SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/x/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998, or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _______.
Commission File Number 1-5562
______________KOLLMORGEN CORPORATION__________________
(Exact name of registrant as specified in its charter)
New York 04-2151861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Reservoir Place, 1601 Trapelo Road, Waltham, MA 02451-7333
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (781) 890-5655
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock - $2.50 par value New York Stock Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
8 3/4% Convertible Subordinated
Debentures Due 2009 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
______________None___________________
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /__X__/ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / x /
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. $133,534,837 as of March 17, 1999.
Indicate the number of outstanding shares of the registrant's Common
Stock. 10,163,806 shares as of March 17, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Definitive Proxy Statement to be filed for the
1999 Annual Meeting of Shareholders are incorporated by reference into Part III.
2
PART I
Item 1. Business.
(a) General. Kollmorgen Corporation (the "Company"), incorporated in
the State of New York in 1916, is one of the major worldwide manufacturers of
high performance electronic motion control products and systems and has
operations in two industry segments: (1) industrial and commercial and (2)
aerospace and defense.
(b) Financial Information about Operating Segments. A table setting
forth the amounts of revenue, pre-tax profit or loss and identifiable assets
attributable to each of the Company's operating segments in each of its last
three fiscal years is contained in Note 16 captioned "Geographic and
industry information" to the Financial Statements.
(c) Narrative Description of Business. Described below is a description
of the Company's two operating segments.
Industrial and Commercial Group
The Company's products and services in this segment include
(i) a number of different types of permanent magnet motors, associated
electronic amplifiers and feedback components, controls and related systems for
a variety of applications, and (ii) specialized engineering services to the
electric utility industry. The Company's line of servo motors and related
drive electronics are used in many types of industrial automation, process
control, machine tool, underwater equipment, and robotic applications. Its
torque motors, tachometer generators are used worldwide in medical, machine
tool and process control applications.
The Company's stepper motors and brushless motors are used for office
and factory automation, instrumentation, and medical applications. Its Commack,
New York facility designs, manufactures and sells a line of low inertia, high
speed of response, d.c. motors and associated electronics used primarily in
industrial automation and medical applications. The Company also manufactures
and sells linear motors for various industrial applications.
The Company distributes industrial motors and a proprietary line of
analog and digital electronic drives under the trademarks "Servostar(R)",
"Digifas" (TM) and "Digilink" (TM) in Europe through its wholly-owned German
subsidiary, Kollmorgen Seidel Servo Drives GmbH.
In July 1998, the Company acquired the Magnedyne motor operation from
Sierracin Corporation. Magnedyne, with operations in California and Mexico,
designs, manufactures and sells primarily torque motors to the semi-conductor,
medical and industrial markets.
In addition to the Company's principal facilities located in Virginia,
New York and California, the Company develops certain proprietary electronic
products in Israel, and manufactures and assembles its commercial products in
several other geographic locations. Through a joint venture in Bombay, India,
the Company manufactures fractional horsepower brushless motors primarily for
the computer and electronics markets. The Company also distributes, and has
begun the manufacture of, its industrial products in the People's Republic of
China through a joint venture company, Tianjin Kollmorgen Industrial
Drives Corporation, located in Tianjin, PRC.
3
In this segment, competitive advantage is gained by the ability of the
Company to design new or adapt existing motor and drive systems to meet
relatively stringent packaging and performance requirements of customers, most
of whom are original equipment manufacturers purchasing the motors and drives
for inclusion in their end product. While meeting these stringent technical
specifications, the motors and drives must also be price competitive. The number
and identity of the competitors in this segment varies depending upon the
particular industry and product application. Several large European and Japanese
manufacturers, either directly or through joint ventures with American
companies, have been able to compete successfully in the United States machine
tool and industrial automation marketplaces, including the market for industrial
motors of the type that the Company manufactures. In other markets, there are
relatively few competitors for each marketplace or application, and generally
they are specialized domestic or foreign motor manufacturers.
The products in this segment are marketed and sold directly through
qualified technical personnel employed by the Company, or through manufacturers'
representatives or distributors, or by a combination of the foregoing.
The Company provides engineering services for the modification and
upgrade of nuclear and fossil power plants of domestic electric utility
companies and independent power producers through a wholly-owned subsidiary,
Proto-Power Corporation. This business also licenses its proprietary
computer-aided engineering software to utility companies for analyzing the
performance of their power plant systems and equipment.
The backlog of this segment at the end of 1998 was $40 million,
essentially all of which is expected to be shipped in 1999.
Aerospace and Defense Group
The Company's motion control products and subsystems in this segment
are primarily manufactured by Kollmorgen Artus, a wholly-owned French
subsidiary, the Inland Motor Division, located in Radford, Virginia and its
Electro-Optical Division located in Northampton, Massachusetts.
Kollmorgen Artus manufactures and sells generators, special motors,
electro-mechanical actuators and drive electronics, synchros, and resolvers,
which are sold worldwide into the defense and aerospace market. After the
successful test flight of its proprietary ac/dc regulated power management
system for the Bell-Boeing V-22 Osprey tiltrotor aircraft in 1997, Kollmorgen
Artus began production of that system in 1998. This business also has a motor
facility in Bien Hoa, Vietnam, for the manufacture of resolvers,
subassemblies and motors. Kollmorgen Artus also manufactures and sells
calibration systems for air traffic control navigation aids.
The specialty d.c. torque motors, tachometer generators and
electro-mechanical actuators and related electronics are used worldwide in a
variety of aerospace and defense applications, including missiles, commercial
and military aircraft and sophisticated guidance tracking systems.
In addition to the products described above, the Company has been the
primary designer and major supplier of submarine periscopes to the United
States Navy since 1916 and also markets and sells submarine periscopes to
navies throughout the world through its Electro-Optical Division. In 1995, the
Company received a $35 million contract from the Naval Sea Systems Command to
design and build a new photonic system that replaces the traditional
through-the-hull periscope. In January 1998, the Company received a $16.6
million pre-production order for this system and in October, was awarded
the first production order.
4
This Division also has been an important supplier of other
electro-optical instruments for various weapon systems, including specialized
on-board sights for the DDG-51 Arleigh-Burke Class of guided missile destroyers.
These instruments often possess highly advanced servo-driven optical systems and
may use lasers, infrared detectors, or low-light level television imaging
systems for night vision. The Company also designs and markets a proprietary
weapon control system under the registered trademark CLAWS(R) for a variety of
platforms.
In general, the Company's aerospace and defense business is
characterized by long-term contracts which require the delivery of products over
more than one year and may include progress payments during the manufacture of
the product. Competition is generally limited to divisions of large
multinational companies which specialize in military contracting. The Company
has been able to compete effectively against these larger companies because of
the Company's experience and expertise in the specialized areas which it serves.
The backlog of this segment at the end of 1998 was $62.2 million of
which approximately 90% is expected to be shipped in 1999.
Customer Base.
Except to the extent that sales to the U.S. government under numerous
prime and sub-contracts may be considered as sales to a single customer, the
Company's business is not characterized by dependence upon one customer or a few
customers, the loss of any of which would have a materially adverse effect on
its total business. Typical of all engineered or custom-made component
businesses, the Company's motion technologies business is characterized by a
customer base founded upon a number of large key accounts, the importance of any
one of which can vary from year to year. During 1998, no customer accounted for
10% or more of the Company's consolidated revenues.
Government Sales.
In 1998, sales to the U.S. Government or for U.S. Government end-use
represented approximately 20.8% of revenues.
Patents.
The Company has either applied for or been granted a number of domestic
and foreign patents pertaining to its business segments. The Company believes
that these patents are and will be important to the Company's continued
leadership position in these business segments and, when necessary, has and will
continue to enforce its legal rights against alleged infringements of its patent
estate. During the first quarter of 1998, the Company received $27.2 million
under a confidential settlement and paid-up license agreement with a large
multinational Japanese company covering certain of the Company's motion control
patents. At the same time, the Company also notified a number of domestic and
foreign companies that licenses are available for these patents. During the
fourth quarter of 1998, the Company also concluded additional licenses for these
patents.
Raw Materials.
The raw materials essential to the Company's business are generally
available in the open market, and the Company did not experience any significant
shortages in such materials during the past three years. The Company believes
that it has adequate sources of raw materials available for use and does not
anticipate any significant shortages.
5
Research and Development.
During 1998, the Company spent $12.1 million or approximately 5% of
its consolidated sales on research activities related to the development of new
products. This compares to $9.7 million or 4.3% in 1997, and $12.1 million or
5.3% in 1996. Substantially all of this amount was sponsored by the Company.
Environmental Matters.
The Company's operations are subject to a variety of federal
environmental laws and regulations. The most significant of these laws are the
Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery
Act, all of which are administered by the United States Environmental Protection
Agency. These statutes and the regulations impose certain controls on
atmospheric emissions, discharges into sewers and domestic waters, and the
handling and disposal of hazardous wastes. In addition, certain state and local
jurisdictions have adopted environmental laws and regulations that are more
stringent than federal regulations. Compliance with these federal and state laws
and regulations has resulted in expenditures by the Company to improve or
replace pollution control equipment. The Company's estimated capital
expenditures for environmental control facilities are not expected to be
material.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act and analogous state statutes, certain liabilities are imposed
for the disposal of "hazardous substances" without regard to fault or the
legality of such disposals. The Company has been named, or has been informed
that it may be named, as a potentially responsible party at several waste
disposal sites under these statutes. Based upon the information available to
date, the Company does not believe that its share of any clean-up costs will
have a material impact on the Company's financial condition, cash flows or
results of operations.
Employees.
