by customers under retainage provisions in
contracts amounted to $2,643,000 and $798,000 at December 31, 1998 and 1997,
respectively. Receivables on contracts in progress are considered to be
collectible within twelve months.
NOTE 3. INDEBTEDNESS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit agreements $ 4,200 $ -
Senior unsecured notes payable 15,000 15,000
Lines of credit 39 583
Bank loans 387 336
Capitalized lease obligations 194 699
--------------------------
Total indebtedness 19,820 16,618
Less current installments 280 1,162
--------------------------
Long-term debt $ 19,540 $ 15,456
--------------------------
--------------------------
</TABLE>
REVOLVING CREDIT AGREEMENTS. On September 29, 1998 the Company entered into a
new credit agreement with a major commercial bank. The new credit agreement
provides for a five (5) year unsecured Revolving Line of Credit (RC) of
$40,000,000 to be used to provide working capital and refinance existing
indebtedness, replacing the old revolving credit agreement of $20,000,000. At
December 31, 1998, there are no outstanding borrowings. Outstanding
borrowings bear interest at the base rate less one half percent (1/2%) or
LIBOR plus a variable component depending on the Company's funded debt/EBITDA
ratio.
<PAGE>
36
Also, included in this new agreement is an unsecured reducing revolving
credit agreement with original total credit availability of $35,000,000
reducing $1,750,000 as of the last day of each quarter beginning December 31,
2000. The Company has remaining total credit availability of $35,000,000 at
December 31, 1998 against which there are outstanding borrowings of
$4,200,000 at December 31, 1998. Outstanding borrowings are due on September
28, 2003 and bear interest at the base rate less one half percent (1/2%) or
LIBOR plus a variable component depending on the Company's funded debt/EBITDA
ratio.
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.
LINES OF CREDIT. A subsidiary company has a line of credit with total
availability of $423,000 against which there are outstanding borrowings of
$39,000 at December 31, 1998. 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 1/2% (7.25% at December 31, 1998), 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
$2,000,000 against which there are no outstanding borrowings at December 31,
1998. The line of credit does not have a stated expiration date as all
amounts are payable upon demand of the lender. The line of credit bears
interest at the lender's prime lending rate plus 1% (8.75% at December 31,
1998), payable monthly. The line of credit is collateralized by liens against
certain real and personal property.
BANK LOANS. A subsidiary company has a $166,000 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%
(8.1% at December 31, 1998). The note is collateralized by liens against
certain real and personal property.
A subsidiary company has a $68,000 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%
(11.75% at December 31, 1998). The note is collateralized by liens against
certain real and personal property.
A subsidiary company has, in aggregate, a $102,000 bank loan which
represents term notes payable in monthly installments including interest
through July 2002. These notes bear interest at fixed rates ranging from 4.9%
to 9.75%. The notes are collateralized by motor vehicles.
A subsidiary company has, in aggregate, a $51,000 bank loan which
represents term notes payable in monthly installments including interest
through November 2002. These notes bear interest at fixed rates ranging from
5.9% to 12%. The notes are collateralized by motor vehicles.
CAPITALIZED LEASE OBLIGATIONS. The Company entered into various computer
hardware and software capital lease agreements totaling $312,000 in 1997.
Monthly installments are due through November 2000. The implied interest
rates in the lease agreements range from 7.0% to 9.0%. The Company did not
enter into any new capital lease agreements during 1998.
COVENANTS. The various indebtedness agreements contain, among other things,
covenants relating to: maintenance of certain levels of consolidated net
worth, limitations of maximum capital expenditures and maintenance of minimum
EBITDA; maintenance of certain ratios of debt to EBITDA, debt service
coverage ratio and funded debt to total capitalization ratio. At December 31,
1998, the Company is in compliance with all covenants under its indebtedness
agreements.
