ITEM 1. BUSINESS. - ------- ---------
(a) General Development - -----------------------
The Registrant was incorporated under the laws of the State of Ohio in August, 1876, succeeding a proprietorship established in 1859 and is engaged primarily in the sale, manufacture, installation and service of automated self-service transaction systems, electronic and physical security products, software and integrated systems.
During 1996, no significant changes occurred in the manner of conducting the Registrant's business.
(b) Financial Information about Industry Segments - -------------------------------------------------
The Registrant operates predominantly in one industry segment: financial systems and equipment. This segment accounts for more than 90% of the consolidated net sales, operating profit and identifiable assets.
(c) Description of Business - ---------------------------
The Registrant develops, manufactures, sells and services automated teller machines (ATMs), electronic and physical security systems, various products used to equip bank facilities, software and integrated systems for global financial and commercial markets. Sales of systems and equipment are made directly to customers by the Registrant's sales personnel and by manufacturer's representatives and distributors. The sales/support organization works closely with customers and their consultants to analyze and fulfill the customers' needs. Products are sold under contract for future delivery at agreed upon prices. In 1996, 1995, and 1994 the Registrant's sales and services of financial systems and equipment accounted for more than 90% of consolidated net sales.
The principal raw materials used by the Registrant are steel, copper, brass, lumber and plastics which are purchased from various major suppliers. Electronic parts and components are also procured from various suppliers. These materials and components are generally available in quantity at this time.
The Registrant had one customer, International Business Machines (IBM), who is its partner in the InterBold joint venture, that accounted for $157,639,000 of the total net sales of $1,030,191,000 in 1996 and $101,363,000 of the total net sales of $863,409,000 in 1995.
Backlog as of December 31, 1996 was $233,586,000 which was a 38% increase from December 31, 1995 backlog of $168,754,000. While this increase in backlog can be considered positive, order backlog is not the sole indicator of future revenue streams. There are numerous other factors which influence the amount and timing of revenue in future periods.
ITEM 1. BUSINESS. - (continued) - ------- ---------
All phases of the Registrant's business are highly competitive; some products being in competition directly with similar products and others competing with alternative products having similar uses or producing similar results. Registrant believes, based upon outside independent industry surveys, that it is the leading manufacturer of automated teller machines in the United States and is also a market leader internationally. In the area of automated transaction systems, the Registrant competes primarily with NCR Corporation, Triton, Siemens-Nixdorf, Dassault, Bull, Olivetti and Fujitsu. In serving the security products market for the financial services industry, the Registrant competes primarily with Mosler and Lefebure in the security equipment and systems field. Of these, some compete in only one or two product lines, while others sell a broader spectrum of products competing with the Registrant. However, the unavailability of comparative sales information and the large variety of individual products makes it impossible to give reasonable estimates of the Registrant's competitive ranking in or share of the market in its security product fields of activity. Many smaller manufacturers of safes, surveillance cameras, alarm systems and remote drive-up equipment are found in the market.
The Registrant charged to expense approximately $41.8 million in 1996, $35.5 million in 1995, and $28.0 million in 1994 for research and development costs.
Compliance by the Registrant with federal, state and local environmental protection laws during 1996 had no material effect upon capital expenditures, earnings or the competitive position of the Registrant and its subsidiaries.
The total number of employee associates employed by the Registrant at December 31, 1996 was 5,980 compared with 5,178 at the end of the preceding year.
(d) Financial Information about International and U.S. - ------------------------------------------------------ Operations and Export Sales ---------------------------
Sales to customers outside the United States as a percent of total consolidated net sales approximated 22.3 percent in 1996, and 19.8 percent in 1995 and 1994.
ITEM 2.
ITEM 2. PROPERTIES. - ------- -----------
The Registrant's corporate offices are located in North Canton, Ohio. It owns facilities (approximately 1.6 million square feet) in Canton, Uniontown and Newark, Ohio; Lynchburg, Virginia; Sumter, South Carolina; and leases facilities (approximately .3 million square feet) in Akron, Canton, Canal Fulton, Massillon, Newark and Seville, Ohio; Mexico City, Mexico; Rancho Dominguez, California; and Shanghai, China. These facilities house manufacturing, production, associated engineering, warehousing, testing, administration and development and distribution for all product lines. To keep its facilities both suitable and adequate for operations, the Registrant has announced the addition of three new facilities in Staunton and Danville, Virginia and in Lexington, North Carolina. The Registrant is also expanding and upgrading its existing operations in Canton, Ohio and Sumter, South Carolina.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS. - ------- ------------------
At December 31, 1996, the Registrant was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material in relation to the Registrant's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------- ----------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of 1996.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- -------------------------------------
Refer to pages 6 through 9.
EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT - (continued)
EXECUTIVE OFFICERS OF THE REGISTRANT - (continued)
EXECUTIVE OFFICERS OF THE REGISTRANT - (continued)
There is no family relationship, either by blood, marriage or adoption, between any of the executive officers of the Registrant.
