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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Section240.14a-12
PACIFIC SCIENTIFIC COMPANY
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(Name of Registrant as Specified in Its Charter)
KOLLMORGEN CORPORATION
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ANALYST CONFERENCE CALL SCRIPT
Remarks by Mr. Argov
Good morning, and thank you for joining us this morning.
Before we begin, I have been asked to point out that this analyst conference
call includes certain forward-looking statements that are subject to various
risks and uncertainties. There can be no assurance that such statements will
prove to be correct. Actual results may differ materially. Forward-looking
statements include assumptions as to how Kollmorgen, Pacific Scientific and the
combined company may perform in the future.
Today, Kollmorgen announced that we have proposed a business combination with
Pacific Scientific Company, of Newport Beach, California.
The transaction we have proposed values Pacific Scientific common stock at
$20.50 per share.
It represents about a 33% premium over Pacific's closing market price on Friday,
and about a 37% premium over Pacific's average closing price over the previous
30 trading days.
As such, we believe this is clearly a very attractive opportunity for Pacific
Scientific shareholders.
In fact, for reason we will be discussing this morning, we believe it is a very
attractive opportunity for the shareholders, customers and employees of both
companies.
I should add that we will also commence a consent solicitation and file
litigation in California to ensure that Pacific Scientific shareholders have the
opportunity to realize the benefits of our offer.
Since many of you are not yet familiar with Kollmorgen, I will begin my comments
this morning by giving you a capsule summary of who Kollmorgen is, what we have
accomplished as a company, where we are today, and where we are going.
After that, I will summarize what we regard as the key strategic, operational
and financial aspects of the transaction, with Bob Cobuzzi, our chief financial
officer, providing some additional financial detail.
Following that, we will be happy to take your question.
First, a bit of history.
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When I came to Kollmorgen six years ago, the company was wrestling with a number
of critical problems including over-reliance on defense-related revenues, high
manufacturing costs, high overheads in many areas, and a lack of new product.
The company was also fragmented, with about a dozen businesses in motion
control, instrumentation and electro-optical sectors. None of the businesses at
that time had the critical mass to be a global leader.
Over the past six years, the new team at Kollmorgen has transformed this 81-
year-old company into what we believe is a very focused, successful, profitable
and growing organization.
We began by implementing a painful but necessary operational restructuring
during 1991 and 1992.
Between 1993 and 1996, we then sold or otherwise disposed of several non-core or
under-performing businesses.
We significantly improved our balance sheet by placing one non-core business in
a joint venture and by later selling our share of that entity through an initial
public offering in Zurich.
And we made the strategic determination to focus on the high-performance
electronic motion control business.
Since electronic motion control is the reason behind our offer to purchase
Pacific Scientific today, let me tell you a little bit about that business.
The market for these very precise electric motors and the electronics that
control them is a multi-billion market-mostly in North America and Europe.
Customers are OEM's who produce machinery in a wide variety of segments. Any
machine that requires rapid and precise movement including the control of speed
and position - in both the industrial/commercial as well as aerospace/defense
markets - is a candidate for our technology.
Indeed, electronic motion control is replacing more mature technologies such as
hydraulics and pneumatics in many applications. The central driver of future
growth in the business is the desire on the part of these OEM customers for
increased productivity in their machinery - and whether this is measured in
increased speed, higher yields, lower scrap, or less down time, the imperative
is basically the same.
At Kollmorgen, we have achieved a position of leadership in a number of areas in
this market. We believe:
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We have a very broad product line, one which allows us to increasingly focus on
providing complete solutions and not just components or parts of solutions.
We have excellent technology, in which we continue to invest. We have done an
enormous amount of work in areas of manufacturing and logistics in order to
attain a low-cost production capability.
We have excellent and well-trained teams of sales engineers throughout the
world, so our market channels are strong.
Finally, we have become a more international company, with full-fledged
operating companies in France, Germany and Israel as well as manufacturing
facilities in India, Vietnam and the People's Republic of China.
We believe Killmorgen's operating and financial results clearly reflect the
success of our business strategies.
Kollmorgen management has delivered year over year growth in sales and operating
income from continuing operations from 1994 through 1996, and will do so again
in 1997.
We achieved this performance by focusing on our core operations while seeking to
maximize returns from non-strategic operations.
We also have considerable expertise in managing debt, having reduced
Kollmorgen's debt and preferred stock obligations by more than 40% during the
past three fiscal years and transitioned from fully-secured to unsecured credit
arrangements.