The Company is a party to a collective bargaining agreement with the
International Association of Machinists and Aerospace Workers that currently
covers 29 employees and expires in August, 1999.
As of December 31, 1998, the Company employed approximately 1,940
employees. The Company believes that it enjoys satisfactory relations with its
employees, including those covered by the collective bargaining agreement.
Financial Information About Foreign and Domestic Operations and Export
Sales.
Financial information on the Company's foreign and domestic operations
and export sales is contained in the response to Item 14(a) of this Report.
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.
6
Size of Leased
Business Segment Location Facility or Owned
Industrial and Vista, CA (1) 37,000 sq.ft. Leased
Commerical Group Commack, NY 100,000 sq.ft. Leased
Groton, CT 32,000 sq.ft. Leased
Radford, VA (1) 261,000 sq.ft. Owned
Radford, VA 15,000 sq.ft. Leased
Petach Tikva, Israel 11,000 sq.ft. Leased
Dusseldorf, Germany 34,000 sq.ft. Leased
Aerospace and Brattleboro, VT 24,000 sq.ft. Leased
Defense Group Northampton, MA 98,000 sq.ft. Owned
Avrille, France 94,000 sq.ft. Owned
Besancon, France 15,000 sq.ft. Owned
Bien Hoa, Vietnam 24,000 sq.ft. Owned
Corporate Waltham, MA 6,250 sq.ft. Leased
(1) Portions of these facilities are utilized for the Aerospace and Defense
Group.
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. 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 17, 1999:
Present
Name Age Office Business Experience
Gideon Argov 42 President Chairman of the Board since March
and 1996, President and Chief Executive
Chief Officer since November 1991;
Executive Director since May 1991. From March
Officer 1988 to May 1991, President and
Chief Executive Officer and
Director of High Voltage Engineering
Company. Prior to May 1991, for
five years a manager and senior
consultant with Bain & Company.
7
Robert J. Cobuzzi 57 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.
Daniel F. Desmond 49 Vice Vice President since November
President 1997. President of the Company's
Aerospace and Defense Group.
President of the Company's
Electro-Optical Division from 1989
to 1997.
James A. Eder 53 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.
Keith D. Jones 40 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.
8
PART II
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 1890 registered holders of the Company's Common Stock
on March 17 , 1999. 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.
SELECTED QUARTERLY STOCK DATA
(In thousands, except per share amounts)
4 Q 98 3 Q 98 2 Q 98 1 Q 98 4 Q 97 3 Q 97 2 Q 97 1 Q 97
------ ------ ------ ------ ------ ------ ------ ------
Market price per
common share:
High: $19 3/8 $21 3/8 $21 15/16 $24 1/4 $20 3/8 $19 1/4 $15 15/16 $15 1/8
Low: 13 5/8 13 3/4 17 5/8 16 16 3/4 14 3/4 11 5/8 10 7/8
Shares of common
stock traded: 647 1,098 703 1,562 1,270 l,914 1,425 2,076
Dividends per
common share $.02 $.02 $ .02 $.02 $.02 $.02 $.02 $.02
Average outstanding
common shares and
common share
equivalents 10,482 10,488 10,702 11,599 10,525 10,465 10,190 10,177
Item 6. Selected Financial Data.
The following table sets forth selected consolidated financial data for
the Company for each of the five fiscal years 1994 through 1998.
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
1998 1997 1996 1995 1994
------------ ------------- ------------ ------------ -------------
Net sales....................................... $243,939 $222,246 $230,424 $228,655 $191,771
Impairment of goodwill and assets held for sale (2,733) - - - -
Acquired research and development....... - (11,391) - - -
Tender offer costs.......................... (1,273) (4,176) - - -
Intellectual property license, net of expense 21,217 - - - -
Gain on sale of investment in joint venture .. - 24,321 - - -
Reorganization of research and development
organization ............................. (1,310) - - - -
Cumulative effect of change in accounting
principle ................................. (438) - - - -
Net income......................................... 14,307 19,720 8,904 7,157 4,051
Total assets...................................... 168,633 145,444 141,330 147,474 138,201
Total debt........................................ 47,809 43,623 65,541 49,808 53,991
Redeemable preferred stock (See Note 8
to Financial Statements)...................... - - - 25,506 22,532
Weighted average diluted shares outstanding .... 10,506 10,364 10,042 9,770 9,703
Earnings per common share:
Basic........................................ $1.42 $2.00 $0.89 $0.26 (1) $0.18
Diluted...................................... $1.36 $1.90 $0.86 $0.26 (1) $0.18
Cash dividends per common share............ $0.08 $0.08 $0.08 $0.08 $0.08
(1) After provision for the 10% premium on the redemption of the Series D Convertible Preferred Stock.
9
Item 7. Management's Discussion and Analysis of Financial Conditions
And Results of Operations
The Company has maintained its focus on high performance motion control.
Over the past four years this effort has resulted in the acquisition of three
companies, the sale of three instrumentation businesses, and the organization
of its motion control business into two groups, the Industrial and Commercial
Group and the Aerospace and Defense Group. In addition, in 1997 the Company
was unsuccessful in acquiring a competitor through an unsolicited tender
offer. Management believes that the results of these activities and other
items detailed below are not indicative of the Company's ongoing operating
results and has therefore grouped them together as "Special Items" to allow
management to discuss the results of operations on a consistent basis.
For the year ended December 31, 1998, the Company had sales of $243.9
million and net income of $14.3 million, or $1.36 per common share (diluted).
These results compare with 1997 sales of $222.2 million and net income of
$19.7 million, or $1.90 per common share (diluted), and 1996 sales of $230.4
million and net income of $8.9 million, or $0.86 per common share (diluted).
Excluding the impact of the Special Items, the Company's net income would have
been $12.0 million, or $1.14 per share; $10.5 million, or $1.02 per share; and
$8.9 million, or $0.86 per share for the years 1998, 1997, and 1996,
respectively.
In January 1998 the Company announced a major license agreement for its
pioneering electronic motion control patents in the amount of $27.2 million,
which, after legal and other expenses, resulted in pre-tax income of $21.2
million. In connection with its patent enforcement program, the Company has
engaged counsel to continue enforcement of the Company's patent estate, and
accordingly, recorded a pre-tax charge of $6.8 million to cover legal expenses
and other related costs. At December 31, 1998, the Company had incurred
costs of $1.2 million in connection with its patent enforcement program.
In the first quarter of 1998, the Company recorded a pre-tax charge of
$2.7 million, primarily relating to the write-down of goodwill from its 1994
acquisition of the assets of Sperry Marine. Also in the first quarter of 1998,
the Company elected to change the vesting method for post-retirement medical
insurance benefits, resulting in a pre-tax charge of $1.6 million.
As mentioned above, the Company has made three acquisitions in the past
two years in the field of motion control and organized itself into two
operating units. As a result of these actions, in the fourth quarter of 1998
the Company reorganized its worldwide research and development organization to
eliminate redundancies and improve the efficiency of its development process,
resulting in a pre-tax charge of $1.3 million for severage cost.
On December 31, 1998 the Company adopted SOP 98-5, "Accounting for the
Costs of Start-Up Activities" which requires all costs of start up activities
to be expensed as incurred. As a result, the Company recorded a charge of $0.4
million as a cumulative change in accounting principle. There was no tax benefit
associated with the charge, which was reflected as a reduction of intangible
assets.
10
In connection with the 1997 acquisitions of Servotronix and Seidel, the
Company has allocated the purchase price to the assets acquired, both tangible
and intangible, and the excess of the purchase price over the assets acquired
has been classified as goodwill. A portion of the purchase price has been
allocated to in-process research and development, in the amount of $10.5 million
and was expensed as "Acquired research and development" in the second quarter of
1997. Also included in acquired research and development was a charge of
approximately $0.9 million for technology acquired unrelated to the Servotronix
and Seidel acquisitions.
On December 15, 1997, the Company commenced a tender offer ("Tender
Offer") for 50.1% of the outstanding shares of Pacific Scientific Company
("Pacific") in cash with the remainder of the Pacific shares to be acquired
through the issuance of the Company's common stock. On February 2, 1998, the
Company terminated its offer to acquire Pacific after a significantly higher
bid was accepted by the Pacific board of directors. Included in the
accompanying financial statements are pre-tax charges of $1.3 million and $4.2
million representing the costs incurred in connection with the Tender Offer for
1998 and 1997, respectively.
The Company entered into an agreement, effective December 31, 1996, to
combine its Macbeth division with the Color Control Systems business of Gretag
AG (the "Joint Venture"). In 1997, the Company sold its interest in the
Joint Venture, receiving approximately $42 million in cash, and resulting in a
gain of $24.3 million. The gain is net of $2.0 million in income taxes and the
utilization of net operating losses and other tax credit carryforwards.
Collectively, the above items will be referred to as the "Special Items"
to provide for comparative discussion of the Company's results on a consistent
basis.
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.
Collectively the French instrumentation business and the Macbeth business will
be referred to as the "Businesses Sold".