PART II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND - ------- --------------------------------------------- RELATED STOCKHOLDER MATTERS. ----------------------------
On January 30, 1997, the Board of Directors of the Registrant declared a three-for-two stock split which was effected in the form of a stock dividend, distributed on February 19, 1997, to shareholders of record on February 7, 1997. Accordingly, all numbers of Common Shares, except authorized shares and treasury shares, and all per share data have been restated to reflect this stock split in addition to the three-for-two stock split declared on January 26, 1996, distributed on February 23, 1996, to shareholders of record on February 9, 1996.
The Common Shares of the Registrant are listed on the New York Stock Exchange with a symbol of DBD. The price ranges of Common Shares for the Registrant are as follows:
There were approximately 58,251 shareholders at December 31, 1996, which includes an estimated number of shareholders who have shares held for their accounts by banks, brokers, trustees for benefit plans and the agent for the dividend reinvestment plan.
On the basis of amounts paid and declared the annualized quarterly dividends per share were $0.45 in 1996 and $0.43 in 1995.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA. (Dollars in thousands) - ------- ------------------------
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS. --------------------------
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
The table below presents the changes in comparative financial data from 1994 to 1996. Comments on significant year-to-year fluctuations follow the table.
NET SALES
Net sales for 1996 totaled $1,030,191, which represented growth of $166,782 or 19.3 percent from 1995 and $270,020 or 35.5 percent from 1994. This was the Registrant's seventh consecutive year of record sales as well as the first year in the Registrant's 138 - year history that sales have exceeded the $1 billion mark.
Product net sales of $688,519 grew $134,897 or 24.4 percent from 1995 and $209,205 or 43.6 percent from 1994. During 1996, the Registrant experienced a significant growth in global sales of ATMs. Sales increased from all other major product lines, except in the electronic security products group. Total U.S. product revenue was up 23.7 percent from 1995. Sales of products outside the United States increased 38.3 percent from 1995 as compared with a 16.2 percent increase in 1995 from 1994.
Service net sales of $341,672 increased $31,885 or 10.3 percent from 1995 and were up $60,815 or 21.7 percent from 1994. The major factors contributing to the service revenue gain in 1996 were the growth of the installed base of equipment resulting from new product installations and continued growth of service offerings such as first-line maintenance.
Total product backlog of unfilled orders was $233,586 at December 31, 1996, compared with $168,754 at the end of 1995 and $152,511 at the end of 1994. While this increase in backlog can be considered positive, order backlog is not the sole indicator of future revenue streams. There are numerous other factors which influence the amount and timing of revenue in future periods.
COST OF SALES AND EXPENSES
Cost of sales for 1996 was $672,253, compared with $568,978 in 1995 and $504,489 in 1994.
Gross profits on product sales increased $58,441 and $95,979 from 1995 and 1994, respectively, to a level of $263,503 in 1996. Product gross margins in 1996 were 38.3 percent of product sales, compared with 37.0 percent in 1995 and 35.0 percent in 1994. The continued increase in product gross profits was a result of increased sales volumes and cost reduction efforts.
Service gross profits of $94,435 in 1996 increased from $89,369 in 1995 and $88,158 in 1994. Service gross margins as a percentage of service sales were 28.8 percent in 1995 and 31.4 percent in 1994, as compared with 27.6 percent in 1996. The reduction in service gross margins is due to a continued growth of new service offerings which have generated lower margins than traditional service offerings.
Supporting the Registrant's volume growth and market expansion, operating expenses increased $29,954 or 16.0 percent from 1995 and were $52,666 or 31.9 percent above 1994. Total operating expenses of $217,574 or 21.1 percent of net sales in 1996 represented a decrease from the 1995 and 1994 level of 21.7 percent. However, research, development and engineering expense has increased proportionately to the growth in net sales reflecting the Company's commitment to ensure a continuing flow of new products in the future.
Operating profit of $140,364 in 1996 represented an increase of $33,553 or 31.4 percent from 1995 and $49,590 or 54.6 percent from 1994. Operating profit again grew faster than net sales as manufacturing cost reductions and operating expense controls continue to cause the operating profit margin to widen from 12.4 percent and 11.9 percent in 1995 and 1994, respectively, up to 13.6 percent in 1996.
OTHER INCOME, NET AND MINORITY INTEREST
Other income, net increased $3,921 or 59.3 percent from 1995 and $5,381 or 104.4 percent from 1994. This increase is primarily due to higher investment income in 1996 as compared with 1995 as a result of continuing growth in Diebold Credit Corporation. Additionally, during 1996, the Registrant realized favorable returns on maturing investments that were previously considered uncertain. The increase in investment income was offset, however, by increases in certain expenses related to Company-owned insurance contracts and amortization related to certain assets.
Minority interest of $4,393 increased from $200 in 1995 and $1,948 in 1994. Minority interest consisted primarily of income or losses allocated to the minority ownership of InterBold and Diebold Financial Equipment Company, Ltd. (China). Minority interests for both companies are calculated as a percentage of profits of the joint ventures based on formulas defined in the relevant agreements establishing each venture.
INCOME
Income before taxes amounted to $146,504 in 1996. This was an increase of $33,281 or 29.4 percent from 1995 and $52,526 or 55.9 percent from 1994. Income before taxes also improved as a percentage of net sales, representing 14.2 percent in 1996, compared with 13.1 percent in 1995 and 12.4 percent in 1994.
