Item 1. Business.
(a) General. Kollmorgen Corporation, incorporated in the State of New York in 1916, has operations in two industry segments: the motion technologies group and electro-optical instruments. The term the "Company" as used herein refers to Kollmorgen Corporation and its subsidiaries.
(b) Financial Information about Industry Segments. A table setting forth the amounts of revenue, operating profit or loss and identifiable assets attributable to each of the Company's industry segments in each of its last three fiscal years is contained in Note 19 captioned "Industry Segment Information to the Financial Statements."
(c) Narrative Description of Business
Motion Technologies Group.
The Company believes that it is one of the major worldwide manufacturers of high performance, brushless, permanent magnet motors with associated electronic servo amplifiers and servo feedback components. These products are manufactured in the United States by the Company's Inland Motor, Industrial Drives and PMI Divisions. In addition, the Company manufactures motion technology products through its French subsidiary, Kollmorgen Artus. The Inland Motor Division designs and manufactures specialty d.c. torque motors, servo motors, tachometer generators, electromechanical actuators and associated high technology drive electronics used worldwide in aerospace, defense, process control, medical, and machine tool applications. The Industrial Drives Division manufactures a line of specialty drive motors and related electronic amplifiers which are used in a variety of industrial applications including industrial automation, process control, machine tools, underwater equipment, and robotics. In the second quarter 1996, the Company introduced a new line of digital drives being sold under the trademark "Servostar" developed by the Company and its affiliate in Israel, Servotronix, Ltd. In addition, this Division sells a line of stepper motors and brushless motors used for office and factory automation, instrumentation, and medical applications. The PMI Division designs, manufactures and distributes a line of low inertia, high speed of response, d.c. motors and associated electronics plus feedback devices used primarily in industrial automation and medical applications. Commencing in 1996, this Division began selling linear motors for various industrial applications. Kollmorgen Artus manufactures and sells generators, special motors, electromechanical actuators and drive electronics, synchros, and resolvers, which are sold worldwide into the defense and aerospace market. During early 1997, Kollmorgen Artus announced the successful test flight of its proprietary ac/dc regulated power management system on the Bell-Boeing V-22 Osprey tiltrotor aircraft.
In addition to the Company's principal facilities referenced under the caption Item 2.
Item 2. Properties.
The Company's corporate office is located in Waltham, Massachusetts. The table which follows sets forth a current summary of the locations of the Company's principal operating plants and facilities, and other pertinent facts concerning them. The Company's facilities are substantially utilized, well maintained and suitable for its products and services.
Item 3.
Item 3. Legal Proceedings.
The Company has various legal proceedings arising from the ordinary conduct of its business; however, they are not expected to have a material adverse effect on the consolidated financial position, cash flows, or results of operations of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Company.
The following is a list of the Company's executive officers, their ages and their positions as of March 15, 1997:
Present Business Experience During Name Age Office Past Five Years
Gideon Argov 40 President Chairman of the Board since and March 1996, President and Chief Chief Executive Officer since November Executive 1991; Director since May 1991. Officer From March 1988 to May 1991, President and Chief Executive Officer and Director of High Voltage Engineering Company. Prior to that date, for five years a manager and senior consultant with Bain & Company.
Robert J. Cobuzzi 55 Senior Senior Vice President (since Vice February 1993), Treasurer and President, Chief Financial Officer since Treasurer July 1991. From April 1989 to and July 1991, Vice President and Chief Treasurer of High Voltage Financial Engineering Company. Prior to Officer April 1989, Vice President and Chief Financial Officer of Ausimont N.V.
James A. Eder 51 Vice Vice President since January President, 1990; General Counsel since Secretary December 1991, and Secretary and since 1983. Previously he had General been Assistant Corporate Counsel Counsel from 1977 to 1982.
Mark E. Petty 41 Vice Vice President since January 1, President 1996. President of the Company's U.S. Motion Technologies Group since 1994. Prior to that, he held several management positions in the Company since March 1992. Previously, President of General Eastern, a Division of High Voltage Engineering Company.
Keith D. Jones 38 Controller Corporate Controller since May, and Chief 1996. Chief Accounting Officer Accounting since March, 1996. Director of Officer Finance and Corporate Controller of Cambridge Biotech Corporation from September 1991 to August 1995.
All officers are elected annually for one-year terms at the organizational meeting of the Board of Directors held immediately following the annual meeting of shareholders.
PART II
Item 5.
Item 5. Market for the Company's Common Equity and Related Shareholder Matters.
The Company's Common Stock is traded on the New York Stock Exchange. There were approximately 2,200 registered holders of the Company's Common Stock on March 14, 1997. The following table sets forth the high and low sales price for shares of the Company's Common Stock within the last two fiscal years and the dividends paid during each quarterly period.
Item 6.
Item 6. Selected Financial Data.
The following table sets forth selected consolidated financial data for the Company for each of the five fiscal years 1992 through 1996. All dollar amounts are in thousands except per share data.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This filing contains forward-looking statements which involve risks and uncertainties. The Company s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference are set forth in the Company's Form 8-K dated January 27, 1997.
On January 16, 1997 the Company completed an agreement ( Subscription Agreement ) to combine effective December 31, 1996 its Macbeth division ( Macbeth ) with the Color Control Systems business of Gretag AG ( Gretag ). Macbeth and Gretag will be owned by a Swiss holding company, Gretag-Macbeth Holding AG ( Holding ) which will be equally controlled by the Company and the shareholders of Gretag AG who will own 48% and 52% of Holding, respectively. Accordingly, the results of operations and statement of cash flows for the twelve months ended December 31, 1996 reflect the inclusion of Macbeth, and the consolidated balance sheet as of December 31, 1996 reflects the net asset value of Macbeth under the caption "Investment in joint venture", which will be accounted for under the equity method prospectively.
In March, 1996 the Company sold a significant portion of its instrumentation business located in France for 12 million French francs (approximately $2.4 million), the approximate book value of the assets sold. In October, 1995 the Company sold its Photo Research business for $3.2 million in cash after expenses relating to the sale, which resulted in a gain of approximately $0.9 million. Collectively these two businesses will be referred to as the Businesses Sold .
On January 19, 1996 the Company entered into a term loan with the Company s lead bank which amended its existing loan agreement to include a $25 million five year amortizing term loan for the purpose of the redemption in February, 1996 of the Company s Series D Convertible Preferred Stock (the "Preferred Stock"). The Preferred Stock had a dividend rate of 9.5% versus the 7.45% interest rate of the term loan, and consequently the redemption had a beneficial impact in 1996 on the Company s earnings per share. Additionally, unlike the dividends on the Preferred Stock, interest payments are deductible from taxable income and will have a favorable impact to the Company in 1997 as its tax benefit carryforwards were essentially utilized in 1996.
Results of Operations
For the year ended December 31, 1996, the Company had sales of $230.4 million and net income of $8.9 million, equal to $0.86 per common share. These results compare with 1995 sales of $228.7 million and net income of $7.2 million equal to $0.26 per common share, and 1994 sales of $191.8 million and net income of $4.1 million, equal to $0.18 per common share. Deducted from earnings in the calculation of earnings per share in 1995 was the 10% premium of $2.3 million, or $0.24 per share, as required by the early redemption of the Preferred Stock in February, 1996.
The Company's sales increased 1% in 1996 over 1995. Excluding the Businesses Sold, revenues increased 9% which is attributable to increased revenue in both of the Company's business segments. Overall within its two segments, the Company s aerospace and defense related revenues decreased 3% and industrial and commercial revenues increased 3%. Domestic sales increased 3% in 1996 over 1995 and sales to customers outside of the United States decreased 3% over 1995. The Company s sales increase of 19% in 1995 over 1994 is also attributable to increased revenues in both of the Company s business segments.