<PAGE>
37
MATURITIES. At December 31, 1998, long-term debt maturities for 1999 and
thereafter are:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS)
---------------------------------------------------------------------
<S> <C>
1999 $ 280
2000 244
2001 2,205
2002 2,177
2003 and thereafter 14,914
--------
$19,820
--------
--------
</TABLE>
NOTE 4. INCOME TAXES
- -------------------------------------------------------------------------------
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 4,857 $ 4,992 $ 5,741
Foreign 600 1,002 -
State 802 882 1,204
----------------------------------------
Total current 6,259 6,876 6,945
Deferred:
Federal 1,251 (223) (976)
State 137 (31) (194)
----------------------------------------
Total deferred 1,388 (254) (1,170)
----------------------------------------
Total income tax expense $ 7,647 $ 6,622 $ 5,775
----------------------------------------
----------------------------------------
</TABLE>
Income tax expense for the years ended December 31, 1998, 1997, and
1996, 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) 1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 7,367 $ 6,154 $ 5,287
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of
federal income tax benefit 610 553 657
Other, net (330) (85) (169)
----------------------------------------
$ 7,647 $ 6,622 $ 5,775
----------------------------------------
----------------------------------------
</TABLE>
<PAGE>
38
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 2,080 $ 1,805
Compensated absences 495 425
Inventories 516 481
Allowance for doubtful accounts 124 117
Various other reserves 999 1,561
-----------------------
Total gross deferred tax assets 4,214 4,389
Less valuation allowance 369 369
-----------------------
3,845 4,020
Deferred tax liabilities:
Depreciation and Amortization (1,426) (1,391)
Long-term contract deferred costs (1,178) -
-----------------------
Total deferred tax liabilities (2,604) (1,391)
-----------------------
Net deferred tax assets $ 1,241 $ 2,629
-----------------------
-----------------------
</TABLE>
There were no net changes in the total valuation allowance for the years
ended December 31, 1998 and 1997. 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.
NOTE 5. BUSINESS SEGMENT INFORMATION
- -------------------------------------------------------------------------------
Harmon Industries manages its operations through two business segments:
domestic and international. Each unit sells train control and train signal
products as well as services to railroads and transit authorities. The
international business segment sells the Company's products and services
outside the U.S.
The Company is reporting business segment information in accordance with
the provisions of Financial Accounting Standards No. 131, "Disclosures about
segments of an Enterprise and Related Information" which was issued in June
1997. Prior to a series of acquisitions and establishment of new foreign
subsidiaries, which occurred between 1995 and 1998, the Company had only one
business segment. Because of the desire to market its products and services
on a global scale, the Company began to manage its operations using the
domestic and international approach in fiscal year 1997.
Harmon Industries evaluates performance based upon net operating profit.
Administrative functions such as finance, treasury and information systems
are centralized. However, where applicable portions of the administrative
function expenses are allocated between the operating segments. The operating
segments do not share manufacturing or distribution facilities. In the event
any materials and/or services are provided to one operating segment by the
other, the transaction is valued according to the company's transfer policy,
which approximates market price. The costs of operating the manufacturing
plants are captured discretely within each segment. The Company's property,
plant and equipment, inventory and accounts receivable are captured and
reported discretely within each operating segment.
<PAGE>
39
Summary financial information for the two reportable segments is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C>
USA Operations
Net Sales 251,537 200,181
Operating Income/(Loss) 21,516 15,273
Assets 156,245 129,352
Accounts Receivable 50,513 42,396
Inventory 42,448 38,645
International Operations
Net Sales 13,682 13,349
Operating Income/(Loss) 692 3,107
Assets 6,608 6,417
Accounts Receivable 1,716 2,605
Inventory 564 420
Consolidated
Net Sales 265,219 213,530
Operating Income/(Loss) 22,208 18,380
Assets 162,853 135,769
Accounts Receivable 52,229 45,001
Inventory 43,012 39,065
</TABLE>
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 $2,667,000,
$2,122,000 and $1,661,000 for the years ended December 31, 1998, 1997 and
1996, 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>
1999 $ 322 $ 2,093 $ 2,415
2000 193 1,800 1,993
2001 91 1,431 1,522
2002 and Thereafter 1 9,630 9,631
</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 1999.
<PAGE>
40
EMPLOYEE BENEFITS. In 1985, the Company formed an Employee Stock Ownership
Plan and Trust (ESOP), which includes all employees. The ESOP held 743,437
shares and 746,358 shares of Company common stock which had been allocated to
plan participants at December 31, 1998 and 1997, 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 $4,809,000,
$3,874,000 and $3,815,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
The Company and its subsidiaries have various bonus plans based
primarily on Company performance. Accrued and unpaid bonuses at December 31,
1998 and 1997 were $3,133,000 and $2,776,000, 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 $286,000, $573,000 and $(365,000) for
the years ended December 31, 1998, 1997 and 1996, 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 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 $15,000 in 1998.
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 50% 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 $120,000 in 1998 and $27,000 in 1997.
The Company also has employment agreements with certain key executives.
Under the terms of these agreements the Company contributed 9,268 shares and
24,150 shares of common stock of the Company to a grantor trust in 1998 and
1997 respectively. The stock price as of the date of grant was $19.25 in 1998
and ranged from $13.92 to $16.50 in 1997. 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.