The effective tax rate was 33.5 percent in 1996, compared with 32.7 percent in 1995 and 32.4 percent in 1994. The primary reason for the higher tax rate in 1996 was a reduction in tax-exempt interest as a percentage of pretax income and tax law changes that affected insurance contracts. Details of the reconciliation between the U.S. statutory rate and the effective tax rate are included in Note 12 of the 1996 Consolidated Financial Statements.
Net income increased to $97,425 or 9.5 percent of net sales, compared with income of $76,209 or 8.8 percent of net sales in 1995 and $63,511 or 8.4 percent of net sales in 1994.
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION
The Registrant continued to enhance its financial position during 1996. Total assets increased $109,306 or 14.6 percent to a 1996 year-end level of $859,101. Asset turnover (excluding cash, cash equivalents and short-term and long-term investment securities) was 1.70 and 1.71 in 1996 and 1995, respectively.
Total current assets at December 31, 1996, of $479,592 represented an increase of $103,380 or 27.5 percent from the prior year-end. The increase in trade receivables and inventories comprised the majority of this increase and was a result of higher sales volumes and continued expansion of international operations and other new business operations in 1996. Trade receivables increased $59,427 or 30.1 percent to a level of $256,572 at December 31, 1996. As a percentage of net sales, trade receivables were 20.1 percent and 22.8 percent in 1994 and 1995, respectively, as compared with 24.9 percent in 1996. Inventories at year-end 1996 totaled $109,432 which represented an increase of $18,430 or 20.3 percent from 1995. This increase in inventory was caused by the growth of product sales of 24.4 percent in 1996.
Long-term securities and other investments declined by $8,338 or 5.7 percent to a level of $138,403 at December 31, 1996, largely due to maturities of tax-exempt municipal bonds, which were reinvested into short-term investments. The Registrant anticipates being able to meet both short- and long-term operational funding requirements without liquidating individual securities prior to maturity by varying the timing of maturities within the portfolio. However, since most of these securities are marketable, they could readily be converted into cash and cash equivalents if needed.
Total property, plant and equipment, net of accumulated depreciation, was $95,934 at the end of 1996, which represented a net increase of $11,862 or 14.1 percent over prior year-end. Capital expenditures were $33,581 in 1996, compared with $35,308 in 1995. The 1996 capital expenditures resulted primarily from the need to meet higher manufacturing capacity requirements; expansion of facilities for research, software development, management development and support services; and continued investment in internal applications hardware and software. In 1996, the Registrant announced the expansion of Diebold Credit Corporation to manage the growing business of financing to customers. Finance receivables increased from $44,614 in 1995 to $46,030 in 1996 due to shipment of additional equipment under lease agreements.
Total current liabilities at December 31, 1996, were $228,220, which represented an increase of $39,142 or 20.7 percent from the prior year-end. The primary cause for the increase in current liabilities was an increase in accounts payable of $27,805 or 41.6 percent to a level of $94,709 from $66,904 in the prior year-end. The Registrant's current ratio was 2.1 at the end of 1996, compared with 2.0 at the end of 1995.
At December 31, 1996, the Registrant had lines of credit totaling $40,000, all unrestricted as to use. Due to the strong liquidity position, the Registrant continued its practice of having no long-term debt. The Registrant's financial position provides it with sufficient resources to meet future capital expenditures, dividend and working capital requirements. However, if the need arises, the Registrant's strong financial position should ensure the availability of adequate additional financial resources.
Pension liabilities were $20,308 at December 31, 1996, representing an increase of $2,785 or 15.9 percent over prior year-end. The net periodic pension costs of $4,669 charged to income in 1996 represented an increase of $1,141 from the prior year, primarily due to a continual increase in the Registrant's employee associates over the past several years resulting in an increase in service cost.
Minority interests of $13,140 represented the minority interest in InterBold owned by IBM and the minority interests in Diebold Financial Equipment Company, Ltd. (China) owned by the Aircraft Industries of China and the Industrial and Commercial Bank of China, Shanghai Pudong Branch. Shareholders' equity increased $67,890 or 13.4 percent to $575,570 at December 31, 1996. Shareholders' equity per share was $8.36 at the end
of 1996, compared with $7.39 in 1995. The Common Shares of the Registrant are listed on the New York Stock Exchange with a symbol of DBD. There were approximately 58,251 shareholders as of December 31, 1996.
On January 30, 1997, the Board of Directors declared a three-for-two stock split effected in the form of a stock dividend, distributed on February 19, 1997, to shareholders of record on February 7, 1997. Accordingly, all numbers of Common Shares, except authorized shares and treasury shares, and all per share data have been restated to reflect this stock split. In addition to the stock split, the Board of Directors declared a first-quarter 1997 cash dividend of $0.125 per share. This amount, which represents a 10.3 percent increase from the prior year's quarterly dividend rate, will be paid on March 28, 1997, to shareholders of record on March 7, 1997. Comparative quarterly cash dividends paid in 1996 and 1995 were $0.1133 and $0.1067, respectively.