The Company s overall gross margin improved as a percent of sales to 34% in 1996 versus 33% in 1995, as a margin decline in the electro-optical instruments segment was more than offset by margin gains in the motion technologies segment. Both changes in gross margin were primarily a result of sales volume. The Company s gross margin declined to 33% in 1995 as compared to 35% in 1994, as a result of margin declines in the Company s motion technologies group caused by increases in Original Equipment Manufacturer ( OEM ) sales, at margins lower than the segment s other businesses.
Sales and marketing expenses were $27.6 million or 12% of sales for 1996 as compared to $29.4 million or 13% of sales for 1995 and $27.8 million or 14% of sales for 1994. The decrease in spending in 1996 was the result of the exclusion of the Businesses Sold for most of 1996. The increase in spending in 1995 as compared to 1994 was primarily the result of increased expenses incurred by the Company s Macbeth division in connection with the launching of several new products and the expansion of its worldwide sales and marketing operations.
Research and development expenses were $12.1 million or 5% of sales in 1996, $13.2 million or 6% of sales in 1995, and $10.8 million or 6% of sales in 1994. The decrease in spending in 1996 was the result of excluding the Businesses Sold for most of 1996. The increase in research and development spending in 1995 over 1994 was primarily attributable to the support of long- term contracts awarded to the Company s French aerospace and defense operation, and for the development of commercial products introduced in 1995 and 1996.
Interest expense was $5.8 million, $4.7 million, and $4.6 million, in 1996, 1995, and 1994, respectively. The increase in interest expense in 1996 over 1995 reflects the impact of the $25 million term loan that the Company entered into to fund the redemption of its Preferred Stock. Interest expense remained relatively flat from 1994 to 1995 as the debt the Company incurred in connection with the 1994 acquisitions of certain assets of Hightech Components Ltd. and Sperry Marine, Inc., and the increased bank debt of the Company s French subsidiary, was offset by the reduction in long-term debt as a result of the Company's annual mandatory sinking fund payments on its two convertible subordinated debentures.
General corporate expenses included interest expense net of investment income and general and administrative expenses. The Company had a zero tax rate in 1996 as a result of the substantial utilization of its remaining net operating loss and other tax credit carryforwards. The Company s tax rate is expected to be approximately 25% on a consolidated basis in 1997. The Company recognized tax benefits of approximately $0.8 million for the year 1994 resulting from resolution of certain prior year tax assessments.
Motion Technologies Group
Sales in the motion technologies group increased to $141.3 million in 1996, up 8% from $130.8 million in 1995. Sales in 1995 were up 27% compared to 1994 sales of $103.4 million. In 1996 this segment increased its domestic revenues by 9% and foreign revenues by 7% over 1995. Sales to the defense market decreased 2% as compared to 1995, while sales to the non-defense markets increased 12%. The most significant increase in sales was in the Company s U.S. commercial business where revenues increased 14% over 1995, largely as a result of increased sales of its motion control systems to specialty machine manufacturers. The sales increase in 1995 versus 1994 reflects an increase in the group s domestic commercial business primarily to OEM s, and its French subsidiary which sells primarily to the aerospace and defense market.
Operating income (excluding corporate expenses) for this segment was $11.3 million and $9.8 million in 1996 and 1995, respectively, and the operating income was $8.5 million in 1994. The increase in operating income in 1996 over 1995 was a result of the increased revenues discussed above. Operating profit as a percent of sales increased in 1996 to 8% from 7%. Gross margins for the segment increased to 31% in 1996 from 30% in 1995. This increase was principally due to the increased sales resulting from the successful application of domestic aerospace and defense products into the industrial and commercial market. Additionally, the Company s French motion technology subsidiary had improved gross margins over 1995 due to increased revenues without an increase in fixed costs. Manufacturing cost reductions and unit price increases in 1996 improved the gross margins on ongoing OEM contracts. The positive improvements in gross margin were somewhat offset by lower gross margins on the Company s commercial products, caused in large part by product mix changes due to new product transition and a slowdown in the semi-conductor equipment industry.
Information concerning gross margins and operating expenses for 1995 reflect certain reclassifications between the two business segments to be consistent with the 1996 presentation, and which result in minor variations from the prior year s report.
The motion technologies group s research and development spending increased to 6% of sales in 1996 from 5% in 1995. Spending increased in the U.S. on new product development, and to support two aerospace programs at the Company s French subsidiary. Sales and marketing expenses increased 6% in 1996 over 1995, but remained at 12% of sales for both years.
The segment s operating income of $9.8 million for 1995 improved as compared to $8.5 million in 1994 as a result of the increased revenues of the group. Gross margins in 1995 declined to 30% as compared to 35% in 1994 due to the increased amount of OEM sales which historically have been at lower gross margins than the group s other business. R&D spending in 1995 remained at 5% of sales as compared with 1994, and sales and marketing expenses were 12% of sales in 1995 as compared to 14% in 1994.
New orders for this segment were up 8% in 1996 over 1995. The Industrial and Commercial Products group had an increase in new orders of 18%, and the Aerospace and Defense Products group showed a decline of 3% compared to 1995. Backlog for this segment was $54.0 and $56.2 million at December 31, 1996 and 1995, respectively. The Company believes the decrease is primarily due to shorter lead-time requirements of the segment s customers, particularly in the non-defense markets. In 1995, new orders were up 14% over 1994, and backlog decreased $4.1 million from $60.3 million at December 31, 1994.
Capital expenditures in 1996, 1995, and 1994 for this segment were $3.7 million, $2.7 million and $3.0 million, respectively, principally for replacement of existing equipment and investments in new equipment to improve manufacturing efficiency.
ELECTRO-OPTICAL INSTRUMENTS
Sales in the electro-optical instruments segment decreased to $89.2 million, down 9% from $97.8 million in 1995. Sales in 1995 increased by 11% over 1994 sales of $88.4 million. The decrease in 1996 versus 1995 was due to the impact of the Businesses Sold. Excluding the Businesses Sold, sales in 1996 increased 10% as compared to 1995. The increase was due primarily to sales at the Company s Proto-Power consulting engineering business where sales nearly doubled in 1996 versus 1995. Sales of color instrumentation products at the Company s Macbeth division increased 6% in 1996. The Electro-Optical division showed a decline of 6% in revenues as compared to 1995 on a long-term military contract for surface naval weapons directors.
Operating income (excluding corporate expenses) for this segment was $8.1 million in 1996 an increase of 27% over 1995 operating income of $6.4 million which was up 93% from 1994 operating income of $3.3 million. Excluding the impact of the Businesses Sold, operating income rose 22% to $9.2 million in 1996 as compared with $7.6 million in 1995. The increase in 1996 over 1995 is primarily a result of increased sales volume at the Company's Proto-Power division. Operating income in the Macbeth light and instrumentation business also improved due to increased sales volume, and lower operating expenses than in 1995 due to decreased personnel and marketing costs.
Gross margins for this segment declined slightly in 1996 over 1995, decreasing to 38% from 39%. Margin declines at the segment s Electro-Optical division were a result of lower sales volume.
Research and development spending decreased 46% in 1996 versus 1995 reflecting the impact of the Businesses Sold, which when excluded would result in a decrease of $0.2 million or 6% in R&D spending versus 1995. Sales and marketing expenses decreased 20% in 1996 over 1995. Excluding the Businesses Sold, sales and marketing expenses remained flat from 1995 to 1996, but declined as a percentage of sales to 12% from 13% in 1995.