<PAGE>
41
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> <C>
Balance at January 1, 1996 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
Granted 168,000 20.375-23.875
Exercised (39,600) 11.00-20.875
Expired (3,900) 11.00-20.875
Balance at December 31, 1998 435,600 $ 14.93 Average Price
</TABLE>
The Company has outstanding stock options for 435,600 shares of common
stock at prices ranging from $9.33 to $23.88 with a weighted-average
remaining contractual life of 4.85 years of which 230,175 shares (average
price $12.86) are exercisable as of December 31, 1998. In May 1998 the
Company granted stock options for up to 1,500 common shares to each of the
Company's eight non-employee directors which expire on May 31, 2005. In May
1997 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, 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.
The Company issued 43,962, 92,307 and 26,471 shares of unregistered
common stock in connection with the 1998, 1997 and 1996 acquisitions of
businesses respectively (See Note 11).
NOTE 8. AFFILIATES
- ------------------------------------------------------------------------------
As of December 31, 1997 the Company had an investment of 20% in Henkes &
Harmon Industries PTY LTD, an unconsolidated affiliate which was accounted
for under the equity method. During 1998 the Company sold its 20% interest in
the affiliate and acquired the Assets of Henkes & Harmon through an asset
purchase (See note 11). Equity in earnings from this affiliate was not
significant prior to the asset purchase or for the years ended December 31,
1997 and 1996. Prior to the acquisition, the Company had sales to this
related entity totaling $373,000, $253,000 and $559,000 for 1998, 1997 and
1996, respectively. The Company had receivables due from this entity of
$69,000 at December 31, 1997.
As of December 31, 1996 the Company also had an investment of 38% in a
formerly unconsolidated affiliate, Vale Harmon Enterprises, Ltd., 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 year ended
December 31, 1996. 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 $90,000, $150,000 and $283,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
<PAGE>
42
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 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.
On August 25, 1998 the United States District court for the Western
District of Missouri granted the Company's motion of summary judgment,
overturning the EAB's ruling. The Missouri Department of Natural Resources
(MDNR) agreed to forego monetary damages and a subsequent circuit court
decree released Harmon from further claims in exchange for performing further
monitoring and cleanup. The decision dismisses the EPA's complaint and
releases Harmon from the EPA penalty action. A federal judge ruled the
complaint is barred by the RCRA which requires the EPA to delegate
enforcement to authorized states. Under the statute, the actions of states
"have the same force and effect" as those taken by the EPA directly. Missouri
has been an authorized state since 1985. On December 28, 1998 the EPA filed
an appeal with the United States Court of Appeals contesting the United
States District courts decision. Harmon is expected to file its opening brief
in the first quarter of 1999, with oral arguments expected 3 to 6 months
thereafter.
Based on the Company's cooperation with the 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 EPA penalties appear to the Company's legal
counsel to be excessive. However, because so few cases have been disposed of
by settlement, or by administrative or judicial proceedings since the new
penalty guidelines were adopted, legal counsel cannot express an opinion as
to the ultimate amount, if any, of the Company's liability.
The Company has recorded a total of $2,472,000 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 any
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 January 29, 1998 the Company acquired the stock of CSS Inc. This
acquisition was made with the issuance of 80,820 shares of unregistered
common stock valued at $17.92 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 $1,158,348.
On April 20, 1998 the Company established a new wholly owned subsidiary,
Industrias Harmon de Mexico, S.A. de C.V. (Harmon de Mexico). The operating
results have been included in the Company's consolidated results of
operations from the date of incorporation.
On October 1, 1998 the Company established a new wholly owned
subsidiary, Harmon Industries Australia PTY LTD (Harmon Australia), which was
capitalized through a cash investment. On that same date, Harmon Australia
(the newly formed subsidiary) acquired substantially all of the assets of
Henkes & Harmon Industries PTY LTD (Henkes Harmon) which consisted primarily
of inventory and accounts receivable. Harmon Australia also assumed certain
liabilities related to the purchased assets on the acquisition date. 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 $373,000.
<PAGE>
43
On October 1, 1998 the Company acquired the stock of Seaboard Systems
CO., Inc. for an initial purchase price of $1,800,000 in cash. In addition to
the initial purchase price, the purchase agreement provides for contingent
payments. These payments are based on the average earnings before taxes for
the calendar years 1998 through 2000. 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 $277,166.
On October 1, 1998 the Company acquired the stock of SES CO, Inc. This
acquisition was made with the issuance of 95,026 shares of unregistered
common stock valued at $21.05 per share and $10,200,000 in cash. In addition
to the initial purchase price, the purchase agreement provides for contingent
payments. These payments are based on the average earnings before taxes for
the calendar years 1998 through 2000. 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 $7,601,076.