MANAGEMENT'S ANALYSIS OF CASH FLOWS
During 1996, the Registrant generated $93,635 in cash from operating activities, compared with $71,152 in 1995 and $39,017 in 1994. In addition to net income of $97,425, adjusted for depreciation, amortization and other charges of $32,963, increases in accounts payable and other certain assets and liabilities of $45,291 also increased cash provided by operations. Cash was utilized in operations to fund long-term finance receivables and increases in inventory levels and trade receivables as a result of additional sales volumes and growth of international operations. Expressed as a percentage of total assets employed, the Registrant's cash yield from operations was 10.9 percent in 1996, compared with 9.5 percent in 1995 and 5.9 percent in 1994.
Net cash generated from operating activities in 1996 was used to reinvest $52,478 in assets of the Registrant, compared with $43,173 in 1995 and $38,299 in 1994. The Registrant returned $31,190 to shareholders in the form of cash dividends paid during 1996, which was a 6.5 percent increase from 1995 and a 16.9 percent increase from 1994.
OTHER BUSINESS INFORMATION
In order to meet continuing worldwide demand, the Registrant has three new manufacturing facilities under construction located in Staunton and Danville, Virginia and in Lexington, North Carolina. In addition, the Registrant plans to expand and upgrade its existing operations in Canton, Ohio and Sumter, South Carolina. The new plants are expected to begin operations by the second half of 1997.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ------- --------------------------------------------
CONSOLIDATED BALANCE SHEETS DIEBOLD, INCORPORATED AND SUBSIDIARIES DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIEBOLD, INCORPORATED AND SUBSIDIARIES (Dollars in thousands except per share amounts)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Registrant and its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
STATEMENTS OF CASH FLOWS
For the purposes of the Consolidated Statements of Cash Flows, the Registrant considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash paid during 1996, 1995 and 1994 for income taxes amounted to $47,293, $40,487 and $37,488, respectively.
INTERNATIONAL OPERATIONS
The Registrant translates the assets and liabilities of its non-U.S. subsidiaries at the exchange rates in effect at year-end and the results of operations at the average rate throughout the year. The translation adjustments are recorded directly as a separate component of shareholders' equity, while transaction gains (losses) are included in net income. The Registrant does not have any investment-type transactions or any unperformed forward exchange contracts.
Sales to customers outside the United States approximated 22.3 percent of net sales in 1996, and 19.8 percent of net sales in 1995 and 1994. The investment used to generate this sales volume is considered minimal by management, due to heavy reliance on outside distributors worldwide.
FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and cash equivalents, trade receivables and accounts payable approximated fair value as of December 31, 1996 and 1995, because of the relatively short maturity of these instruments.
TRADE RECEIVABLES AND SALES
Revenue, after provision for installation, is generally recognized based on the terms of the contracts which, for product sales, is usually when material to be installed for customer orders is shipped from the plants.
The equipment that is sold is usually shipped and installed within one year. Installation that extends beyond one year is ordinarily attributable to causes not under the control of the Registrant.
The concentration of credit risk in the Registrant's trade receivables with respect to the banking and financial services industries is substantially mitigated by the Registrant's credit evaluation process, reasonably short collection terms and the geographical dispersion of sales transactions from a large number of individual customers. The Registrant maintains allowances for potential credit losses, and such losses have been minimal and within management's expectations.
INVENTORIES
Inventories are valued at the lower of cost or market applied on a first-in, first-out basis. Cost is determined on the basis of actual cost.
INVESTMENT SECURITIES
Effective January 1, 1994, the Registrant adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." There was no cumulative effect on the Consolidated Income Statement resulting from the adoption of Statement 115.
DEPRECIATION AND AMORTIZATION
Depreciation of property, plant and equipment is computed using the straight-line method for financial statement purposes. Accelerated methods of depreciation are used for federal income tax purposes. Amortization of leasehold improvements is based upon the shorter of original terms of the lease or life of the improvement.
RESEARCH AND DEVELOPMENT
Total research and development costs charged to expense were $41,797, $35,470 and $28,029 in 1996, 1995 and 1994, respectively.
OTHER ASSETS
Other assets primarily consist of the costs in excess of the net assets of acquired businesses (goodwill), pension assets and certain other assets. These assets are stated at cost and, if applicable, are amortized ratably over a period of three to 25 years. The Registrant periodically monitors the value of goodwill by assessing whether the asset can be recovered over its remaining useful life through undiscounted cash flows generated by the underlying businesses.
DEFERRED INCOME
Deferred income is recognized for customer billings in advance of the period in which the service will be performed and is recognized in income on a straight-line basis over the contract period.
STOCK-BASED COMPENSATION
Prior to January 1, 1996, the Registrant accounted for its stock option plans in accordance with the provisions of Accounting Principles Board 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 the underlying stock exceeded the exercise price. On January 1, 1996, the Registrant adopted Statement of Financial Accounting Standards 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, Statement 123 also allows entities to continue to apply the provisions of APB Opinion 25 and provide pro forma net income and pro forma net income per share disclosures for employee stock option grants made in 1995 and future years as if the fair value based method defined in Statement 123 had been applied. The Registrant has elected to continue to apply the provisions of APB Opinion 25 and provide the pro forma disclosure provisions of Statement 123.