Operating income in 1995 of $6.4 million was up 93% from 1994. The increase was attributable to the contribution from increased sales by the Company s Electro-Optical, Macbeth, and Proto-Power divisions.
Backlog for this segment was $41.8 million, $53.1 million, and $58.3 million at December 31, 1996, 1995, and 1994, respectively. The decrease in 1996 was caused in large part by the decrease in new orders under long-term military contracts by the Electro-Optical division, and the elimination of the backlog of the Businesses Sold.
Capital expenditures in 1996, 1995, and 1994 for this segment were $1.2 million, $1.1 million, and $1.7 million, respectively, primarily for replacement of existing equipment and investment in new equipment to improve the efficiency of product manufacturing.
Liquidity and Capital Resources
The Company's consolidated cash position decreased by $4.3 million during 1996. Cash provided from operations was $6.4 million, while $0.1 million was provided by investing activities due primarily to the sale of assets, and $10.4 million was used for financing activities.
At December 31, 1996, the Company was contingently liable for $7.9 million of standby letters of credit issued principally to secure advance payments received from foreign customers on long-term military contracts.
Accounts receivable growth used $9.7 million of cash reflecting significant increases of progress billings on long-term military contracts, and the increased revenues at the Company s Proto-Power division. Inventories used $0.4 million of cash as compared to $3.9 million in the prior year, reflecting the Company s focus on reducing inventory purchases in 1996. Recoverable amounts on long-term contracts decreased by $7.1 million reflecting the attainment of billing milestones on long term military contracts under the percentage-of-completion method. Accounts payable and accrued liabilities used $3.8 million in cash reflecting payments made in connection with the sale of a portion of the Company s instrumentation business in France and scheduled payments made in the first quarter of 1996.
The Company's investing activities in 1996 included expenditures of $4.8 million for property, plant and equipment primarily for replacement of existing equipment and investment in new equipment to improve the efficiency of manufacturing. In early 1996 the Company sold a portion of its instrumentation business located in France and received $2.4 million. The Company also sold two buildings which it did not occupy in 1996 receiving $2.9 million in cash after expenses. The Company invested $1.4 million to purchase stock in Servotronix, Ltd. a company in Israel which is involved in the joint development of high performance digital drives and controls with the Company s motion technologies group. In 1997 the Company intends to make additional investments of approximately $8.5 million in cash and the Company s common stock to acquire the balance of the outstanding shares of Servotronix.
The Company's financing activities used $10.4 million of cash during the year. On January 19, 1996 the Company entered into a five year $25 million term loan to finance the redemption of its outstanding Preferred Stock, which was redeemed in cash for $25.8 million in February 1996. Scheduled payments under the term loan were $2.3 million in 1996. Dividends, both common and preferred, accounted for $1.1 million. The Company also made mandatory sinking fund payments on its two convertible subordinated debentures totaling $3.8 million. The Company is required, under the terms of the convertible subordinated debenture agreements, to make certain mandatory sinking fund payments each year through the year 2009. The Company paid $1.9 million against notes the Company issued in connection with the 1994 acquisition of the submarine periscope assets of Sperry Marine, Inc. and the assets of Hightech Components Ltd. At the Company's French facility, $1.1 million was repaid against existing credit lines.
In April, 1996 the Company entered into a lease financing arrangement with a leasing company to provide for the financing of up to $5 million for equipment purchases through March 31, 1997. During 1996 the Company financed approximately $2.8 million under the equipment lease agreement.
Capital spending for 1997 is expected to be at the same level as 1996. The Company expects to obtain lease or debt financing for some of its capital requirements for 1997. The Company s need, cost of, and access to funds are dependent on future operating results, as well as conditions external to the Company. The Company continues to focus on working capital reductions and effective cash management in order to maximize the amount of available cash. The Company believes that with the cash generated from operations and with its current and future borrowing capacity it will be able to finance its 1997 capital expenditures, sinking fund payments, working capital requirements, and acquisition commitments. The preceding forward-looking statements are subject to significant risks and uncertainties, which may cause the Company s actual experience to differ from its expectations. These risks and uncertainties include, among other things, the possibility that the Company s capital needs will be greater than expected, due to, for example, lower than expected revenues, operating losses, increased working capital needs, unanticipated capital expenditure requirements and acquisitions, and the possibility that external borrowings, financing arrangements, or other capital sources will not be available as anticipated or will not be available on terms that are favorable to the Company.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is included in Item 14(a) of this Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Company.
The information required by this Item 10 of Form 10-K relating to directors who are nominees, and to directors continuing in office after the Company's Annual Meeting of Shareholders to be held on May 14, 1997, is contained in the definitive proxy statement to be filed with the Securities and Exchange Commission (the "Commission") on or before April 7, 1997, under the headings "Nominees", and "Continuing Directors", and such information is incorporated herein by reference in response to this item.
The information required by this Item 10 of Form 10-K with respect to executive officers is set forth in Part I of this Form 10-K under the heading "Executive Officers of the Company".
Item 11.
Item 11. Executive Compensation.
The information required by this Item 11 of Form 10-K is contained in the Company's definitive proxy statement to be filed with the Commission on or before April 7, 1997, under the heading "Executive Compensation" and such information is incorporated herein by reference in response to this item.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item 12 of Form 10-K is contained in the definitive proxy statement to be filed with the Commission on or before April 7, 1997, under the headings "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" and such information is incorporated herein by reference in response to this item.
Item 13.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements. See Index to Financial Statements on page 19.
(2) Exhibits. See Exhibit Index on page 48.
(b) Reports on Form 8-K.
(i) On January 27, 1997, the Company filed a current report on Form 8-K setting forth certain risk factors relating to forward looking statements that the Company and its representatives may make from time to time.
(ii) On January 31, 1997, the Company filed a current report on Form 8-K announcing the signing of an agreement with the shareholders of Gretag AG relating to the formation of Gretag-Macbeth Holding AG, a new Swiss joint venture composed of the Company's Macbeth color business and the Gretag Color Control Systems business.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Kollmorgen Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KOLLMORGEN CORPORATION
/s/ Robert J. Cobuzzi Robert J. Cobuzzi Its: Senior Vice President, Treasurer and Chief Financial Officer March 28, 1997
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 Company and in the capacities and on the dates indicated:
/s/ Gideon Argov Gideon Argov March 28, 1997 President and Chief Executive Officer/Director
/s/ Robert J. Cobuzzi Robert J. Cobuzzi March 28, 1997 Senior Vice President, Treasurer and Chief Financial Officer/Director
/s/ Keith D. Jones Keith D. Jones March 28, 1997 Controller and Chief Accounting Officer
/s/ James A. Eder James A. Eder March 28, 1997 Vice President and Secretary and Attorney-in-Fact For:
James H. Kasschau, Director Geoffrey S. Rehnert, Director
J. Douglas Maxwell, Jr., Director George P. Stephan, Director
Robert N. Parker, Director
The following consolidated financial statements of the Company and its subsidiaries are included in response to Item 8.
Page(s) in Form 10-K -----------
Report of Independent Accountants 20
Consolidated Balance Sheets as of December 31, 1996 and 1995 21-22
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 23
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 24-25
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 26-27
Notes to Consolidated Financial Statements 28-47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders Kollmorgen Corporation:
We have audited the accompanying consolidated balance sheets of Kollmorgen Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kollmorgen Corporation and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts January 27, 1997
KOLLMORGEN CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995, and 1994 (Dollars in thousands, except per share amounts) _________________________________________________________________
Note 1. Summary of significant accounting policies
A summary of the significant accounting policies followed by Kollmorgen Corporation is presented below. Certain reclassifications have been made to the prior years' financial statements to conform to 1996 classifications. For purposes of the Notes to Consolidated Financial Statements, the term the "Company" refers to Kollmorgen Corporation and its subsidiaries.