11
Results of Operations
The following table reflects the results of operations for the
Company's two operating segments excluding the impact of the Special Items and
the Businesses Sold. This comparison provides a consistent basis by which to
view the results of the Company's two operating segments (in millions):
1998 1997 1996
------------------ ---------------- ---------------
Industrial and Commercial Group:
Bookings $ 135.5 $ 117.4 $ 91.7
Sales 135.7 120.2 90.2
Profit before tax 10.2 10.2 6.1
Aerospace and Defense Group:
Bookings $ 106.3 $ 104.6 $ 90.5
Sales 108.2 102.0 107.2
Profit before tax 13.6 10.5 11.0
1998 versus 1997
Total profit before tax increased in 1998 to $24.9 million as compared
to a loss in 1997 of $3.4 million. Excluding the Special Items and Businesses
sold discussed above, profit before tax would have been $17.4 million in 1998,
an increase of 42% over $12.3 million in 1997. Excluding the Special Items,
the Industrial and Commercial Group's profit before tax remained unchanged at
$10.2 million in both 1998 and 1997. Increased profit before tax at the
group's motion business was offset by a decline in the group's engineering
consulting business. The Aerospace and Defense Group's profit before tax
increased 29% to $13.6 million in 1998 from $10.5 million in 1997 principally
due to the performance of its motion components business and the group's
electro-optical business.
The Company's sales increased 10% in 1998 to $243.9 million as compared
to $222.2 million in 1997. The Industrial and Commercial Group's revenue
increase to $135.7 million in 1998 from $120.2 million in 1997, or 13%, was a
result of the Magnedyne, Seidel, and Servotronix acquisitions, and an increase
in the sales of fractional motors manufactured at the Company's production
facility located in India. The sales increase more than offset a sales decline
by the group's engineering consulting business. Sales by the Aerospace and
Defense Group increased 6% to $108.2 million in 1998 from $102.0 million in
1997, reflecting increased sales by all of the group's businesses.
The Company's overall gross margin as a percent of sales remained
relatively constant at approximately 31% in 1998 and 1997. The Industrial and
Commercial Group had a decrease in gross margin as a percent of sales to 30% in
1998 from 32% in 1997. The decrease was caused by the volume decline in the
group's engineering consulting business. The Aerospace and Defense Group
improved its gross margin as a percent of sales to 33% in 1998 as compared to
31% in 1997. The improvement was a result of margin improvements by the
group's motion components business.
12
Sales and marketing expenses increased 6% in 1998 to $23.2 million as
compared to $21.9 million in 1997, but remained constant at 10% of sales in
both years. The increase is related principally to the full year impact of the
Seidel and Servotronix acquisitions and increased sales and bookings during the
year in the Industrial and Commercial Group.
Research and development ("R&D") expenses were $12.1 million or 5% of
sales in 1998 as compared with $9.7 million or 4% of sales in 1997. R&D
expenses at the Industrial and Commercial Group increased $2.6 million during
1998 to 5% of sales from $4.6 million or 4% in 1997 reflecting the impact of
the Magnedyne, Seidel, and Servotronix acquisitions. R&D expenses at the
Aerospace and Defense Group increased 9% in 1998, but remained at 5% of sales
for both 1998 and 1997.
General and administrative expenses increased $0.3 million or 1% in
1998 as compared to 1997, but remained at approximately 10% of sales for both
years.
Bookings for the Company's products and services increased 9% in 1998
as compared with 1997. The Industrial and Commercial Group saw an increase in
bookings of 15% in 1998 versus 1997 as a result of the Magnedyne, Seidel, and
Servotronix acquisitions, and the increase in its ongoing motion business more
than offsetting decreased orders for the group's engineering consulting
business. The Aerospace and Defense Group's bookings increased 2% in 1998 over
1997 principally due to an increase by its French operations offsetting a
decline in long term orders at the group's domestic military systems business
where orders are typically large multi-year orders received on an infrequent
basis.
1997 versus 1996
Profit before tax declined in 1997 to a loss of $3.4 million from
income in 1996 of $8.4 million. Excluding the Special Items discussed above
and the equity in earnings of the Joint Venture, profit before tax would have
been $12.3 million in 1997, an increase of 47% over 1996. Excluding the
Special Items and the Businesses Sold, the Industrial and Commercial Group's
profit before tax increased by 67% in 1997 over 1996 to $10.2 million from $6.1
million as a result of the improved results by the group's domestic operations,
increased sales from its high volume business, the impact of the Seidel
acquisition, and strong performance in the engineering consulting business.
The Aerospace and Defense Group's profit before tax declined in 1997 by 4% to
$10.5 million from $11.0 million in 1996 as a result of the start-up costs of
the Vietnam manufacturing facility and a decline in foreign sales.
13
The Company's sales decreased 4% in 1997 versus 1996. Excluding the
Businesses Sold, increased revenue in the Industrial and Commercial Group
contributed to a 13% revenue increase. The Industrial and Commercial Group's
revenue increased to $120.2 million in 1997 from $90.2 million in 1996 or 33%
as a result of the Seidel and Servotronix acquisitions, increased revenues for
engineering consulting service, and an increase in the sales of its ongoing
motion control products. Sales to Aerospace and Defense customers declined 5%
from $107.2 million in 1996 to $102.0 million in 1997, a result of the
weakening in the value of the French franc and a decline in motion control
component sales.
The Company's overall gross margin declined as a percent of sales to
31% in 1997 from 34% in 1996 as a result of the impact of the Businesses Sold.
Excluding the Businesses Sold, the Company's gross margin as a percent of sales
for 1996 was consistent with 1997 at approximately 31%. The Industrial and
Commercial Group increased its gross margin as a percent of sales from 30% in
1996 to 32% in 1997. The Aerospace and Defense Group maintained a 31% gross
profit as a percent of sales for both 1996 and 1997.
Sales and marketing expenses were $21.9 million or 10% of sales in 1997
as compared to $27.6 million or 12% of sales in 1996. Excluding the Businesses
Sold, sales and marketing expenses increased 15% from $19.1 million in 1996 to
$21.9 million in 1997, but sales and marketing expenses as a percent of sales
remained at 10% of sales for both years. The increase in spending for sales
and marketing was in the Industrial and Commercial Group due to the Seidel and
Servotronix acquisitions.
Research and development expenses were $9.7 million or 4% of sales in
1997 as compared with $12.1 million or 5% of sales in 1996. Excluding the
Businesses Sold, R&D expenses were $9.7 million in 1997 or 4% of sales and $8.8
million or 5% of sales in 1996. R&D expenses by the Industrial and Commercial
Group increased to $4.6 million in 1997 from $3.5 million in 1996, but remained
at 4% of sales. This increase in spending was a result of the Seidel and
Servotronix acquisitions. R&D expenses by the Aerospace and Defense Group
decreased in 1997 to $4.6 million from $5.3 million in 1996. The decline in
spending was a result of decreased spending by the group's French operation,
where R&D expenses had risen significantly in 1996 to support certain long-term
development contracts.
General and administrative ("G&A") expenses declined to $22.8 million
or 10% of sales in 1997, from $24.3 million or 11% of sales in 1996. Excluding
the impact of the Businesses Sold, G&A expenses increased 3% to $22.8 million
or 10% of sales in 1997 from $22.2 million or 11% of sales in 1996. The
increase in G&A expenses was a result of increased spending by the Industrial
and Commercial Group due to the Seidel and Servotronix acquisitions and because
of increased support required by this group's engineering consulting business.
14
Interest and Taxes
Interest expense was $3.4 million, $4.7 million, and $5.8 million in
1998, 1997, and 1996, respectively. The continued decrease in interest expense
was due to lower debt levels. This was a result of the repayment at the end of
the second quarter of 1997 of the balance of the $25 million term loan the
Company entered into to fund the redemption of its Preferred Stock in 1996.
Additionally, the Company makes annual mandatory sinking fund payments on its
convertible subordinated debentures.
The Company recorded a provision for income taxes of $10.1 million in
1998 or 41% of pre-tax income. Excluding the Special Items, the Company
provided income taxes at 31%. The 41% tax rate reflects the effect of the
patent licensing income, taxable in the U.S., which was subject to Japan
withholding tax. The Company's effective tax rate (excluding Special Items) of
31% is less than the statutory U.S. tax rate as some of the Company's foreign
subsidiaries operate in countries where the statutory rate is less than the U.S.
rate, or the Company is operating under a tax holiday agreement. The Company
reported income taxes of $2.8 million in 1997 provided against a loss before
taxes of $3.4 million. The acquired research and development charge was not
deductible for tax purposes and only a portion of the Tender Offer costs were
deductible in 1997. After adjustment for these items, the Company recorded a
tax provision of approximately 28% against earnings. The Company had a zero
tax rate in 1996 as a result of the utilization of net operating loss and other
tax credit carryforwards.
Liquidity and Capital Resources
The Company's consolidated cash position decreased by $1.8 million
during 1998. Cash provided by operations was $17.8 million, $20.3 million was
used in investing activities, and financing activities provided $0.8 million.
The Company used $3.8 million of cash to fund working capital
requirements, principally relating to the increase in accounts receivable due
to increased sales in 1998; however, the Company saw modest improvement in days
sales outstanding. The Company continues to focus on working capital reductions
and effective cash management in order to maximize the amount of available cash.
The Company's investing activities in 1998 included expenditures of
$9.7 million for property, plant and equipment, primarily for replacement of
existing equipment, investment in new equipment to improve the efficiency of
manufacturing, and continued investment in information systems both domestically
and in Europe. The Company used $10.0 million of cash to fund the purchase of
Magnedyne.
15
The Company's financing activities provided $0.8 million of cash during
the year. Net borrowings under its short-term credit facilities were $1.9
million to fund working capital requirements. The Company also made mandatory
sinking fund payments on its convertible subordinated debentures totaling $1.8
million. The Company is required, under the terms of the 8.75% convertible
subordinated debenture, to make certain mandatory sinking fund payments each
year through the year 2009. The Company borrowed $2.0 million under its
revolving credit facilities primarily to fund a portion of the Seidel
acquisition. Common dividends paid were $0.8 million.