TAXES ON INCOME
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
The Registrant has reclassified the presentation of certain prior-year information to conform with the current presentation format.
NOTE 2: RELATED PARTY TRANSACTIONS
INTERBOLD JOINT VENTURE
The Consolidated Financial Statements include the accounts of InterBold, a joint venture between the Registrant and IBM, of which the Registrant owns 70 percent. The joint venture provides ATMs and other financial self-service systems worldwide. IBM's ownership interest in InterBold is reflected in "minority interest" on the Registrant's Consolidated Balance Sheets. Net profits of InterBold are allocated based upon a formula as specified in the partnership agreement.
NOTE 3: INVESTMENT SECURITIES
At December 31, 1996 and 1995, the investment portfolio was classified as available-for-sale due to the potential needs for liquidity to fund future acquisitions, joint ventures and strategic alliances throughout the world as part of a continuing strategy to strengthen the Registrant's global competitiveness. The marketable debt and equity securities are stated at fair value, and the Registrant includes as a separate component of shareholders' equity until realized net unrealized holding gains of $526 (net of taxes of $283) and net unrealized holding gains of $958 (net of taxes of $516) at December 31, 1996 and 1995, respectively. The fair value of securities and other investments is estimated based on quoted market prices.
The Registrant's investment securities, excluding insurance contracts, at December 31, are summarized as follows:
NOTE 6: FINANCE RECEIVABLES
The components of finance receivables for the net investment in sales-type leases are as follows:
- -------------------------------------------------------------------------------- Future minimum lease receivables due from customers under sales-type leases as of December 31, 1996, are as follows:
NOTE 7: SHORT-TERM FINANCING
At December 31, 1996, bank credit lines approximated $40,000 with various banks for short-term financing. The Registrant had no outstanding borrowings under these agreements at December 31, 1996 and 1995.
The Registrant has informal understandings with certain banks to maintain compensating balances which are not legally restricted as to withdrawal. The lines of credit can be withdrawn at each bank's option.
NOTE 8: SHAREHOLDERS' EQUITY
On January 30, 1997, the Board of Directors declared a three-for-two stock split effected in the form of a stock dividend, distributed on February 19, 1997, to shareholders of record on February 7, 1997. Prior to the 1997 stock split, on January 26, 1996, the Board of Directors declared a three-for-two stock split effected in the form of a stock dividend, distributed on February 23, 1996, to shareholders of record on February 9, 1996. Accordingly, all numbers of Common Shares, except authorized shares and treasury shares, and all per share data have been restated to reflect these stock splits.
On the basis of amounts declared and paid, the annualized quarterly dividends per share were $0.45 in 1996, $0.43 in 1995 and $0.39 in 1994.
At December 31, 1996, the Registrant has three stock-based compensation plans, which are described below. The Registrant applies APB Opinion 25 and related interpretations in accounting for its plans. Under the guidelines of APB Opinion 25, compensation cost for fixed and variable stock-based awards is measured by the excess, if any, of the market price of the underlying stock over the exercise price of the option at the grant date.
In the following chart, the Registrant provides net income and net income per share reduced by the pro forma amounts calculating compensation cost for the Registrant's fixed stock option plan consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.5 and 6.5 percent; dividend yield of 2.2 and 3.0 percent; expected lives of seven, six and four years for options granted in both 1996 and 1995; and volatility of 21 and 20 percent.
Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under Statement 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to January 1, 1995, is not considered.
FIXED STOCK OPTIONS
Under the 1991 Equity and Performance Incentive Plan (1991 Plan), Common Shares are available for grant of options at a price not less than 85 percent of the fair market value of the Common Shares on the date of grant. The exercise price of options granted in 1996 and 1995 was equal to the market price at the grant date, and accordingly, no compensation cost has been recognized. In general, options are exercisable in cumulative annual installments over five years, beginning one year from the date of grant. The number of Common Shares that may be issued or delivered pursuant to the 1991 Plan is 3,265,313, of which 2,365,052 shares were available for issuance at December 31, 1996. The 1991 Plan will expire on April 2, 2002.
The 1991 Plan replaced the Amended and Extended 1972 Stock Option Plan (1972 Plan), which expired by its terms on April 2, 1992. Awards already outstanding under the 1972 Plan are unaffected by the adoption of the 1991 Plan.
The following is a summary with respect to options outstanding at December 31, 1996, 1995 and 1994, and activity during the years ending on those dates:
The following table summarizes pertinent information regarding fixed stock options outstanding and options exercisable at December 31, 1996:
RESTRICTED SHARE GRANTS
The 1991 Plan also provides for the issuance of restricted shares without cost to certain employee associates. Outstanding shares granted at December 31, 1996, totaled 147,263 restricted shares. The shares are subject to forfeiture under certain circumstances. Unearned compensation representing the fair market value of the shares at the date of grant will be charged to income over the three-to-five-year vesting period.