Principles of Consolidation Except as discussed in Note 2, the consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
Cash and Cash Equivalents Cash equivalents are stated at cost that approximates fair value. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Recoverables Recoverable amounts on long-term contracts represent revenues recognized on a percentage-of-completion basis less progress billings.
Inventories Inventories are stated at the lower of cost or market, principally using the first-in, first-out method. Progress payments received on contracts other than major long-term contracts are deducted from inventories.
Property, Plant and Equipment and Accumulated Depreciation Property, plant and equipment are carried at cost and include expenditures for major improvements which substantially increase their useful life. Repairs and maintenance are expensed as incurred. When assets are retired or otherwise disposed of, the assets and related allowances for depreciation and amortization are eliminated from the accounts and any resulting gain or loss is recognized.
For financial reporting purposes, depreciation is provided generally on a straight-line basis over the estimated useful lives of the buildings (10 to 40 years) and the machinery and equipment (3 to 12 years). Leasehold
Notes to Consolidated Financial Statements - continued
improvements are depreciated over the remaining period of the existing leases. For income tax purposes, depreciation is computed by using various accelerated methods and, in some cases, different useful lives than those used for financial reporting.
Goodwill and Intangibles Goodwill consists of amounts by which the cost of acquisitions exceeded the values assigned to net tangible assets. Intangible assets consist principally of patents. All of these assets are being amortized on a straight-line basis over periods ranging from 10 to 20 years.
At each balance sheet date, management evaluates whether there has been a permanent impairment in the value of goodwill or intangible assets by assessing the carrying value of the asset against the anticipated future cash flows from related operating activities. Factors which management considers in performing this assessment include current operating results, trends and prospects, and, in addition, demand, competition, and other economic factors.
Foreign Currency Translation The functional currency for the majority of the Company s foreign operations is the applicable local currency. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using the exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses resulting from such translation are included in stockholders equity. Gains or losses resulting from foreign currency transactions are included in other income.
Revenue Recognition Sales, other than revenues from major long-term contracts, are recorded based upon product shipment or acceptance by the customer if earlier. Major programs that are performed under long-term contracts are accounted for using the percentage-of-completion method. Revenues recognized under this method were $31.7 million, $37.7 million, and $34.4 million in 1996, 1995, and 1994, respectively. In most cases the contracts also provide for progress billings over the life of the program.
Earnings Per Common Share Earnings per common share is based on net income less the dividends, interest accretion and the premium paid (see Note 8) on redeemable preferred stock divided by the weighted average number of common and dilutive common equivalent shares outstanding. Fully diluted net income assumes full conversion of all convertible securities into common stock that include the convertible subordinated debentures and redeemable preferred stock. The fully diluted calculation does not result in significant dilution of net income per common share and, accordingly, is not presented.
Income Taxes The Company accounts for income taxes under the liability method. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences
Notes to Consolidated Financial Statements - continued
between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is required to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Postretirement Benefits Other Than Pensions The Company has elected the delayed recognition method in which the cost for employees hired prior to January 1, 1992, is being amortized over 20 years. The Company paid approximately $0.9 million in 1996 for postretirement benefits to retirees.
Fair Value of Financial Instruments The method and assumptions used to estimate the fair value of each class of financial instrument for which it is practicable to estimate a value are as follows:
Long-Term Debt: The fair value of the Company s long-term debt is estimated based on its quoted market prices.
Standby Letters of Credit: The fair values of letters of credit are based on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
Note 2. Investment in joint ventures
On January 16, 1997, the Company completed an agreement ( Subscription Agreement ) to combine, effective December 31, 1996, its Macbeth division ( Macbeth ) with the Color Control Systems business of Gretag AG ( Gretag ). Macbeth and Gretag will be owned by a Swiss holding company ( Holding or the Joint Venture ) which will be equally controlled by the Company and the shareholders of Gretag AG who will own 48% and 52% of Holding, respectively. Accordingly, the results of operations and statement of cash flows for the twelve months ended December 31, 1996 reflect the inclusion of Macbeth, and the consolidated balance sheet as of December 31, 1996 reflects the net asset value of Macbeth as Investment in joint venture. The Company will account for this transaction using the equity method.
Included in the Company s Investment in joint venture is a note receivable of 6.8 million Swiss francs (approximately $5.1 million) payable by the Joint Venture to the Company. The note is non-interest bearing until December 31, 1997 when it will accrue interest at 1% above the three month CHF LIBOR rate, which was 3% at December 31, 1996. The note is due in full from the proceeds of any initial public offering of the common stock of the Joint Venture. If the note has not been repaid by December 31, 1997, the note will be repaid in equal quarterly installments over a five year period commencing March 31, 1998. The fair value of this note at December 31, 1996 after consideration of imputed interest for the non-interest bearing period discounted at the Company's incremental borrowing rate of 8% is $4.3 million.
Notes to Consolidated Financial Statements - continued
Note 3. Inventories
Inventories at December 31 consist of the following:
1996 1995 --------- --------- Raw materials $ 11,816 $ 15,110 Work in process 8,118 7,653 Finished goods 2,516 3,447 --------- --------- $ 22,450 $ 26,210 ========= =========
Note 4. Property, Plant and Equipment
Property, plant and equipment at December 31 consists of the following:
1996 1995 --------- --------- Land $ 1,460 $ 2,086 Leasehold improvements 812 792 Buildings 25,937 35,652 Machinery and equipment 68,807 74,385 Capital leases 382 581 --------- --------- 97,398 113,496 Less accumulated depreciation and amortization 72,251 84,693 --------- --------- $ 25,147 $ 28,803 ========= =========
Note 5. Financial Instruments
The Company has not used derivatives to hedge its exposure to market risks from changes in foreign exchange rates and interest rates. In 1996, however, as part of its borrowing facility with its lead bank (see Note 6) the Company entered into a $25 million five year amortizing interest rate swap which effectively converts a floating rate debt to a fixed rate of interest of 7.45%. The Company has no exposure to fluctuations in interest rates during the term of the loan, unless the Company was to prepay the loan and interest rates declined. The fair value of the interest rate swap at December 31, 1996, was $0.3 million.
The Company s principal foreign operations are in countries in which the currency historically has been fairly stable. Management believes that any fluctuations in currency rates within these countries will not have a material adverse effect on the Company s financial condition, cash flows, or results of operations.
Notes to Consolidated Financial Statements - continued
Note 6. Lines of credit and notes payable
Notes payable consist of the following at December 31:
1996 1995 -------- -------- Foreign $ 5,545 $ 7,103 Domestic - 1,916 -------- -------- $ 5,545 $ 9,019 ======== ========
On January 19, 1996 the Company amended its borrowing facility with its lead bank to provide for (i) a five year $20 million revolving credit facility bearing interest at the bank's prime rate plus one half of one percent or the Eurodollar rate plus two percent (with a 21 million French franc facility for the Company s French subsidiary, and a $12.5 million sublimit on letters of credit), and (ii) a $25 million amortizing five year term loan. The term loan was for the sole purpose of redeeming the Convertible Preferred Stock as discussed in Note 8. The borrowing facility is secured by substantially all of the tangible and intangible assets of the Company (excluding real property). The facility contains certain financial covenants that the Company must comply with including limits on capital spending, minimum cash flow requirements, minimum tangible net worth, current ratio, and other ratios relating to the amount of total debt that the Company may have as compared to the Company s net worth and earnings. These requirements change during the term of the loan. The Company was in compliance with all covenants at December 31, 1996.