Our goal is to continue to execute on our strategy of focusing on becoming
a world leader in the area of high-performance electronic motion control.
With that as a backdrop, let us turn to our proposal to Pacific Scientific
shareholders.
As I mentioned, our offer of $20.50 per share for Pacific Scientific represents
an approximately 33% premium over Pacific's closing price on Friday, and an
approximately 37% premium over the company's average closing share price for the
preceding 30 trading days.
If the tender offer is successfully consummated, Pacific Scientific shareholders
would receive an immediate cash payment of $20.50 per share for half of
Pacific's outstanding common stock.
Significantly, because they would also receive Kollmorgen stock in the proposed
second-step merger, Pacific shareholders would also continue to participate in
the future growth
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of the combined company, through an equity stake of approximately 43% in the
combined company.
We are confident that based on the hard, direct consolidation synergies it would
create, this transaction will be accretive to earnings per share in 1999, and
increasingly so thereafter.
In that regard, we have identified more than $15 million of annual operating
synergies that the combined company can be expected to achieve in 1999, rising
to more than $20 million in the year 2000 and increasing thereafter.
And this is a transaction backed by committed financing. Specifically,
Kollmorgen has entered into a binding commitment letter with Salomon Smith
Barney and its affiliate, Salomon Brothers Holding, in which Salomon Brothers
Holding has committed to provide, subject to certain conditions, what Kollmorgen
believes is a conservatively financed secured bank facility to fully finance the
transaction.
What would the combined company look like?
As I indicated in my letter to Buck Hill, which is included in today's press
release, it would be a leader in high-performance electronic motion controls-one
of the fastest-growing segments of the motors and controls business.
Because our motion control product lines are highly complementary, we believe
the combined company will be well-positioned to become a full-service provider,
and to offer a broader array of products support services to an expanded
customer base.
With increased size and global scope, we believed the combined company will be
able to more effectively market its products to customers around the world,
offer international on-site product support, and conduct more effective and
cost-efficient research and development, marketing, production and sourcing.
Finally, we believe the combined company would enjoy greatly enhanced growth
opportunities, both externally and internally. We're confident that our
increased size and scope would enable us to be a leader in the accelerating
consolidation of the motion control industry and raise our visibility in the
business and financial communities.
I'd now like to introduce our chief financial officer, Bob Cobuzzi, who will
briefly discuss some additional financial aspects of this proposed transaction,
after which we'll open this up to questions.
Bob?
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MR. COBUZZI
Thank you, Gideon. Let me briefly summarize how we've structured our offer:
We have commenced a tender offer to acquire a majority of Pacific Scientific's
common stock outstanding on a fully diluted basis for $20.50 per share in cash.
Following the successful completion of the tender offer, Kollmorgen and Pacific
Scientific will merge and the Pacific Scientific shares not purchased in the
tender offer will be exchanged for Kollmorgen common stock having a value of
$20.50, subject to a collar.
Following completion of the transaction, Pacific Scientific shareholders will
own an equity stake of approximately 43% in the combined company, based upon
Friday's market price for Kollmorgen stock.
The stock portion of our offer is subject to a 10% up and down collar centered
at $16.88, which was Kollmorgen's NYSE closing price this past Friday. The
collar provides Pacific Scientific's shareholders with an ownership stake that
varies between 45% and 40% at each end of the collar. If our stock trades above
or below the collar, shareholders will receive Kollmorgen stock in the merger
with a value higher or lower than $20.50.
Based on this structure, the total valuation of the transaction is approximately
$341 million - consisting of an approximately $264 million equity consideration
plus approximately $77 million of assumed debt.
The combined company will be leveraged at what we believe is a conservative
4.9-times total debt to last-twelve-month EBITDA.
As Gideon noted, it will be financed entirely through a secured bank facility.
I'll now turn this back over to Gideon.
MR. ARGOV
Thank you, Bob.
We'll now open this up to questions.
[Q&A, after which Mr. Argov concludes with the following comment]
Let me conclude this conference call by saying that we believe this proposed
combination is a bold, exciting initiative for Pacific Scientific, Kollmorgen,
and the shareholders, customers and employees of both companies.
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We are firmly committed to pursuing this matter and are convinced that Pacific
Scientific shareholders will support our proposal.
Although it is clear to us that Pacific's Board up to now has not given adequate
consideration to our offer, nothing would please us more than to proceed with
this merger on a friendly basis, so that both Pacific Scientific shareholders
and Kollmorgen shareholders can begin to receive promptly the benefits of our
offer.