The Company entered into a five year, $50 million unsecured
multicurrency credit facility in 1997 and no amounts were outstanding at
December 31, 1998. Borrowings under the agreement bear interest at the bank's
prime lending rate or the Eurodollar rate plus a margin ranging from 75 to 175
basis points, and is currently at 75 basis points. The margin varies based on
the financial performance of the Company, and the Company expects to continue
its financial performance at a level that will maintain the existing margin
rate for the foreseeable future.
Capital spending for 1999 is expected to decrease versus 1998. The
Company expects to obtain lease or debt financing for some of its capital
requirements for 1999. 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 believes that with the cash generated from operations and
with its current borrowing capacity, it will be able to finance its 1999
capital expenditures, sinking fund payments, and working capital requirements.
The Company operates in countries in which the currency historically
has been considered stable. Management believes that any fluctuations in
currency rates within these countries will not have a material effect on the
Company's financial condition, cash flows, or results of operations.
Year 2000 Issue
The year 2000 issue is the result of computer programs having been
written using two digits, rather than four, to define the applicable year.
Any of the Company's computers, computer programs, manufacturing and
administration equipment or products that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. If any
of the Company's systems or equipment that have date-sensitive software use
only two digits, system failures or miscalculations may result causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or send and receive electronic data with third parties
or engage in similar normal business activities.
16
During 1998, the Company formed an ongoing internal review team to
address the year 2000 issue that encompasses operating and administrative areas
of the Company. A team of global professionals has been engaged in a process to
work with Company personnel to identify and resolve significant year 2000
issues in a timely manner. In addition, executive management regularly monitors
the status of the Company's year 2000 remediation plans. The process includes
an assessment of issues and development of remediation plans, where necessary,
as they relate to internally used software, computer hardware and use of
computer applications in the Company's manufacturing processes and products.
In addition, the Company is engaged in assessing the year 2000 issue with
significant suppliers.
The assessment process has been completed at the Company's U.S.
operations. With respect to the Company's international operations, the
assessment process has been completed for computer software and hardware
information technology systems used internally by the Company. The assessment
process at several international operations for internally used manufacturing
and administrative equipment is expected to be completed in April 1999. In
addition, the Company is finalizing its assessment of significant suppliers at
all major locations to determine the extent to which the Company is vulnerable
to third parties' failure to remediate their own year 2000 issues. Finally,
related to products sold by the Company, the Company believes it has no
exposure to contingencies related to year 2000 issues.
During the past three years, as part of business modernization
programs intended to reduce cycle time and improve profitability, the Company
has purchased Enterprise Resource Planning ("ERP") Systems for some of its
operations in the U.S. and other international locations, which the software
vendors have indicated are year 2000 compliant. The Company is in the
implementation phase for these systems and other ancillary financial systems
with many sites expected to achieve full implementation before September 30,
1999. Some sites are not expected to implement new ERP systems before the end
of 1999 and accordingly, the Company has begun making the current systems year
2000 compliant. The cost of making those adaptations are not expected to be
material and will be expensed in the period incurred. It is expected that the
Company will be in full compliance with its internal systems before the year
2000. If, due to unforeseen circumstances, the implementation is not completed
on a timely basis, the year 2000 could have a material impact on the operations
of the Company.
The Euro
On January 1, 1999, eleven of fifteen member countries of the European
Union established fixed conversion rates between their existing currencies
("legacy currencies") and one common currency, the euro. The euro now trades
on currency exchanges and may be used in business transactions. The conversion
to the euro eliminates currency exchange rate risk among the eleven member
countries. Beginning in January 2002, new euro-denominated bills and coins will
be issued. The Company's business units significantly affected by the euro
conversion have established plans to address the issues raised by the euro
17
currency conversion, and expect to be substantially complete with these plans
by the year 2000. These issues include, among others, the need to adapt
computer and financial systems, business processes and equipment, and the need
to accommodate euro-denominated transactions and the impact of one common
currency on product pricing, taxation and governmental and legal regulations.
The Company does not expect the system and equipment conversion costs to be
material to its financial condition, results of operations or cash flows. Due
to numerous uncertainties, the Company cannot reasonably estimate the effects
currency will have on pricing and the resulting impact, if any, on its
financial condition results of operations or cash flows.
New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). The SOP is applicable to
the Company beginning in fiscal 1999. The Company engages in ongoing update,
enhancement and replacement of its computer systems. Currently, the Company
capitalizes only external costs associated with services and software in
connection with these activities that are significant. To date, internal
resources associated with these activities have not been significant. The
Company is currently evaluating the effect, if any, of implementing SOP 98-1.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities" which must be adopted for
fiscal years beginning after June 15, 1999. The new standard establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. The Company expects to adopt SFAS 133 by January 1, 2000. Had the
Company implemented SFAS 133 for the current reporting period, there would have
been no material effect on the financial statements.
Forward looking information
Certain statements in this report are "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
All forward looking statements involve risks and uncertainties. In particular,
any statement contained herein, in press releases, written statements or other
documents filed with the Securities and Exchange Commission, or in the Company's
communications and discussions with investors and analysts in the normal course
of business through meetings, phone calls and conference calls, regarding the
consummation and benefits of future acquisitions, as well as expectations with
respect to future sales, operating efficiencies and product expansion, are
subject to known and unknown risks, uncertainties and contingencies, many of
which are beyond the control of the Company. These factors may cause actual
results, performance or achievements to differ materially from anticipated
results, performances or achievements. Factors that might affect such forward
looking statements include, but are not limited to, overall economic and
business conditions; the demand for the Company's goods and services; the
timing of and market acceptance of new products; competitive factors in the
industries and geographic markets in which the Company competes; changes in tax
requirements (including tax rate changes, new tax laws and revised tax law
interpretations); interest rate fluctuations and other capital market
conditions, including foreign currency rate fluctuations; economic and
political conditions in international markets; the ability to achieve
anticipated synergies and other cost savings in connection with acquisitions;
the timing, impact and other uncertainties of future acquisitions; and the
Company's ability and its customers' and suppliers' ability to replace, modify
or upgrade computer programs in order to adequately address the year 2000
issue. Any forward looking statements should be considered in light of these
factors.
18
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. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
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 12, 1999, is
contained in the definitive proxy statement to be filed with the Securities and
Exchange Commission (the "Commission") on or before April 5, 1999, 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. 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 5, 1999, under the heading "Executive Compensation" and such
information is incorporated herein by reference in response to this item.
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 5, 1999, 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. Certain Relationships and Related Transactions.
None.
PART IV
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 46.
(b) Reports on Form 8-K.
(1) On November 4, 1998, the Company filed a current
report on Form 8-K announcing the adoption of the
Amended and Restated Rights Agreement dated October 22,
1998 between the Company and BankBoston, N.A. as rights
agent.
19
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 26, 1999
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 26, 1999
President and
Chief Executive Officer/Director
/s/ Robert J. Cobuzzi
Robert J. Cobuzzi March 26, 1999
Senior Vice President, Treasurer and
Chief Financial Officer/Director
/s/ Keith D. Jones
Keith D. Jones March 26, 1999
Controller and
Chief Accounting Officer
/s/ James A. Eder
James A. Eder March 26, 1999
Attorney-in-Fact For:
Jerald G. Fishman, Director J. Douglas Maxwell, Director
Herbert L. Henkel, Director Robert N. Parker, Director
James H. Kasschau, Director George P. Stephan, Director
20
INDEX TO FINANCIAL STATEMENTS
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 21
Consolidated Balance Sheets as of December 31, 1998 and 1997. 22
Consolidated Statements of Operations for the years ended December 31, 23
1998, 1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended 24
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31, 25
1998, 1997 and 1996.
Notes to Consolidated Financial Statements. 27
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Kollmorgen Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Kollmorgen Corporation and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations, shareholders' equity and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 22, 1999
22
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in thousands, except per share amounts)
ASSETS
1998 1997
Current assets:
Cash and cash equivalents (Note 1) $ 13,086 $ 14,854
Accounts receivable (net of allowance of $581
in 1998 and $971 in 1997) 48,927 39,528
Recoverable amounts on long-term contracts 2,597 5,762
Inventories (Note 5) 27,838 25,162
Prepaid expenses 1,885 2,041
----- -----
Total current assets 94,333 87,347
Property, plant, and equipment, net (Note 6) 30,809 26,673
Goodwill, patents, and other intangible assets
(net of accumulated amortization
of $5,759 in 1998 and $4,840 in 1997) 20,420 14,343
Deferred income taxes (Note 12) 9,448 5,802
Other assets 13,623 11,279
------ ------
Total assets $168,633 $ 145,444
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,336 $ 18,467
Income taxes payable 6,733 2,869
Accrued compensation and payroll taxes 8,883 9,218
Accrued liabilities 19,227 20,866
Line of credit (Note 7) 9,270 5,232
Current portion of long-term debt (Note 7) 2,419 2,012
----- -----
Total current liabilities 60,868 58,664
Long-term debt (Note 7) 36,120 36,379
Other liabilities 14,943 8,673
Minority interest 175 136
Commitments and contingencies (Note 14)
Shareholders' equity (Notes 9 and 10):
Common stock, par value $2.50 per share
-- authorized 25,000,000 shares
-- issued 10,774,145 and 10,769,008 shares
in 1998 and 1997, respectively
-- outstanding 10,125,355 and 10,018,022
shares in 1998 and 1997, respectively 26,932 26,921
Additional paid-in capital 12,882 12,682
Retained earnings 22,772 9,268
Accumulated other comprehensive income (270) (602)
Less common stock in treasury, at cost
-- 648,790 and 750,986 shares in 1998
and 1997, respectively (5,789) (6,677)
----- ------ ------
Total shareholders' equity 56,527 41,592
------ ------
Total liabilities and shareholders' equity $ 168,633 $145,444
========= ========
The accompanying notes are an integral part of these consolidated financial statements.