PERFORMANCE SHARE GRANTS
The 1991 Plan also provides for the issuance of Common Shares based on certain management objectives achieved within a specified performance period of at least one year as determined by the Board of Directors. The management objectives set in 1996 are based on a three-year performance period ending December 31, 1998. The management objectives for the period ended December 31, 1996, were set in April 1994. The objectives were exceeded and a payout was made in the form of a combination of cash and Common Shares in 1997.
The compensation cost that has been charged against income for its performance-based share grant plan was $13,534, $7,201 and $5,169 in 1996, 1995 and 1994, respectively.
In February 1989, the Board of Directors declared a dividend distribution of one right for each outstanding Common Share of the Registrant. Pursuant to the Rights Agreement covering the Shareholder Rights Plan, each right entitles the registered holder to purchase one one-hundredth of a share of Cumulative Redeemable Serial Preferred Shares, without par value, at a price of $130. The rights become exercisable 20 days after a person or group acquires 20 percent or more of the Registrant's shares. At that time, rights certificates would be issued and could be traded independently from the Registrant's shares. If the Registrant is involved in certain mergers or other business combination transactions at any time after the rights become exercisable, then the rights will be modified so as to entitle the holder to buy a number of an acquiring Registrant's shares having a market value of twice the exercise price of each right. In addition, if a holder of 20 percent or more acquires the Registrant by means of a reverse merger in which the Registrant and its shares survive, or engages in certain other self-dealing transactions with the Registrant, each right not owned by the acquirer will become exercisable for a number of Common Shares of the Registrant with a market value of two times the exercise price of the right. The rights are redeemable for $0.01 per right at any time before 20 percent or more of the Registrant's shares have been acquired, and will expire on February 10, 1999, unless redeemed earlier by the Registrant. As a result of the stock split effected on February 19, 1997, each Common Share is currently accompanied by one-fifth of a right.
NOTE 9: NET INCOME PER SHARE
The net income per share computations are based upon the weighted-average number of Common Shares outstanding during each year. The inclusion in the computation of incremental shares applicable to outstanding stock options and performance shares would have no material effect.
NOTE 10: PENSION PLANS AND POSTRETIREMENT BENEFITS
The Registrant has several pension plans covering substantially all employee associates. Plans covering salaried employee associates provide pension benefits that are based on the employee associate's compensation during the 10 years before retirement. The Registrant's funding policy for those plans is to contribute annually at an actuarially determined rate. Plans covering hourly employee associates and union members generally provide benefits of stated amounts for each year of service. The Registrant's funding policy for those plans is to make at least the minimum annual contributions required by applicable regulations.
In 1996, the Registrant exercised its option to change the measurement date on which plan assets and obligations are determined from December 31 to September 30. The September 30 measurement date is intended to be used consistently from year to year.
Approximately 90 percent of the plan assets at September 30, 1996, and December 31, 1995, respectively, were invested in listed stocks and investment grade bonds.
A summary of the components of net periodic pension costs follows:
Assumptions used to measure the projected benefit obligation and the expected long-term rate of return on plan assets at September 30, 1996, December 31, 1995 and 1994 are as follows:
Minimum liabilities have been recorded in 1996, 1995 and 1994 for the plans whose total accumulated benefit obligation exceeded the fair value of the plan's assets.
The Registrant offers an employee associate 401(k) Savings Plan (Savings Plan) to encourage eligible employee associates to save on a regular basis by payroll deductions, and to provide them with an opportunity to become shareholders of the Registrant. Under the Savings Plan in 1996, the Registrant matched 80 percent of a participating employee associate's first 4 percent of contributions and 40 percent of a participating employee associate's second 4 percent of contributions.
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheets at December 31, for the Registrant's defined benefit pension plans:
In addition to providing pension benefits, the Registrant provides healthcare and life insurance benefits for certain retired employee associates. Eligible employee associates may be entitled to these benefits based upon years of service with the Registrant, age at retirement and collective bargaining agreements. Presently, the Registrant has made no commitments to increase these benefits for existing retirees or for employee associates who may become eligible for these benefits in the future. Currently there are no plan assets, and the Registrant funds the benefits as the claims are paid.
A summary of the components of net periodic postretirement (life and healthcare) benefit costs follows:
The effect of a one percentage point annual increase in the assumed healthcare cost trend rate would increase the service and interest cost components of the healthcare benefits from $1,645 to $1,787, an 8.6 percent increase.
Measurement of the accumulated postretirement benefit obligation at September 30, 1996, and December 31, 1995, was based on a discount rate of 7.25 percent in 1996 and 1995. The following table sets forth the components of the accumulated postretirement benefit obligation at December 31:
The postretirement benefit obligation was determined by application of the terms of medical and life insurance plans together with relevant actuarial assumptions and healthcare cost trend rates projected at annual rates declining from 9.0 percent in 1996 to 4.5 percent through the year 2005 as well as the following years. The effect of a one percentage point annual increase in these assumed healthcare cost trend rates would increase the healthcare accumulated postretirement benefit obligation from $23,185 to $25,265, a 9.0 percent increase.