At December 31, 1996, the Company had $7.9 million of standby and documentary letters of credit outstanding with its lead bank, approximately $4 million (21 million francs) under the French facility, and no amounts were outstanding under the domestic revolving credit facility.
The Company's French subsidiary, Kollmorgen Artus, maintains working capital lines of credit with three French banks other than the Company s lead bank discussed above. At December 31, 1995 the Company had approximately $3.1 million outstanding and $0.7 million of availability under these lines of credit.
Notes to Consolidated Financial Statements - continued
Note 7. Long-term debt
Long-term debt consists of the following:
1996 1995 -------- -------- 8 3/4% Convertible subordinated debentures due 2009 $ 34,590 $ 36,340 10.50% Convertible subordinated debentures due 1997 2,000 4,000 Term loan, 7.45% due through 2001 22,750 -
Term loan, 4.50% due through 2001 424 - Term loans, 10.50% due 1997 9 28 Capital lease obligations 223 421 -------- -------- 59,996 40,789 Less current maturities 6,942 3,901 -------- -------- $ 53,054 $ 36,888 ======== ========
The 8.75% Convertible Subordinated Debentures are convertible at any time prior to maturity, unless previously redeemed, into 1,006,987 shares of common stock of the Company at a conversion price of $34.35 per share, subject to adjustment in certain events. The Company is required to make annual sinking fund payments sufficient to retire at least $1.75, but not more than $3.5 million principal amounts commencing May 1, 19954, and each year thereafter including May 1, 2008. The balance, if any, is due on May 1, 2009. At December 31, 1996 the market price of these debentures approximated carrying value.
The 10.50% Convertible Subordinated Debentures, issued in a private placement, are convertible into 80,000 shares of the Company's common stock at a price of $25 per share at any time prior to maturity, unless previously redeemed. The debentures are subject to mandatory sinking fund payments which commenced on August 1, 1993, and each year thereafter including August 1, 1997, in the amount of $2 million of principal reduction.
As described in Note 6 above, the 7.45% term loan was for the sole purpose of redeeming the Company s Preferred Stock (as described in Note 8), and the balance is to be repaid in mandatory installments of $3 million, $5.25 million, $6 million, $6.75 million, and $1.75 million in the years 1997, 1998, 1999, 2000, and 2001 respectively.
The Company incurred $5.8 million, $4.7 million, and $4.6 million of interest expense on debt in 1996, 1995, and 1994, respectively.
Notes to Consolidated Financial Statements - continued
Long-term debt at December 31, 1996, matures as follows:
Date Maturities ---- ---------- 1997 $ 6,942 1998 7,172 1999 7,806 2000 8,634 2001 3,602 Thereafter 25,840 -------- $59,996 ======== Note 8. Preferred Stock
In March, 1990, the Company sold 23,187.5 shares of a new issue of Series D convertible preferred stock (the "Preferred Stock") for $1,000 per share, or an aggregate of approximately $23.2 million, to a group of investors led by Tinicum Enterprises, Inc. The Preferred Stock had a cumulative dividend rate of 9.5 percent per year and was convertible into an aggregate of 1,717,591 shares of Kollmorgen common stock, subject to antidilution provisions.
On February 19, 1996, the Company redeemed all of the Preferred Stock. The redemption price included a 10% premium of $2.3 million plus unpaid dividends through the date of redemption. At December 31, 1995 there were no unpaid dividends, and the Preferred Stock is shown at its liquidation value plus the 10% premium or $25.5 million. The Company borrowed $25 million to finance the redemption (see Note 6), and made required repayments in 1996 of $2.3 million. This amount together with the amount of the redemption to be funded from working capital, or a total of $2.8 million, is classified as a current liability on the accompanying balance sheet at December 31, 1995.
Note 9. Common Stock, Additional Paid-in Capital and Treasury Stock
Pursuant to the By-Laws of the Company, directors who are not employees of the Company receive an annual retainer of $12,000. Under the terms of the 1992 Stock Ownership Plan for Non-Employee Directors, each non-employee director receives at least 50% of his annual retainer in shares of common stock. The number of shares of common stock is based on the fair market value of such shares at the end of each quarterly period.
The Company maintains a Shareholder Rights Plan which provides one Preferred Stock Purchase Right (Right) for each outstanding share of Common Stock of the Company. Each Right entitles the registered holder, subject to the terms of a Rights Agreement, to purchase one one-thousandth of a share (Unit) of Series B Preferred Stock, par value $1.00 per share (Preferred Stock), at a purchase price of $50 per Unit. The units of Preferred Stock are non-redeemable, voting, and are entitled to certain preferential dividend
Notes to Consolidated Financial Statements - continued
rights. The exercise price and the number of units issuable are subject to adjustment to prevent dilution.
The Rights are not exercisable until the earlier to occur of (i) 10 days following a public announcement (the date of such announcement being the "Stock Acquisition Date") that a person or group has acquired beneficial ownership of 20% or more of the then outstanding shares of capital stock of the Company entitled to vote or (ii) a date determined by the Board of Directors following the commencement of a tender or exchange offer which would result in a party beneficially owning 30% or more of the shares of voting stock of the Company.
The Board of Directors of the Company may redeem the Rights at any time on or prior to the tenth day following the Stock Acquisition Date at a price of $0.01 per Right. Unless earlier redeemed, the Rights will expire on December 20, 1998.
Common stock reserved for issuance at December 31, 1996 and 1995, were as follows: conversion of debentures and redeemable preferred stock -- 1,086,987 and 2,935,524, respectively; and stock options and other awards -- 1,634,991 and 1,122,441, respectively.
As a result of the Company's losses in previous years, there was not a sufficient amount of retained earnings from which to pay dividends and, accordingly, dividends paid on common and preferred stock were charged to "Additional Paid-in Capital."
Note 10. Stock option and purchase plans
In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based Compensation. SFAS 123 is effective for periods beginning after December 15, 1995. SFAS 123 requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments based on fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. The Company adopted the disclosure provisions of SFAS 123 in 1996 and continues to apply APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized. Pro forma amounts are indicated below.
The Company s maintains two employee stock option plans under which grants have been made to officers and key employees. Additionally, the Company maintains a non-employee director "(NED)" stock option plan that provides, among other things, a one-time grant to each non-employee director of a non-qualified stock option to purchase (i) 15,000 shares of common stock and (ii) the right to acquire an additional option to purchase up to 10,000 shares if the non-employee director purchases a corresponding number of shares on the open market within ninety days after the grant. Generally, the options outstanding under the Company s stock plans: (a) are granted at
Notes to Consolidated Financial Statements - continued
prices which equate to the market value of the stock on the date of grant, (b) vest ratably over a five year period for the employee plans and over a two year period for the NED plan and (c) expire ten years subsequent to award. At 12/31/96 the Company has authorized 1,309,991 and 325,000 shares for issuance under the employee plans and the NED plan, respectively. A total of 275,500 and 125,000 options were granted in 1996 under the employee plans and the NED plan, respectively.
A summary of the status of the Company s stock options as of December 31, 1996, 1995, and 1994, and changes during the year ended on those dates is presented below:
The fair value of each option granted during 1996 and 1995 is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: (a) dividend yield of 0.8%, (b) expected volatility of 37%, (c) risk-free interest rate of 6.2%, in 1996 and 5.6% in 1995, and (d) expected life of 5 years. The Weighted Average Fair Value of options granted during the years 1996 and 1995 are $4.21 and $3.54, respectively.