The following unaudited pro forma consolidated results of operations are
presented as if the acquisition of SES CO, Inc. had been made at the
beginning of the periods presented. The effects of the other 1998
acquisitions on the consolidated financial statements are not significant and
have been excluded from the pro forma presentation.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31, 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 276,812 $ 227,653
Net earnings 13,440 12,020
Basic earnings per common share 1.28 1.17
Diluted earnings per common share 1.26 1.16
</TABLE>
The pro forma consolidated results of operations include adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects. The
unaudited pro forma information is not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the beginning
of the periods presented or the future results of the combined operations.
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 shares of unregistered common stock valued at $14.73 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 shares of
unregistered common stock valued at $5.67 per share, a $198,000 note payable
and $145,000 in
<PAGE>
44
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.
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
1998, 1997 and 1996 awards under these plans consistent with the methodology
presented in Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, the Company's net income and basic earnings per
share would have been reduced by approximately $637,000 in 1998, $280,000 in
1997 and $325,000 in 1996, or $.06 per share in 1998, $.03 per share in 1997
and $.03 per share in 1996. The fair value of the options granted is
estimated at values ranging from $7.56 to $11.86 in 1998, $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 .11 per share in 1998 and .10 per share in 1997 and 1996, volatility
of 49% in 1998 and ranging between 46% and 48% in 1997 and between 41% and
70% in 1996, risk-free interest rate ranging between 5.57% and 5.65% in 1998,
5.90% and 6.40% in 1997 and 5.25% and 7.01% in 1996, assumed forfeiture rate
of 0% in 1998, 1997 and 1996, and an expected life of 2.85 years in 1998 and
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.
NOTE 13. SUBSEQUENT EVENT
- -------------------------------------------------------------------------------
On March 2, 1999, the Company signed a letter of intent to acquire the
majority control of Angiolo Siliani S.p.A. and of Siliani Elettronica ed
Impianti S.p.A. of Florence, Italy (Siliani). The acquisitions will
involve a combination of cash and the issuance of common stock. The
companies will operate under the name Siliani Harmon. Closing is expected on
April 30, 1999.
Angiolo Siliani S.p.A. is a market leader in switch point machines
for both standard and high-speed lines, equipment and devices for
interlockings, as well as electromechanical devices for locomotives.
Siliani Elettronica ed Impianti S.p.A. operates in the field of
electronic equipment and systems for signaling and train control, including
axle-counter equipment, hot wheel and hot box detectors, Automatic Train
Control (ATC), speed control and diagnostics. It also has a division in
Genoa, Italy that designs and installs railway interlockings.
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>
39
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 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. Foudrec
Bjorn E. Olsson Charles M. Foudree
President and Executive Vice President - Finance,
Chief Executive Officer Treasurer and Secretary
February 10, 1999
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, 1998 and 1997,
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, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Kansas City, Missouri
February 10, 1999
<PAGE>
46
INVESTOR INFORMATION
FORM 10-K
- -------------------------------------------------------------------------------
Shareholders may receive a copy of the Corporation's 1998 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 11, 1999, 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 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
- -------------------------------------------------------------------------------
1600 NE Coronado Drive
Blue Springs, Missouri 64014-6236
816/229-3345
Telefax: 816/229-0556
COMMON STOCK PRICE -RANGE AND
DIVIDEND INFORMATION
- -------------------------------------------------------------------------------
At December 31, 1998, there were 10,662,400 shares outstanding and
approximately 613 shareholders of record. Cash dividends are 11 cents per
share per year, paid semi-annually at 51_2 cents per share.
The range of high and low prices for the past eight -quarters ended
December 31, 1998 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 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
March 31 $ 22 - $16 5/6 $12 2/3 - $ 11
June 30 26 - 19 3/4 16 - 11 1/6
September 30 24 - 17 3/8 18 1/3 - 12 5/6
December 31 26 1/2 - 18 5/8 19 2/3 - 15 1/3
</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 4, 1999, 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
Knight Securities L.P.
Mayer & Schweitzer, Inc.
Sherwood Securities Corp.
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>
47
MANAGEMENT, DIRECTORS AND CORPORATE DATA
BOARD OF DIRECTORS
- --------------------------------------------------
Robert E. Harmon (59)
Chairman of the Board
Bruce M. Flohr (60)
Founder & Chairman Emeritus
RailTex, Inc.