23
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1998, 1997, and 1996
(Dollars in thousands, except per share amounts)
1998 1997 1996
Net sales $ 243,939 $ 222,246 $ 230,424
Cost of sales 167,501 152,276 152,928
------------- ------------- -------------
Gross profit 76,438 69,970 77,496
------------- ------------- -------------
Selling and marketing expense 23,202 21,858 27,570
General and administrative expense 23,139 22,847 24,348
Research and development expense 12,125 9,662 12,143
Reorganization of research and development organization (Note 2) 1,310 - -
Impairment of goodwill and assets held for sale (Note 1) 2,733 - -
Acquired research and development (Note 2) - 11,391 -
Tender offer costs (Note 2) 1,273 4,176 -
------------- ------------- -------------
Income from operations 12,656 36 13,435
Other income (expense):
Interest (expense) (3,387) (4,650) (5,806)
Interest income 771 612 493
Intellectual property license, net of expenses (Note 4) 21,217 - -
Other, net (Notes 4, 15) (6,356) 585 268
------------- ------------- -------------
Income (loss) before income taxes, joint venture,
minority interest and change in accounting principle 24,901 (3,417) 8,390
Provision for income taxes (Note 12) (10,085) (2,838) -
------------- ------------- -------------
Income (loss) before equity in earnings of joint venture,
minority interest and change in accounting principle 14,816 (6,255) 8,390
Equity in earnings of joint venture (Note 3) - 1,430 -
Minority interest (71) 224 514
Gain on sale of investment in joint venture, net of income taxes (Note 3) - 24,321 -
------------- ------------- -------------
Income before cumulative effect of change in accounting principle 14,745 19,720 8,904
Cumulative effect of change in accounting principle (Note 1) (438) - -
------------- ------------ ------------
Net income $ 14,307 $ 19,720 $ 8,904
============= ============= =============
Net income available to common shareholders $ 14,307 $ 19,720 $ 8,619
Earnings per common share:
Basic $ 1.42 $ 2.00 $ 0.89
Diluted $ 1.36 $ 1.90 $ 0.86
Number of shares used in calculating earnings per common share:
Basic 10,081,578 9,875,963 9,732,055
Diluted 10,506,252 10,363,873 10,042,106
The accompanying notes are an integral part of these consolidated financial statements.
24
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1998, 1997 and 1996 (Dollars in thousands)
Common Stock Accumulated
---------------------------- Additional Other
Issued Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income
Balance, December 31, 1995 $10,762,024 $26,904 $14,343 $(18,958) $(1,454)
Net income 8,904
Common stock issuances 3,546 10 34
Dividends paid on common
and preferred stock (1,069)
Common stock issued from treasury (142)
Translation adjustments (no tax
charge in comprehensive income) 2,245
Comprehensive income
------------- ------------- ------------- ------------- -----------------
Balance, December 31, 1996 10,765,570 26,914 13,166 (10,054) 791
Net income 19,720
Common stock issuances 3,438 7 37
Dividends paid on common stock (392) (398)
Common stock issued from treasury (129)
Translation adjustments (net of tax
benefit of $400 in comprehensive
income) (1,393)
Comprehensive income
------------- ------------- ------------- ------------- -----------------
Balance, December 31, 1997 10,769,008 26,921 12,682 9,268 (602)
Net income 14,307
Common stock issuances 5,137 11 67
Dividends paid on common stock (803)
Common stock issued from treasury 133
Translation adjustments (net of tax
charge of $100 in comprehensive
income) 332
Comprehensive income
------------- ------------- ------------- ------------- -----------------
============= ============= ============= ============= =================
Balance, December 31, 1998 10,774,145 $ 26,932 $ 12,882 $ 22,772 $ (270)
============= ============= ============= ============= =================
Treasury Stock Totals Comprehensive
---------------------------- ----------------------------- Income
Shares Amount Outstanding Amount ----------------
Shares
Balance, December 31, 1995 (1,068,558) $ (9,538) 9,693,466 $11,297
Net income 8,904 $ 8,904
Common stock issuances 3,546 44
Dividends paid on common
and preferred stock (1,069)
Common stock issued from treasury 56,050 500 56,050 358
Translation adjustments (no tax
charge in comprehensive income) 2,245 2,245
Comprehensive income
------------- ------------- -------------- ------------- -----------------
Balance, December 31, 1996 (1,012,508) (9,038) 9,753,062 21,779 11,149
=================
Net income 19,720 19,720
Common stock issuances 3,438 44
Dividends paid on common stock (790)
Common stock issued from treasury 261,522 2,361 261,522 2,232
Translation adjustments (net of tax
benefit of $400 in comprehensive
income) (1,393) (1,003)
Comprehensive income
------------- ------------- -------------- ------------- -----------------
Balance, December 31, 1997 (750,986) (6,677) 10,018,022 41,592 18,717
=================
Net income 14,307 14,307
Common stock issuances 5,137 78
Dividends paid on common stock (803)
Common stock issued from treasury 102,196 888 102,196 1,021
Translation adjustments (net of tax
charge of $100 in comprehensive
income) 332 229
Comprehensive income
============= ============= ============= ============= ================
Balance, December 31, 1998 (648,790) $ (5,789) 10,125,355 $56,527 $14,536
============= ============= ============= ============= ================
The accompanying notes are an integral part of these consolidated financial statements.
25
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
1998 1997 1996
Cash flows from operating activities:
Income from operations $ 14,307 $ 19,720 $ 8,904
Adjustments to reconcile income to net cash
provided by operating activities:
Depreciation 5,648 4,367 5,259
Amortization 1,643 1,228 1,063
Acquired research and development - 11,391 -
Impaired asset charge 2,733 - -
Gain (loss) on sale of assets 255 (24,766) (561)
Equity in earnings of joint venture - (1,430) -
Deferred income taxes (3,572) (4,034) (1,991)
Minority interest and other non-cash expenses 557 (107) (470)
Changes in operating assets and liabilities (net of
effects from acquisitions and divestitures):
Accounts receivable (5,154) 5,101 (9,664)
Recoverable amounts on long-term contracts 3,165 (789) 7,143
Inventories (878) (842) (353)
Prepaid expenses 235 (275) (840)
Accounts payable and accrued liabilities (1,285) (4,868) (3,832)
Other deferred expenses 105 (1,683) 1,710
----------- ------------ -----------
Net cash provided by operating activities 17,759 3,013 6,368
----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures (9,659) (6,216) (4,848)
Proceeds from sale of assets (net of related expenses) 250 - 5,762
Proceeds from sale of investment in joint venture - 41,396 -
Acquisitions and equity investments, net of cash acquired (10,300) (15,421) (1,529)
Other (581) 262 753
----------- ------------ -----------
Net cash provided by (used in) investing activities (20,290) 20,021 138
----------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial statements.
26
1998 1997 1996
Cash flows from financing activities:
Borrowing (repayments) under credit lines, net 1,887 (337) (1,552)
Principal repayment on other notes - - (1,916)
Proceeds from common stock issued from treasury 66 1,281 358
Redemption of preferred stock - - (25,506)
Borrowings of long-term debt 2,427 4,920 25,463
Repayments of long-term debt (2,790) (26,738) (6,164)
Dividends paid on common and preferred stock (803) (790) (1,069)
----------- ------------ -----------
Net cash provided by (used in) financing activities 787 (21,664) (10,386)
----------- ------------ -----------
Effect of exchange rate changes on cash (24) 39 (464)
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents (1,768) 1,409 (4,344)
Cash and cash equivalents at beginning of year 14,854 13,445 17,789
----------- ------------ -----------
Cash and cash equivalents at end of year $ 13,086 $ 14,854 $ 13,445
=========== ============ ===========
Supplemental cash flow information
Cash paid during the period for:
Interest $ 3,770 $ 5,269 $ 5,467
Income taxes $ 7,013 $ 7,358 $ 445
The accompanying notes are an integral part of these consolidated financial statements.
27
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(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 and its subsidiaries, (the "Company") is presented below. Certain
reclassifications have been made to the prior years' financial statements to
conform to 1998 classifications.
Principles of Consolidation. Except as discussed in Note 3, the
consolidated financial statements include the accounts of the Company and all of
its majority-owned subsidiaries. For those consolidated subsidiaries where
Company ownership is less than 100%, the outside stockholders' interest is shown
as "Minority interest". All significant intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates. The consolidated financial statements are prepared
in conformity with generally accepted accounting principles and, accordingly,
include amounts that are based on management's best estimates and judgments.
Actual results could differ from those estimates. Certain significant estimates
are disclosed throughout these consolidated financial statements.
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.
Recoverable Amounts on Long-Term Contracts. These represent revenues
recognized on a percentage-of-completion basis net of progress billings.
Inventories. Inventories are stated net of reserve 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. Property, plant, and equipment are
stated at cost less accumulated depreciation 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
as other income or expense.
For financial reporting purposes, these assets are being depreciated 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 improvements
are depreciated over the lesser of their useful lives or 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.
28
Year 2000 Costs. Costs of modifying computer software for Year 2000
compliance are expensed as they are incurred.
Goodwill and Intangibles. Goodwill consists of amounts by which the
cost of acquisitions exceeded the values assigned to net tangible and
intangible assets. Intangible assets consist principally of patents and
intangible assets purchased as part of acquisitions (Note 2). All of these
assets are being amortized on a straight-line basis over periods ranging from 5
to 20 years.