Notes to Consolidated Financial Statements - continued
The following table summarizes information about currently outstanding and exercisable stock options at December 31, 1996:
Had compensation costs for the Company s 1996 and 1995 grants for stock-based compensation plans been determined consistent with SFAS 123, the Company s net income and net income per share for 1996 and 1995 would approximate the pro forma amounts below:
1996 1995 ----------------- ------------------ As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- --------- Net income $8,904 $8,612 $7,157 $7,145 Net income per share $0.86 $0.83 $0.26 $0.26
The effect of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated.
Note 11. Taxes on income
The components of income (loss) before income taxes were as follows:
1996 1995 1994 -------- -------- -------- Domestic $ 9,436 $ 7,543 $ 5,001 Foreign (1,046) (386) (1,765) -------- -------- -------- Total $ 8,390 $ 7,157 $ 3,236 ======== ======== ========
Notes to Consolidated Financial Statements - continued
Statement of Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109") requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
As required by FAS 109, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets. Management has evaluated the components of its deferred tax assets, the anticipated taxable income of the Company, and concluded that, in accordance with applicable accounting standards, it is more likely than not that a portion of these assets will not be utilized.
For income tax purposes the Company has elected to treat the transfer of the Macbeth assets into the Joint Venture as a taxable transaction. Accordingly, the Company will recognize a tax gain of the excess of the fair value of the Macbeth assets over their net tax value.
The valuation allowance decreased during 1996 resulting from recognizing benefits from the utilization of net operating loss and tax credit carryforwards as a result of current income from operations and the tax gain from the formation of the Joint Venture.
The provision (benefit) for income taxes consists of the following (in thousands):
1996 1995 1994 -------- -------- -------- Current provision (benefit): U.S. federal $ 1,543 $ 61 $ (906) Foreign - (235) 35 State 185 - 56 -------- -------- -------- 1,728 (174) (815) -------- -------- -------- Deferred provision (benefit): U.S. federal (1,487) - - Foreign - 174 - State (241) - - -------- -------- -------- (1,728) 174 - -------- -------- -------- Total $ - $ - $ (815) ======== ======== ========
Notes to Consolidated Financial Statements - continued
The U.S. effective income tax rate from operations is different from the U.S. federal statutory rate for the following reasons:
1996 1995 1994 -------- -------- -------- Income tax provision (benefit) if computed at U.S. federal rates $ 2,937 $ 2,433 $ 1,100 Gain on the formation of Joint Venture 8,645 - - Benefit of net operating loss carryforwards and tax credits (13,487) (2,650) (1,769) Foreign unutilized net operating losses and tax credits 364 - 646 Foreign tax rate variances - 70 (2) State income taxes net of federal benefit 1,602 - 37 Other (61) 147 (827) -------- -------- -------- $ - $ - $ (815) ======== ======== ========
The deferred tax assets and liabilities are comprised of the following:
12/31/96 12/31/95 -------------------- Bad debt reserve $ 197 $ 233 Employee benefit reserves 2,015 711 Reserve for net realizable value of real estate 1,088 1,200 Other 3,526 3,807
General business tax and other credits 4,477 18,842
Property, plant and equipment (2,215) (2,527) --------- --------- 9,388 22,266
Valuation allowance (7,660) (22,266) --------- --------- Net deferred tax asset $ 1,728 $ - ========= =========
For Federal income tax purposes, the Company has no domestic regular tax net operating loss carryforwards. The Company has foreign net operating losses of approximately $2.4 million and these net operating losses expire beginning in 1998.
Notes to Consolidated Financial Statements - continued
Note 12. Asset Acquisitions and Equity Investments
In May, 1995 the Company entered into an agreement to acquire for $0.6 million, a 10% equity interest in Servotronix Ltd., an Israeli firm which designs and markets digital control systems for the motion control market. In 1996 the Company increased its equity interest in Servotronix to 25.1 % with payments totaling $1.4 million. The Company intends to purchase the remaining shares of Servotronix in 1997 for approximately $8.5 million, a portion of which may be paid in the Company s common stock.
In 1995 the Company invested $1.0 million for a 51% interest in a joint venture in Bombay, India, to manufacture high volume brushless fractional horsepower motors. Additionally, the Company has advanced $1.9 million to the joint venture to fund its working capital requirements. The joint venture was finalized in 1996 and the Company's proportionate share of the operating results has been included in the financial results of the Company for 1996. Management believes that the exclusion of the joint venture in 1995 does not have a material impact on the financial statements presented for that year.
Note 13. Sale of Assets
In March 1996 the Company sold a significant portion of its instrumentation business located in France for approximately $2.4 million, the net book value of the assets sold.
During 1996 the Company sold real estate which it did not occupy for $2.9 million, net of related expenses, and which resulted in a gain of approximately $0.4 million.
In February, 1995 the Company sold a vacant building which it had recorded as an asset held for sale at the end of 1994, and valued at $3 million, and which resulted in a loss of approximately $0.5 million.
In October, 1995, the Company sold its Photo Research division for approximately $3.2 million in cash after deducting related expenses, and which resulted in a gain of approximately $0.9 million.
Note 14. Leases
The Company leases certain of its facilities and equipment under various operating and capital lease arrangements. Such arrangements generally include fair market value renewal and/or purchase options.
Rent expense for operating leases amounted to $2.2 million in 1996, $2.5 million in 1995, and $2.1 million in 1994. Future minimum rental payments required under non-cancelable operating and capital leases having a lease term in excess of one year, together with the present value of the net minimum lease payments at December 31, 1996, are as follows:
Notes to Consolidated Financial Statements - continued
Operating Capital Leases Leases ---------- ---------- 1997 $ 1,704 $ 117 1998 1,518 80 1999 1,391 55 2000 1,383 0 2001 995 0 Thereafter 3,300 0 -------- -------- Total minimum lease payments$ 10,291 $ 252 ======== Less amounts representing interest (29) -------- Present value of net minimum lease payments $ 223 ========
Note 15. Contingencies
The Company has various lawsuits, claims, commitments and contingent liabilities arising from the ordinary conduct of its business; however, they are not expected to have a material adverse effect on its consolidated financial position.
In doing business with the U.S. Government, the Company is subject to routine audits and, in certain circumstances, to inquiry, review, or investigation by the U.S. Government Agencies relating to the Company's compliance with Government Procurement policies and practices. The Company's policy has been and continues to be to conduct its activities in compliance with all applicable rules and regulations.
Pursuant to the Subscription Agreement described in Note 2, the Company has retained certain potential liabilities of the Macbeth division. Management believes that the assumption of these potential liabilities will not have a material adverse effect on the financial position of the Company.
The Company is engaged primarily in the manufacture and sale of highly diversified lines of commercial, industrial, and military products into both domestic and international markets. The Company generally does not require collateral from its customers on the basis of ongoing reviews and evaluations of their credit and financial condition.
Note 16. Pension and other employee benefit plans
The Company maintains three non-contributory qualified defined benefit pension plans covering substantially all domestic employees (the
Notes to Consolidated Financial Statements - continued
"Plans"). Plans covering most employees provide pension benefits based generally on the employee's years of service and final five-year or career average compensation. Due to full funding, the Plans currently have no required contribution by the Company.