San Antonio, Texas
Charles M. Foudree (54)
Executive Vice President-
Finance, Treasurer and Secretary
Rodney L. Gray (46)
Vice Chairman
Azurix
Houston, Texas
Herbert M. Kohn (60)
Attorney-at-Law
Bryan Cave LLP
Kansas City, Missouri
Douglass Wm. List (43)
Management Consultant
Baltimore, Maryland
Gerald E. Myers (57)
Management Consultant
Tempe, Arizona
Bjorn E. Olsson (53)
President & CEO
John A. Sprague (45)
Managing General Partner
Jupiter Partners, LP
New York, New York
Judith C. Whittaker (60)
Vice President, General
Counsel/Secretary
Hallmark Cards, Inc.
Kansas City, Missouri
( ) Indicates Age of Director
MANAGEMENT
- --------------------------------------------------
Bjorn E. Olsson
President & CEO
Charles M. Foudree
Executive Vice President-
Finance and Secretary
Lloyd T. Kaiser
Executive Vice President-
Domestic Sales and Service
William P. Marberg
Executive Vice President-
System Sales & Support
Raymond A. Rosewall
Executive Vice President-
Manufacturing
Ronald G. Breshears
Vice President-Human Resources
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
William J. Scheerer
Vice President--
Applications Engineering
Stephen L. Schmitz
Vice President-Controller
Jeffery J. Utterback
Vice President and
General Manager-
Riverside Operations
DOMESTIC LOCATIONS
- --------------------------------------------------
Riverside, California
Torrance, California
Jacksonville, Florida
Atlanta, Georgia
Delphi, Indiana
Louisville, Kentucky
Hingham, Massachusetts
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 Australia, Pty. Ltd.
Bayswater, Victoria, Australia
Vale-Harmon Enterprises, Ltd.
Saint-Laurent, Quebec, Canada
Vaughan Harmon Systems Ltd.
Ware, England
Industrias Harmon de Mexico, SA de CV
Monterrey, Mexico
<PAGE>
HARMON INDUSTRIES, INC.
1600 NE Coronado Drive
Blue Springs, Missouri 64014
Telephone 816-229-3345
Facsimile: 816-229-0556
www.hamonind.com
[LOGO]
<PAGE>
Exhibit 21
Harmon Industries, Inc.
Listing of Subsidiaries at December 31, 1998
<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.
Harmon Railway Systems Harmon Railway Systems Virgin Islands
International Corporation International Corporation
Vaughan Harmon Systems, Ltd. Vaughan Harmon Systems, Ltd. England
Vale Harmon Enterprises, Ltd. Vale Harmon Enterprises, Ltd. Quebec, Canada
Devtronics, Inc. Devtronics, Inc. Florida
Harmon Industries Australia Pty. Ltd. Harmon Industries Australia Pty. Ltd. Australia
Industrias Harmon de Mexico, SA de CV Industrias Harmon de Mexico, SA de CV Mexico
CSS, Inc. CSS, Inc. Indiana
SES CO, Inc. SES CO, Inc. Massachusetts
Seaboard Systems, Inc. Seaboard Systems, Inc. Massachusetts
</TABLE>
Page 91
<PAGE>
The Board of Directors
Harmon Industries, Inc.:
We consent to incorporation by reference in the registration statements (No.
333-25493 and No. 333-53809) on Form S-8 of Harmon Industries, Inc. of our
report dated February 10, 1999 relating to the consolidated balance sheets of
Harmon Industries, Inc. and subsidiaries as of December 31, 1998, and 1997,
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, 1998, and all related schedules, which report appears in the December 31,
1998, annual report on Form 10-K of Harmon Industries, Inc.
/s/ KPMG LLP
Kansas City, Missouri
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,669
<SECURITIES> 0
<RECEIVABLES> 52,580
<ALLOWANCES> (351)
<INVENTORY> 43,012
<CURRENT-ASSETS> 109,044
<PP&E> 61,859
<DEPRECIATION> (35,284)
<TOTAL-ASSETS> 162,853
<CURRENT-LIABILITIES> 53,180
<BONDS> 19,540
0
0
<COMMON> 2,666
<OTHER-SE> 82,292
<TOTAL-LIABILITY-AND-EQUITY> 162,853
<SALES> 265,219
<TOTAL-REVENUES> 265,219
<CGS> 208,932
<TOTAL-COSTS> 208,932
<OTHER-EXPENSES> 34,414
<LOSS-PROVISION> 33
<INTEREST-EXPENSE> 1,555
<INCOME-PRETAX> 21,049
<INCOME-TAX> 7,647
<INCOME-CONTINUING> 13,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,402
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.25
</TABLE>