NOTE 11: LEASES
The Registrant's future minimum lease payments due under operating leases for real and personal property in effect at December 31, 1996, are as follows:
Rental expense for 1996, 1995 and 1994 under all lease agreements amounted to approximately $28,100, $22,000 and $18,100, respectively.
NOTE 12: INCOME TAXES
Income tax expense attributable to income from continuing operations consists of:
In addition to the 1996 income tax expense of $49,079, certain deferred income tax expenses of $(133) were allocated directly to shareholders' equity.
A reconciliation of the difference between the U.S. statutory tax rate and the effective tax rate is as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Registrant's deferred tax assets and liabilities are as follows:
At December 31, 1996, the Registrant's international subsidiaries had deferred tax assets relating to net operating loss carryforwards of $1,441, that expire in years 1997 through 2003. For financial reporting purposes, a valuation allowance of $1,441 has been recognized to offset the deferred tax assets relating to the net operating loss carryforwards.
NOTE 13: COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Registrant was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Registrant's financial position or results of operations.
NOTE 14: SEGMENT INFORMATION
The Registrant operates predominantly in one industry segment, financial systems and equipment. This industry segment accounts for more than 90 percent of the consolidated revenues, operating profit and identifiable assets.
The Registrant had one customer, IBM, its partner in the InterBold joint venture, that accounted for $157,639 of the total net sales of $1,030,191 in 1996 and $101,363 of the total net sales of $863,409 in 1995.
NOTE 15: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
See "Comparison of Selected Quarterly Financial Data (Unaudited)" on page 31 of this Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENT DISCLOSURE
In the Registrant's written or oral statements, the use of the words "believes", "anticipates", "expects" and similar expressions is intended to identify forward-looking statements which have been made and may in the future be made by or on behalf of the Registrant, including statements concerning future operating performance, the Registrant's share of new and existing markets, and the Registrant's short- and long-term revenue and earnings growth rates. Although the Registrant believes that its outlook is based upon reasonable assumptions regarding the economy, its knowledge of its business, and on key performance indicators which impact the Registrant, there can be no assurance that the Registrant's goals will be realized. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. The Registrant undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Numerous risks and uncertainties could cause actual results to differ materially from those anticipated in forward-looking statements. These include, but are not limited to:
- -competitive pressures, including pricing pressures and technological developments;
- -changes in the Registrant's relationships with customers, suppliers, distributors and/or partners in its business ventures;
- -changes in political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the worldwide business in each of the Registrant's operations;
- -acceptance of the Registrant's product and technology introductions in the marketplace; and
- -unanticipated litigation, claims or assessments.
See Note 15 to Consolidated Financial Statements and 5-Year Summary 1996-1992.
REPORT OF MANAGEMENT
The management of the Registrant is responsible for the contents of the consolidated financial statements, which are prepared in conformity with generally accepted accounting principles. The consolidated financial statements necessarily include amounts based on judgments and estimates. Financial information elsewhere in the Form 10-K is consistent with that in the consolidated financial statements.
The Registrant maintains a comprehensive accounting system which includes controls designed to provide reasonable assurance as to the integrity and reliability of the financial records and the protection of assets. An internal audit staff is employed to regularly test and evaluate both internal accounting controls and operating procedures, including compliance with the Registrant's statement of policy regarding ethical and lawful conduct. The role of KPMG Peat Marwick LLP, the independent auditors, is to provide an objective examination of the consolidated financial statements and the underlying transactions in accordance with generally accepted auditing standards. The report of KPMG Peat Marwick LLP accompanies the consolidated financial statements.
The Audit Committee of the Board of Directors, composed of directors who are not members of management, meets regularly with management, the independent auditors and the internal auditors to ensure that their respective responsibilities are properly discharged. KPMG Peat Marwick LLP and the Internal Audit organization have full and independent access to the Audit Committee.
Gerald F. Morris
Executive Vice President and Chief Financial Officer
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - ------- ----------------------------------------------------------- AND FINANCIAL DISCLOSURE. -------------------------
There have been no changes in accountants or disagreements with accountants on accounting and financial disclosures.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- ---------------------------------------------------
Information with respect to directors of the Registrant is included on pages 4 through 8 of the Registrant's proxy statement for the 1997 Annual Meeting of Shareholders ("1997 Annual Meeting") and is incorporated herein by reference. Refer to pages 6 through 9 of this Form 10-K for information with respect to executive officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. - -------- -----------------------
Information with respect to executive compensation is included on pages 9 through 18 of the Registrant's proxy statement for the 1997 Annual Meeting and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - -------- ---------------------------------------------------------------
Information with respect to security ownership of certain beneficial owners and management is included on pages 2 through 7 of the Registrant's proxy statement for the 1997 Annual Meeting and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- -----------------------------------------------
The information with respect to certain relationships and related transactions set forth under the caption "Compensation Committee Interlocks and Insider Participation" on page 8 of the Registrant's proxy statement for the 1997 Annual Meeting is incorporated herein by reference.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. - -------- ----------------------------------------------------------------
(a) Documents filed as a part of this report.