The net periodic pension cost for the years 1996, 1995 and 1994 included the following components:
1996 1995 1994 -------- -------- -------- Service cost $ 2,499 $ 1,617 $ 1,986 Interest cost 3,633 3,123 3,104 Actual (return) loss on plan assets (10,502) (13,472) 158 Net amortization and deferral 4,280 8,396 (5,508) -------- -------- -------- Net periodic pension cost (credit) $ (90) $ (336) $ (260) ======== ======== ========
The assumptions used in determining the end of year benefit obligations included a discount rate of 6.50% in 1996 and 1995, and 8.25% in 1994, an expected investment return of 10% and compensation increases of 5%. The Plans' assets consist principally of cash, common stocks, and bonds.
The Plans' funded status together with the amounts recognized in the Company's Balance Sheet at December 31 are as follows:
1996 1995 -------- -------- Actuarial present value of benefit obligations: Vested $(36,545) $(40,853) ======== ======== Accumulated (37,450) (41,766) ======== ======== Projected (51,729) (56,600) Plans' assets at fair value 63,879 58,357 -------- -------- Plans' assets in excess of projected benefit obligation 12,150 1,757 Unrecognized net (gain) loss (5,864) 4,931 Unrecognized net asset at January 1 (4,705) (5,277) Unrecognized prior service cost 1,717 1,798 -------- -------- Prepaid pension cost $ 3,298 $ 3,209 ======== ========
Notes to Consolidated Financial Statements - continued
The Salaried Employees' Retirement Plan provides that in the event of a termination of that plan following a change in control of the Company, any assets of the plan remaining after provision is made for all benefits thereunder will be employed to supplement such benefits.
The Company also maintains a Supplemental Retirement Income Plan ("SERP") for former key employees. The Company has accrued an actuarially determined liability of $3.5 million at December 31, 1996 and 1995, in anticipation of the payment of such benefits in the future to seven former employees who were designated as eligible by the Personnel and Compensation Committee for participation in the SERP program. The Company incurred a pension expense of $0.3 million in 1996 and in 1995 for the SERP.
The Company has a voluntary 401(k) savings and investment plan designed to enhance the existing retirement program covering eligible domestic employees. In 1996, the Company matched 50% of each participant's contributions, up to a maximum contribution of 2% of base salary. Company contributions to this plan were $0.7 million, $0.5 million, and $0.2 million in 1996, 1995, and 1994, respectively.
As a result of the formation of the Joint Venture as described in Note 2, the Company expects the employees of Macbeth to become employees of the Joint Venture in 1997. This will be accounted for as a curtailment and a settlement under Statements of Accounting Standards No. 88, "Employers' Accounting for Settlement and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). The gain or loss has not yet been determined.
Note 17. Postretirement medical insurance benefits
The Company maintains a postretirement medical benefits plan covering substantially all domestic employees hired prior to January 1, 1992. The plan is contributory. Retiree contributions are adjusted annually, and are based on the difference between total cost and the employer contribution. The Company's contribution towards retiree medical benefits for employees retiring after January 1, 1992, are capped at 1991 levels. FAS 106 was implemented on a delayed recognition basis, resulting in amortization of the transition obligation amount over 20 years. The Company currently funds the plan as claims are paid.
Net periodic postretirement benefit cost for 1996, 1995, and 1994 included the following components:
Notes to Consolidated Financial Statements - continued
1996 1995 1994 -------- -------- -------- Service cost $ 168 $ 122 $ 133 Interest cost 423 460 435 Amortization of obligation at transition 278 278 278 Amortization of (gain)/loss 9 - - ------- ------- ------- Net periodic postretirement benefit cost $ 878 $ 860 $ 846 ======= ======= =======
The plan amounts recognized in the Company's Balance Sheet at December 31, 1996 and 1995, are as follows:
1996 1995 -------- -------- Accumulated postretirement benefit obligations: Retirees and dependents $ (3,712) $ (4,174) Fully eligible active plan participants (326) (315) Other active plan participants (2,498) (2,330) -------- -------- Total (6,536) (6,819) Plan assets at fair value - - -------- -------- Accumulated postretirement benefit obligation in excess of plan assets (6,536) (6,819) Unrecognized net (gain) loss 559 835 Unrecognized prior service cost - - Unrecognized transition obligation 4,448 4,726 -------- -------- Accrued postretirement benefit cost $ (1,529) $ (1,258) ======== ========
The Company's postretirement benefit plans are unfunded.
For measurement purposes, a 6.0% annual rate of increase in the per capita cost of covered medical benefits was assumed for 1997; the rate was assumed to decrease to 5.5% for 1998 and remain at that level thereafter. Increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation as of January 1, 1996, by $193 thousand and the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost by $16 thousand.
The weighted average discount rates used in determining the accumulated postretirement benefit obligation are 7.0% and 6.5% as of December 31, 1996 and 1995,respectively.
Notes to Consolidated Financial Statements - continued
Note 18. Foreign Operations and Geographic Segments, and Export Sales
The impact of the Company's foreign operations upon the consolidated financial statements are summarized as follows (in thousands):
1996 1995 1994 -------- -------- -------- Net sales North America $190,776 $180,891 $151,288 Europe 48,806 56,269 45,922 Other 440 - - Eliminations (9,598) (8,505) (5,439) --------- --------- --------- $230,424 $228,655 $191,771 ========= ========= =========
Net income North America $ 9,416 $ 7,501 $ 5,199 Europe (55) (325) (1,403) Other (536) - - Eliminations 79 (19) 255 --------- --------- --------- $ 8,904 $ 7,157 $ 4,051 ========= ========= =========
Identifiable assets North America $105,445 $107,450 $102,998 Europe 33,288 41,238 36,037 Other 4,223 0 0 Eliminations (1,626) (1,214) (834) --------- --------- --------- $141,330 $147,474 $138,201 ========= ========= =========
The Company's principal foreign manufacturing facilities are in France, India, and Germany. The sales eliminations are transfers at prevailing wholesale selling prices. The Company has no other significant foreign operations.
In addition to foreign operations, export sales amounted to $39.7 million in 1996, $31.9 million in 1995, and $32.5 million in 1994. Sales to the U.S. Government or for U.S. Government end-use amounted to $41.3 million in 1996, $43.5 million in 1995, and $39.3 million in 1994.
Note 19. Industry Segment Information
The Company has operations in two industry segments: the motion technologies group and electro-optical instruments. The following table
Notes to Consolidated Financial Statements - continued
includes certain financial information relating to each of the Company s segments in the last three fiscal years.
1996 1995 1994 -------- --------- --------- Motion Technologies Group Sales $141,250 $130,811 $103,379 Operating income 11,274 9,798 8,521 Assets 82,539 76,509 64,238 Capital additions 3,667 2,728 3,000 Depreciation 3,380 3,316 3,105 Backlog 54,047 56,248 60,267
Electro-Optical Instruments Sales $ 89,174 $ 97,844 $ 88,392 Operating income 8,133 6,406 3,315 Assets 31,515 50,255 48,078 Capital additions 1,156 1,111 1,738 Depreciation 1,695 2,214 2,567 Backlog 41,767 53,119 58,303
Corporate Operating (expenses) $(10,503) $ (9,047) $ (8,600) Assets 27,276 20,710 25,885 Capital additions 25 13 99 Depreciation 184 221 225
Consolidated Sales $230,424 $ 228,655 $ 191,771 Net income before taxes 8,904 7,157 3,236 Assets 141,330 147,474 138,201 Capital additions 4,848 3,852 4,837 Depreciation 5,259 5,751 5,897 Backlog 95,814 109,367 118,570
The operating income in the above table represents operating segment income after minority interest and before general corporate expenses, interest, and income taxes. Identifiable assets by segment are those assets used exclusively in the operation of that industry segment.