Impairment of Long-Lived Assets. The Company reviews long-lived assets
for impairment when events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. Each impairment
test is a comparison of the carrying value of the asset against the anticipated
future cash flows from related operating activities. If an impairment is
indicated, the asset is written down to its fair value.
In 1998, the Company recorded a charge of $2.7 million for the
impairment of assets. Of this amount $2.0 million related to the write-down of
goodwill from its 1994 acquisition of the assets of Sperry Marine. Additionally,
the Company increased its reserve for impaired real estate by $0.7 million to
reflect its current assessment of the fair value of real estate held for sale.
Foreign Currency Translation. The functional currency for the majority
of the Company's foreign operations is each entity's local currency. The
translation from the functional 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 an average exchange rate
during the period. The gains or losses resulting from such translation are
included in shareholders' 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) or delivery of service. Major programs that are performed
under long-term contracts are accounted for using the percentage-of-completion
method. Revenues recognized under the percentage of completion method were $34.5
million, $31.6 million, and $31.7 million in 1998, 1997, and 1996, respectively.
In most cases, the contracts provide for progress billings over the life of the
program.
Earnings Per Common Share. Earnings per common share ("EPS") is
based on net income less the dividends, interest accretion and the premium paid
on redeemable preferred stock (Note 8), divided by the weighted average number
of common and dilutive common equivalent shares outstanding. Note 10 to the
Consolidated Financial Statements contains a summary of the proforma effects to
reported earnings per share for 1998, 1997 and 1996 if the Company had elected
to recognize stock based compensation expense in accordance with Statement of
Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation."
29
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 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 where the cost for employees hired prior to
January 1, 1992 is amortized over 20 years.
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: Estimated based on its market price.
Standby Letters of Credit: Based on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties at the
reporting date.
Derivatives: Derivative financial instruments are used by the Company in
the management of foreign currency exposures and are accounted for on an
accrual basis. Gains and losses resulting from effective hedges of
existing assets, liabilities, or firm commitments are deferred and
recognized when the offsetting gains and losses are recognized on the
related hedged items. The Company does not use hedging for speculative
purposes. As of December 31, 1998 and 1997, the Company had no foreign
exchange contracts outstanding.
Change in Accounting Principle. On December 31, 1998, the Company
adopted SOP 98-5, "Accounting for the Costs of Start-Up Activities" which
requires all costs of start-up activities to be expensed as incurred. As a
result, the Company recorded a charge of $438 thousand as a cumulative change
in accounting principle. There was no tax benefit associated with the charge,
which was reflected as a reduction of intangible assets.
30
Note 2. Asset Acquisitions and Equity Investments
On July 1, 1998, the Company acquired the assets of the Magnedyne
division of Sierracin Corporation in a purchase transaction for $10.0 million in
cash. The excess of the purchase price over the net assets acquired of $7.7
million has been classified as goodwill and is being amortized over fifteen
years. The results of operations for Magnedyne are consolidated in the
accompanying financial statements effective July 1, 1998. Magnedyne designs
and builds brushless and brush-type torque motors and drives.
In May 1995, the Company entered into an agreement to acquire for $0.6
million, a 10% equity interest in Servotronix Ltd. ("Servotronix"), a firm in
Israel which designs and markets digital control systems for the motion
control market. In 1996, the Company increased its equity interest in
Servotronix to 25% with payments totaling $1.4 million. Effective April 2, 1997,
the Company purchased the remaining shares of Servotronix for $6.4 million of
cash and through the issuance of 257,522 shares of the Company's common stock.
Effective June 10, 1997, the Company entered into a binding agreement to
purchase all of the shares of Fritz A. Seidel Elektro-Automatik GmbH ("Seidel"),
a designer and distributor of electronic motion control products located in
Germany, for $9.4 million in cash. The results of operations for Seidel are
consolidated in the accompanying financial statements effective July 1, 1997.
In connection with the acquisitions of Servotronix and Seidel, the
Company allocated the purchase price to the assets acquired, both tangible and
intangible, and any excess of the purchase price over the assets acquired is
classified as goodwill. Intangible assets acquired consist primarily of
completed technology and trade names and are being amortized over a five to
seven year period. Goodwill is being amortized over a fifteen- year period. A
portion of the purchase price has been allocated to in-process research and
development in the amount of $10.5 million, which was expensed as "Acquired
research and development" in the second quarter of 1997. Also included in
acquired research and development was a charge of approximately $0.9 million for
technology acquired unrelated to the Servotronix and Seidel acquisitions.
Management believes that the technological feasibility of the in-process
technology had not yet been established and the technology had no alternative
future use.
As a result of these acquisitions, in the fourth quarter of 1998 the
Company reorganized its worldwide research and development organization. In
connection with the reorganization to eliminate redundancies and improve the
efficiency of its the development process, the Company took a pre-tax charge of
$1.3 million. The charge was for severance costs that were substantially paid by
the end of January 1999.
On December 15, 1997, the Company commenced a tender offer ("Tender
Offer") for 50.1% of the outstanding shares of Pacific Scientific Company
("Pacific") in cash with the remainder of the Pacific shares to be acquired
through the issuance of the Company's common stock. On February 2, 1998, the
Company terminated its offer to acquire Pacific after a significantly higher bid
was accepted by the Pacific board of directors. Included in the accompanying
financial statements are pre-tax charges of $1.3 million and $4.2 million
representing the costs incurred in connection with the Tender Offer for 1998 and
1997, respectively.
31
Note 3. Sale of Investment in Joint Venture
Effective December 31, 1996, the Company completed an agreement
("Subscription Agreement") to combine its Macbeth division ("Macbeth") with the
Color Control Systems business of Gretag AG ("Gretag"). The combined entity,
GretagMacbeth, is owned by a Swiss holding company (the "Joint Venture")
which was equally controlled by the Company and the shareholders of Gretag AG
who owned 48% and 52% of the Joint Venture, 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 accounted for this transaction using
the equity method until the sale of its investment in Joint Venture.
In 1997, the Company sold its interest in the Joint Venture, receiving
approximately $42 million in cash, and resulting in a gain of $24.3 million.
The gain is net of $2 million in income taxes and the utilization of net
operating losses and other tax credit carryforwards.
For income tax purposes, the Company has elected to treat the transfer
of the Macbeth assets into the Joint Venture as a taxable transaction in 1996.
Accordingly, the Company has recognized a tax gain of the excess of the fair
value of the Macbeth assets over their book value.
Note 4. Intellectual Property Licensing
In January 1998, the Company announced a major license agreement for its
pioneering electronic motion control patents in the amount of $27.2 million,
which, after legal and other expenses, resulted in pre-tax income of $21.2
million. In connection with its patent enforcement program, the Company has
engaged counsel to continue enforcement of the Company's patent estate, and
accordingly, has recorded a pre-tax charge of $6.8 million to cover legal
expenses and other related costs. At December 31, 1998, the Company had incurred
costs of $1.2 million in connection with its patent enforcement program.
Additionally, in 1998 the Company recognized $1.5 million in income in
connection with its patent licensing and enforcement efforts.
Note 5. Inventories
At December 31, net inventories consist of the following:
1998 1997
---- ----
Raw materials $ 12,187 $ 12,640
Work in process 8,073 8,871
Finished goods 7,578 3,651
---------- ------------
$ 27,838 $ 25,162
========== ============
Note 6. Property, Plant, and Equipment
At December 31, property, plant, and equipment consist of the following:
1998 1997
---- ----
Land $ 1,270 $ 1,368
Leasehold improvements 1,155 1,027
Buildings 25,787 25,671
Machinery and equipment 84,088 72,279
Capital leases 382 382
----------- ------------
112,682 100,727
Less accumulated depreciation
and amortization (81,873) (74,054)
----------- ------------
$ 30,809 $ 26,673
=========== =============
32
Note 7. Debt
At December 31, long-term debt consists of the following:
1998 1997
---- ----
8.75% convertible subordinated debentures due 2009 $ 31,090 $ 32,840
$50 million revolving credit facility - 4,854
$11 million revolving credit facility 6,051 -
Term loans, various rates, due through 2003 1,344 572
Capital lease obligations 54 125
-------------- -------------
38,539 38,391
Less current maturities (2,419) (2,012)
-------------- -------------
$ 36,120 $ 36,379
============== =============
The 8.75% convertible subordinated debentures are convertible at any
time prior to maturity, unless previously redeemed, into 905,095 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 million, but not more than
$3.5 million principal amounts commencing May 1, 1994, and each year thereafter
including May 1, 2008. The balance, if any, is due on May 1, 2009. At December
31, 1998, the market price of these debentures approximated carrying value.
On September 30, 1997, the Company amended its borrowing facility with
its lead bank to provide for a five year, $50 million unsecured revolving
multicurrency credit facility bearing interest, at the Company's option, at the
bank's prime rate plus 50 basis points or the Eurodollar rate plus a margin
ranging from 75 to 175 basis points. At December 31, 1998, had the Company
borrowed, the rate would have been 5.82%. The facility contains certain
financial covenants that the Company must comply with including limits on
capital spending, minimum cash flow requirements, minimum net worth, 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. The Company was in compliance
with all covenants at December 31, 1998. At December 31, 1998, there were $1.2
million of standby letters of credit outstanding, and $48.8 million of
availability under the facility.
On May 13, 1998, the Company entered into an agreement with one of its
syndicate banks to provide for an $11 million revolving credit facility for its
French and German subsidiaries. This revolving credit facility has terms similar
to the existing $50 million unsecured revolving multicurrency credit facility.