1. The following additional information for the years 1996, 1995 and 1994 is submitted herewith:
Independent Auditors' Report on Financial Statements and Financial Statement Schedule
SCHEDULE II. Valuation and Qualifying Accounts
All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
- ------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. - -------- ---------------------------------------------------------------- (continued) -----------
2. Exhibits
3.1 (i) Amended and Restated Articles of Incorporation of Diebold, Incorporated -- incorporated by reference to Exhibit 3.1 (i) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
3.1 (ii) Code of Regulations -- incorporated by reference to Exhibit 4(c) to Registrant's Post-Effective Amendment No. 1 to Form S-8 Registration Statement No. 33-32960.
3.2 Certificate of Amendment by Shareholders to Amended Articles of Incorporation of Diebold, Incorporated -incorporated by reference to Exhibit 3.2 to Registrant's Form 10-Q for the quarter ended March 31, 1996.
4. Rights Agreement dated as of February 10, 1989 between Diebold, Incorporated and Ameritrust Company National Association -- incorporated by reference to Exhibit 2.1 to Registrant's Registration Statement on Form 8-A dated February 10, 1989.
* 10.1 Form of Employment Agreement as amended and restated as of September 13, 1990 -- incorporated by reference to Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990.
* 10.2 Schedule of Certain Officers who are Parties to Employment Agreements in the form of Exhibit 10.1.
* 10.3 (i) Supplemental Retirement Benefit Agreement with William T. Blair -- incorporated by reference to Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
* 10.3 (ii) Consulting Agreement with William T. Blair.
* 10.5 Supplemental Employee Retirement Plan (as amended January 1, 1994) -- incorporated by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
10.6 Amended and Restated Partnership Agreement dated as of September 12, 1990 -- incorporated by reference to Exhibit 10 to Registrant's Form 8-K dated September 26, 1990.
* 10.7 1985 Deferred Compensation Plan for Directors of Diebold, Incorporated -- incorporated by reference to Exhibit 10.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.
* 10.8 1991 Equity and Performance Incentive Plan -- incorporated by reference to Exhibit 4(a) to Registrant's Form S-8 Registration Statement No. 33-39988.
* Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. - ------------------------------------------------------------------------- (continued) -----------
* 10.9 Long-Term Executive Incentive Plan -- incorporated by reference to Exhibit 10.9 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
* 10.10 1992 Deferred Incentive Compensation Plan (as amended and restated as of July 1, 1993) -- incorporated by reference to Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
* 10.11 Annual Incentive Plan -- incorporated by reference to Exhibit 10.11 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.
* 10.12 Employment Agreement with Robert P. Barone -- incorporated by reference to Exhibit 10.12 to Registrant's Form 10-Q for the quarter ended September 30, 1994.
* 10.13 Forms of Deferred Compensation Agreement and Amendment No. 1 to Deferred Compensation Agreement.
21. Subsidiaries of the Registrant.
23. Consent of Independent Auditors.
24. Power of Attorney.
27. Financial Data Schedule.
* Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 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.
DIEBOLD, INCORPORATED
March 7, 1997 By: /s/Robert W. Mahoney - ----------------- ------------------------------- Date Robert W. Mahoney Chairman of the Board and Chief Executive Officer
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 the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/Robert W. Mahoney Chairman of the Board and March 7, 1997 - ---------------------- Chief Executive Officer -------------- Robert W. Mahoney (Principal Executive Officer)
/s/Gerald F. Morris Executive Vice President March 7, 1997 - ------------------- and Chief Financial Officer ------------- Gerald F. Morris (Principal Accounting and Financial Officer)
/s/Louis V. Bockius III Director March 7, 1997 - ----------------------- ------------- Louis V. Bockius III
/s/Daniel T. Carroll Director March 7, 1997 - ----------------------- ------------- Daniel T. Carroll
* Director March 7, 1997 - ----------------------- ------------- Richard L. Crandall
* Director March 7, 1997 - ----------------------- ------------- Donald R. Gant
/s/L. Lindsey Halstead Director March 7, 1997 - ----------------------- ------------- L. Lindsey Halstead
* Director March 7, 1997 - ----------------------- ------------- Phillip B. Lassiter
Signature Title Date --------- ----- ----
* Director March 7, 1997 - --------------------- ------------- John N. Lauer
* Director March 7, 1997 - --------------------- ------------- William F. Massy
* Director March 7, 1997 - -------------------- ------------- Gregg A. Searle
/s/W. R. Timken, Jr. Director March 7, 1997 - ----------------------- ------------- W. R. Timken, Jr.
* The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the Powers of Attorney executed by the above-named officers and directors of the Registrant and filed with the Securities and Exchange Commissions on behalf of such officers and directors.
Dated: March 7, 1997 *By: /s/Gerald F. Morris --------------- ---------------------------------- Gerald F. Morris, Attorney-in-Fact
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders Diebold, Incorporated
We have audited the accompanying consolidated balance sheets of Diebold, Incorporated and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 14 (a)(1) of Form 10-K of Diebold, Incorporated for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements and financial statement schedule are the responsibility of the Registrant's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 Diebold, Incorporated and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related 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.
/s/KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP Cleveland, Ohio January 16, 1997, except for the first paragraph of Note 8, which is as of January 30, 1997