Effective January 1, 1996, the Company began reporting the operating results of its French instruments business in the electro-optical instruments segment. Previously, the business had been part of the motion technologies group. Accordingly, the 1995 and 1994 segment information has been restated to reflect this change.
Corporate expenses include interest expense, interest income, and general and administrative expenses, and are not allocated to respective
Notes to Consolidated Financial Statements
segments. Corporate assets consist principally of cash and investments, net assets held for disposition, equity investments, and intangible pension assets.
Note 20. Quarterly Results of Operations (Unaudited)
Quarter 1996 First Second Third Fourth - ---- -------- -------- -------- -------- Net sales $ 57,040 $ 59,788 $ 52,830 $ 60,766 Gross profit 19,226 20,158 17,525 20,587 Net income 1,648 2,229 1,804 3,223
Earnings per common share 0.14 0.22 0.18 0.32
Quarter 1995 First Second Third Fourth - ---- -------- -------- -------- -------- Net sales $ 53,416 $ 58,887 $ 54,668 $ 61,684 Gross profit 17,723 19,851 18,589 19,878 Net income 1,172 1,838 1,501 2,646
Earnings (loss) per common share 0.06 0.13 0.10 (0.03)
Deducted from earnings in the fourth quarter of 1995 was the 10% premium of $2.3 million or $0.24 per share as required by the early redemption of the Preferred Stock in February, 1996.
EXHIBIT INDEX
Page in this Exhibit No. Description of Exhibit Form 10-K
3(a) Restated Certificate of Incorporation, N/A as amended, incorporated by reference to Exhibit 3(a) of the Form SE filed on April 2, 1990.
3(b) By-Laws, as amended. N/A
4(a) Debenture Purchase Agreement dated as N/A of July 30, 1982, with respect to 10-1/2% Convertible Subordinated Debentures Due 1996 incorporated by reference to Exhibit 4 to the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 1982.
4(b) Indenture dated as of May 1, 1984, with N/A respect to 8-3/4% Convertible Subordinated Debentures Due 2009 incorporated by reference to Exhibit 4 to Registration Statement on Form S-3 (2-90655).
4(c) Rights Agreement dated as of December 20, N/A 1988, as amended and restated as of March 27, 1990, between the Company and the First National Bank of Boston, as Rights Agent, incorporated by reference to Exhibit 4(d) of the Form SE filed on April 2, 1990.
10(a) Third Restated and Amended Letter of Credit N/A Facility Agreement dated January 19, 1996, among Kollmorgen Corporation, The First National Bank of Boston, Certain Other Financial Institutions Listed on Schedule 1, and The First National Bank of Boston, as Agent, incorporated by reference to Exhibit 10 of the Form SE filed on or about February 11, 1996.
Page in this Exhibit No. Description of Exhibit Form 10-K
10(b) Subscription Agreement dated as of N/A January 15, 1997 among Gretag AG, Dr. Eduard M. Brunner, William J. Recker, Dr. Hans R. Zulliger, Kollmorgen Corporation, Gretag-Macbeth Holding AG, incorporated by reference to Exhibit 10(A) of Form SE filed on January 31, 1997.
10(c) Kollmorgen Stock Option Plan, as amended, N/A incorporated by reference to Exhibit A of the Company's Proxy Statement dated March 24, 1987, for the Annual Meeting of Shareholders held on April 22, 1987.
10(d) Kollmorgen 1991 Long Term Incentive Plan, N/A as amended, incorporated by reference to Exhibit A of the Company's Proxy Statement dated April 5, 1996, for the Annual Meeting of Shareholders held on May 8, 1996.
10(e) Form of 1988 and 1990 Non-Qualified Stock N/A Option Agreement for James A. Eder. Said agreements are incorporated by reference to Exhibit 10(g) to the Annual Report on Form 10-K of the Company for the year ended December 31, 1988.
10(f) Form of 1991, 1992, and 1993 Non-Qualified N/A Stock Option Agreement under the Long-Term Incentive Plan and/or Kollmorgen Stock Option Plan for Gideon Argov, Robert J. Cobuzzi, James A. Eder and Mark E. Petty. Each agreement is identical except for the number of shares and the date of grant. Said agreement is incorporated by reference to Exhibit 10(j) to the Annual Report on Form 10-K of the Company for the year ended December 31, 1991.
10(g) Form of 1995 and 1996 Incentive Stock N/A Option Agreement under the Long-Term Incentive Plan for Gideon Argov, Robert J. Cobuzzi, James A. Eder, Keith D. Jones and Mark E. Petty. Each agreement is identical except for the number of shares and the date of grant. Said Agreement is incorporated by reference to Exhibit 10(g) to the Annual Report on Form 10-K of the Company for the year ended December 31, 1995.
Page in this Exhibit No. Description of Exhibit Form 10-K
10(h) Kollmorgen 1992 Stock Ownership Plan for N/A Non-Employee Directors, as amended, incorporated by reference to Exhibit B of the Company's Proxy Statement dated April 5, 1996, for the Annual Meeting of Shareholders held on May 8, 1996.
10(i) Form of Non-Qualified Stock Option 52 Agreement for the grant of 15,000 options between each non-employee director and the Company pursuant to the Kollmorgen 1992 Stock Ownership Plan for Non-Employee Directors, as amended.
10(j) Kollmorgen 1997 Corporate Incentive Plan N/A for Corporate Officers and other key corporate employees is identical to the plan incorporated by reference to Exhibit 10(j) to the Annual Report on Form 10-K for the year ended December 31, 1996.
10(k) Letter employment agreement dated May 21, N/A 1991, for Gideon Argov. Said Agreement is incorporated by reference to Exhibit 10(c) to the Annual Report on Form 10-K of the Company for the year ended December 31, 1991.
10(l) Letter employment agreement dated July 1, N/A 1991, for Robert J. Cobuzzi. Said Agreement is incorporated by reference to Exhibit 10(c) to the Annual Report on Form 10-K of the Company for the year ended December 31, 1991.
10(m) Form of severance agreement for George P. N/A Stephan. Said agreement is incorporated by reference to Exhibit 10(i) to the Annual Report on Form 10-K of the Company for the year ended December 31, 1989.
10(n) Form of Indemnification Agreement for each N/A of the Company's executive officers, directors and director emeritus. Each agreement is identical to this exhibit except for the name and title of each individual. Said agreement is incorporated by reference to Exhibit 10(f) to the Annual Report on Form 10-K of the Company for the year ended December 31, 1987.
Page in this Exhibit No. Description of Exhibit Form 10-K
10(o) Description of Post-Retirement Arrangement for N/A Non-Employee Directors. Said agreement is incorporated by reference to Exhibit 10(i) to the Annual Report on Form 10-K of the Company for the year ended December 31, 1988.
10(p) Supplemental Retirement Income Plan for N/A key executives incorporated by reference to Exhibit 10(n) to the Annual Report on Form 10-K of the Company for the year ended December 31, 1990.
10(q) Master Equipment Lease Agreement dated N/A as of April 19, 1996, between Provident Commercial Group, Inc. and Kollmorgen Corporation incorporated by reference to EX-10 of the Form SE filed on November 30, 1996.
11 Calculations of Earnings Per Share 58
21 Subsidiaries of the Company 59
23 Consent of Independent Accountants - 60 Coopers & Lybrand L.L.P.
24 Powers of Attorney 61
27 Financial Data Schedule 66
99 Certain Risk Factors incorporated by N/A reference to Exhibit 99 to the Form 8-K of the Company filed on January 27, 1997.