At December 31, 1998, the Company's German subsidiary had $6.1 million
outstanding at a rate of 4.10%.
33
Term loans held by the Company had a weighted average interest rate of
4.40% at December 31, 1998.
Long-term debt at December 31, 1998, matures as follows:
Date Maturities
1999 $ 2,419
2000 2,193
2001 2,019
2002 7,811
2003 1,757
Thereafter 22,340
------
$38,539
=======
At December 31, 1998, the Company's foreign subsidiaries had $9.3
million outstanding and $4.6 million additional availability under lines of
credit.
The Company incurred $3.4 million, $4.7 million, and $5.8 million of
interest expense on debt in 1998, 1997, and 1996, respectively.
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. 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 the Company's 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. The Company
borrowed $25 million in January 1996 to finance the redemption and the loan was
repaid during 1997.
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 received an annual retainer of $24 thousand, $12 thousand, and
$12 thousand in 1998, 1997 and 1996, respectively. 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 the Company's common
stock. The number of shares of common stock issued is based on the fair market
value of such shares at the end of each quarterly period.
34
The Company maintains a Shareholder Rights Plan which was amended and
restated effective October 22, 1998 and which provides for 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 $70 per Unit. The units of Preferred Stock are non-redeemable, voting,
and are entitled to certain preferential dividend rights. The exercise price
and the number of units issuable are subject to adjustment to antidilution
provisions. 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 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 20% or more of the shares of common 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 October 22, 2008.
Common stock reserved for issuance at December 31, 1998 and 1997 were as
follows: conversion of debentures - 905,095 and 956,041, respectively; and stock
options and other awards - 1,814,139 and 1,418,699, 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 until the end
of the second quarter of 1997. Accordingly, dividends paid on common stock prior
to the date were charged to "Additional paid-in capital". For the remainder of
1997 and all of 1998, dividends were charged to "Retained earnings".
Treasury stock is carried at average cost.
Note 10. Stock Based Compensation Plans
At December 31, 1998, the Company has five stock-based compensation
plans. 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 Accounting Practices
Bulletin ("APB") Opinion 25 and related interpretations in accounting for its
employee stock-based compensation. Compensation expense for shares issued to
directors of $80 thousand, $50 thousand, and $40 thousand was recognized for
1998, 1997, and 1996, respectively. Pro forma amounts are indicated below.
The Company maintains three 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 to
each non-employee director, among other things, a one-time grant 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 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 December 31, 1998 the Company currently has
available 1,484,441 and 288,194 shares for issuance under the employee plans and
the NED plan, respectively. A total of 459,000 and 4,614 options were granted in
1998 under the employee plans and the NED plan, respectively.
On April 1, 1997, the Company approved a stock option plan for key
employees of Servotronix in conjunction with the acquisition of that company
(Note 2). Under this plan, 83,000 shares were authorized and granted in
exchange for the surrender of rights to acquire Servotronix shares held by
these employees. The options outstanding under this plan a) were granted at
no cost, b) vest over a three year period, and c) expire ten years subsequent
to award.
35
A summary of the status of the Company's stock options as of December
31, 1998, 1997, and 1996 and changes during the year ended on those dates is
presented below:
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
1998 Exercise 1997 Exercise 1996
Exercise
Shares Price Shares Price Shares Price
------------ ---------- ------------ ----------- ----------- -----------
Outstanding at January 1: 1,240,900 $ 9.45 1,263,700 $ 8.93 986,950 $ 7.95
Granted 463,614 17.94 124,269 17.54 400,500 10.91
Granted to Servotronix employees - - 83,000 - -
-
Exercised (104,060) 4.42 (180,769) 7.34 (56,050) 6.39
Canceled (21,200) 12.22 (49,300) 8.42 (67,700) 8.38
------------ ------------ -----------
Outstanding at December 31 1,579,254 12.18 1,240,900 9.26 1,263,700 8.93
============ ============ ===========
Options exercisable at December 31 776,461 9.31 620,100 8.70 576,200 7.97
============ ============ ===========
Options available for future grant 234,885 177,799 256,163
============ ============= ===========
The fair value of each option granted during 1998, 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
1998 1997 1996
---- ---- ----
Expected dividend yield 0.4% 0.8% 0.8%
Expected stock price volatility 38.0% 32.0% 37.0%
Risk-free interest rate 5.6% 5.8% 6.2%
Expected life of options 6 years 6 years 5 years
The weighted average fair value of options granted during the years
1998, 1997 and 1996 is $8.03, $6.94, and $4.23, respectively.
The following table summarizes information about currently outstanding
and exercisable stock options at December 31, 1998:
Number of Weighted Weighted Number Weighted
Options Average Average Exercisable Average
Range of Outstanding Remaining Exercise at Exercise
Exercise Prices at 12/31/98 Contractual Life Price 12/31/98 Price
$ 0 - 8.375 484,054 3.6 years $ 7.28 435,161 $ 7.99
8.625 - 11.625 399,000 7.4 years 9.99 218,800 10.03
11.750 - 17.750 397,300 8.6 years 15.76 113,850 12.29
$ 18.125 - 20.938 298,900 9.1 years 18.30 8,650 18.67
------- -------
1,579,254 6.9 years $ 12.18 776,461 $ 9.31
========= =======
36
If compensation costs for the Company's 1998, 1997, and 1996 grants for
stock-based compensation plans had been determined in accordance with the fair
value method described by SFAS 123, the Company's net income and net income per
share for these years would approximate the pro forma amounts below:
1998 1997 1996
----------------------------- ----------------------------- ----------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------- ------------- -------------- ------------- ------------- -------------
Net income $ 14,307 $ 13,139 $ 19,720 $ 19,088 $ 8,904 $ 8,612
Earnings per common share:
Basic $ 1.42 $ 1.30 $ 2.00 $ 1.93 $ 0.89 $ 0.86
Diluted $ 1.36 $ 1.25 $ 1.90 $ 1.84 $ 0.86 $ 0.83
The effect of applying SFAS 123 in this pro forma disclosure is not
indicative of future compensation expense amounts, as SFAS 123 does not apply to
awards prior to 1995, and additional awards in future years are anticipated.
Note 11. Earnings Per Share
Basic earnings per share excludes the dilutive effect of common equivalent
securities and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. A reconciliation between basic EPS and diluted EPS is as
follows:
1998 1997 1996
---- ---- ----
Income before change in accounting principle $14,745 $19,720 $ 8,904
Cumulative effect of change in accounting principle (438) - -
-------------- -------------- -------------
Net income 14,307 19,720 8,904
Less: preferred stock dividends and accretion of
preferred stock discount - - (285)
-------------- -------------- -------------
Net income available to common shareholders $14,307 $19,720 $ 8,619
============== ============== =============
Shares used in net income per share - basic 10,082 9,876 9,732
Effect of dilutive securities: Stock options 424 488 310
-------------- -------------- -------------
Shares used in net income per share - diluted 10,506 10,364 10,042
============== ============== =============
Income per share before change in accounting
principle - basic $ 1.46 $ 2.00 $ 0.89
Income per share before change in accounting
principle - diluted $ 1.40 $ 1.90 $ 0.86
Net income per share - basic $ 1.42 $ 2.00 $ 0.89
Net income per share - diluted $ 1.36 $ 1.90 $ 0.86
37
During 1998, options to purchase 91,393 shares of common stock with
exercise prices ranging from $18.44 to $20.94 per share and with expiration
dates ranging up to May 12, 2008 were outstanding, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. Also, 905,095 common equivalent
shares of the convertible subordinated debentures were not included in the
diluted EPS calculation as a result of their antidilutive effect.
During 1997, options to purchase 103,500 shares of common stock with
exercise prices ranging from $17.31 to $18.69 per share and with expiration
dates ranging up to December 16, 2007 were outstanding, but were not included in
the computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares. Also, 956,041 common
equivalent shares of the convertible subordinated debentures were not included
in the diluted EPS calculation as a result of their antidilutive effect.
During 1996, options to purchase 126,200 shares of common stock with
exercise prices ranging from $12.00 to $16.88 per share and with expiration
dates ranging up to May 15, 2006 were outstanding, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. Also, 1,086,987 common equivalent
shares of the convertible subordinated debentures were not included in the
diluted EPS calculation as a result of their antidilutive effect.
Note 12. Taxes on income
The components of income (loss) before income taxes, joint venture, and minority
interest were as follows:
1998 1997 1996
---- ---- ----
Domestic $22,393 $ 5,751 $9,436
Foreign 2,508 (9,168) (1,046)
-------- -------- -------
Total $24,901 $(3,417) $8,390
======== ======== =======
Statement of Financial Accounting Standard No.109 ("SFAS 109"),
"Accounting for Income Taxes", 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 SFAS 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 these
assets will be realized.
38
For income tax purposes the Company treated the transfer of the Macbeth
assets into the Joint Venture as a taxable transaction in 1996. Accordingly, the
Company recorded a tax gain on the excess of the fair value of the Macbeth
assets over its net tax value.
The valuation allowance decrease in 1997 and 1996 resulted from the
utilization of net operating loss and tax credit carryforwards, current income
from operations and the tax gain from the formation of the Joint Venture. The
1998 valuation allowance decrease resulted from the utilization of certain
foreign tax loss carryforwards. The current foreign tax provision consists of
the foreign withholding taxes paid by the Company in connection with the
license agreement more fully explained in Note 4.
The provision (benefit) for income taxes consists of the following:
1998 1997 1996
---- ---- ----
Current provision:
U.S. federal $ 9,314 $ 4,705 $ 1,543
Foreign 2,720 - -
State 2,055 2,207 185
--------- --------- ---------
14,089 6,912 1,728
Deferred (benefit):
U.S. federal (3,345) (2,980) (1,487)
Foreign - - -
State (659) (1,094) (241)
---------- ---------- ----------
(4,004) (4,074) (1,728)
---------- ---------- ----------
Total provision $ 10,085 $ 2,838 $ -
========== ========== =============
The U.S. effective income tax rate from operations is different from
the U.S. federal statutory rates for the following reasons:
1998 1997
---- ----
Income tax provision (benefit) at U.S. federal
statutory rates $ 8,716 $ (1,196)
Foreign taxes withheld 1,768 -
Tender offer costs - 550
Write-off of acquired research and development - 3,098
Benefit of net operating loss
carryforwards and tax credits - (600)
Unutilized foreign net operating losses - 549
Reduction of valuation allowance (292) -
Foreign tax rate variances (792) (129)
State income taxes net of federal benefit 908 400
Other (223) 166
-------------- -------------
$ 10,085 $ 2,838
============== =============
39
The deferred tax assets and liabilities are comprised of the following:
1998 1997
---- ----
Bad debt reserve $ 151 $ 153
Employee benefit reserves 3,766 2,928
Reserve for net realizable value of real estate 881 62
Patent defense accrual 2,457 -
Depreciation (1,455) (1,372)
Federal tax credits - 1,024
Foreign losses - 292
Other 4,006 3,007
-------------- -------------
9,806 6,094
Valuation allowance - (292)
============== =============
Net deferred tax asset $9,806 $5,802
============== =============
Note 13. Operating Leases
The Company leases certain of its facilities and equipment under
operating lease arrangements. Such arrangements generally include fair market
value renewal and/or purchase options.
Rent expense for operating leases amounted to $2.7 million, $2.5
million, and $2.2 million in 1998, 1997 and 1996, respectively. Future minimum
rental payments required under non-cancelable operating leases having a lease
term in excess of one year at December 31, 1998 are as follows:
Operating
Leases
1999 $ 2,939
2000 2,868
2001 2,640
2002 1,312
2003 959
Thereafter 4,277
----------
Total minimum lease payments $ 14,995
===========
Note 14. Commitments and Contingencies
The Company has various lawsuits, claims, commitments and contingent
liabilities including environmental matters arising from the ordinary conduct of
its existing businesses; however, they are not expected to have a material
adverse effect on its consolidated financial position and cash flows.
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 is to conduct its activities in compliance with all applicable rules and
regulations.
40
Note 15. Pension plans and postretirement benefits
Pension Plans:
The Company maintains two non-contributory qualified defined benefit
pension plans (the "Plans") covering substantially all domestic employees. Due
to full funding, the Plans currently have no required contributions by the
Company.
The net periodic pension cost for the years 1998, 1997 and 1996 includes
the following components:
1998 1997 1996
---- ---- ----
Service cost $ 2,337 $ 2,085 $ 2,499
Interest cost 3,174 3,542 3,633
Expected return on plan assets (7,007) (6,218) (5,806)
Amortization of:
Transition obligation (538) (545) (572)
Prior service cost 160 146 157
Actuarial gain (555) (28) -
-------------- ------------- -------------
Net periodic pension credit $ (2,429) $ (1,018) $ (89)
============== ============= =============
The assumptions used in determining the net periodic pension credit
included discount rates of 6.5%, 7.0%, and 6.5% in 1998, 1997 and 1996,
respectively, an expected investment return of 10% and compensation increases of
5% for the years ending 1998, 1997, and 1996.
The assumptions used in determining the end of year benefit obligations
included discount rates of 6.25% for 1998 and 6.5% for 1997, and compensation
increases of 5% per year. The Plans' funded status, together with the amounts
recognized in the Company's balance sheet at December 31 are as follows:
1998 1997
---- ----
Change in benefit obligations:
Benefit obligation at beginning of year $54,575 $51,729
Service cost 2,337 2,085
Interest cost 3,174 3,542
Amendments 223 -
Actuarial (gain)/loss (3,766) 7,054
Settlement - (3,192)
Curtailment - (1,652)
Special termination benefit - 240
Benefits paid (2,328) (5,231)
-------------- --------------
Benefit obligation at end of year 54,215 54,575
Change in plan assets:
Fair value of plan assets at beginning of year 70,340 63,879
Actual return on plan assets 5,378 11,693
Benefits paid (2,329) (5,232)
-------------- --------------
Fair value of plan assets at end of year 73,389 70,340
Funded status 19,174 15,765
Unrecognized actuarial gain (8,989) (7,408)
Unrecognized portion of net obligation at transition (3,375) (3,914)
Unrecognized prior service cost 1,417 1,355
-------------- --------------
Net amount recognized 8,227 5,798
Amounts recognized in the Statement of Financial Position consist of:
Prepaid benefit cost 8,227 5,798
Accrued benefit liability - -
-------------- --------------
Net amount recognized $ 8,227 $ 5,798
41
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 that 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 $3.7 million and $3.6 million at December 31, 1998 and
1997, respectively, in anticipation of the future payment of such benefits to
seven former employees who were designated as eligible by the Company's board of
directors for participation in the SERP program. The Company incurred a pension
expense of $0.3 million in 1998 and 1997 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 1998 and 1997, the Company matched 50% of each participant's contributions,
up to a maximum contribution of 2% of base salary. Company annual contributions
to this plan were $0.7 million in 1998, 1997, and 1996.
In 1997, employees of Macbeth became employees of the Joint Venture as
described in Note 3. This was accounted for as a curtailment and a settlement
under Statement of Financial Accounting Standard No. 88, "Employers' Accounting
for Settlement and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits". The Plan's funded status in 1997 reflects a curtailment
gain of $1.2 million, a settlement gain of $0.5 million, and a special
termination benefit loss of $0.2 million due to the Joint Venture.
Postretirement Benefits:
The Company maintains a postretirement medical benefits plan covering
substantially all domestic employees hired prior to January 1, 1992.
Net periodic postretirement benefit cost for 1998, 1997, and 1996
includes the following components:
1998 1997 1996
---- ---- ----
Service cost $ 266 $ 213 $ 168
Interest cost 263 382 423
Amortization of:
Transition obligation 30 252 278
Actuarial loss - - 9
------------- ------------- -------------
Net periodic postretirement benefit cost $ 559 $ 847 $ 878
============= ============= =============
42
The Company's postretirement benefit plans are unfunded.
During 1998, the Company elected to change the vesting method used to
determine eligibility for post-retirement medical insurance benefits, resulting
in a curtailment charge of $1.6 million.
For measurement purposes, a 9.2% annual rate of increase in the per
capita cost of covered medical benefits was assumed for 1998; the rate was
assumed to decrease to 5.5% for 2000 and remain at that level thereafter.
The assumptions used in determining the net periodic postretirement
benefit cost included discount rates of 6.5%, 7.0%, and 6.5%, for 1998, 1997,
and 1996, respectively.
The weighted average discount rates used in determining the end of year
accumulated postretirement benefit obligation are 6.25% and 6.5% as of December
31, 1998 and 1997, respectively.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effect on the
Postretirement Medical Benefit Progam:
One-Percentage One-Percentage
Point Decrease Point Increase
----------------- ----------------
Effect on total of service and interest cost $ (21) $ 21
components
Effect on postretirement benefit obligation (157) 157
The Plans' funded status together with the amounts recognized in the
Company's balance sheet at December 31 is as follows:
1998 1997
---- ----
Change in benefit obligations:
Benefit obligation at beginning of year $ 5,939 $ 6,536
Service cost 266 213
Interest cost 263 382
Amendments (1,643) -
Actuarial gain (18) (117)
Curtailment - (680)
Benefits paid (388) (395)
-------------- --------------
Benefit obligation at end of year 4,419 5,939
Change in plan assets:
Fair value of plan assets at beginning of year - -
Employer contributions 388 394
Benefits paid (388) (394)
-------------- --------------
Fair value of plan assets at end of year - -
Funded status (4,419) (5,939)
Unrecognized actuarial loss 214 233
Unrecognized portion of net obligation at transition 420 3,717
-------------- --------------
Net amount recognized (3,785) (1,989)
Amounts recognized in the Statement of Financial Position consist of:
Prepaid benefit cost - -
Accrued benefit liability (3,785) (1,989)
-------------- --------------
Net amount recognized $ (3,785) $(1,989)
43
Note 16. Geographic and industry information
The effect of the Company's foreign operations upon the consolidated
financial statements are summarized as follows:
1998 1997 1996
---- ---- ----
Net Sales
North America $ 189,003 $179,524 $190,776
Europe 55,983 44,733 48,806
Other 18,248 12,759 440
Eliminations (19,295) (14,770) (9,598)
------------------ --------------- -----------------
$ 243,939 $222,246 $230,424
================== =============== =================
Net Income
North America $ 11,967 $ 30,304 $ 9,416
Europe 2,215 (410) (55)
Other 126 (8,536) (536)
Eliminations (1) (1,638) 79
------------------ --------------- -----------------
$ 14,307 $ 19,720 $ 8,904
================== =============== =================
Identifiable Assets
North America $ 125,106 $ 97,211 $ 105,445
Europe 46,252 44,306 33,288
Other 15,190 13,914 4,223
Eliminations (17,914) (9,987) (1,626)
------------------ --------------- ----------------
$ 168,634 $ 145,444 $ 141,330
================== =============== =================
The Company's principal foreign facilities are in France, Germany,
India, Israel, and Vietnam. 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 $26.4
million in 1998, $21.0 million in 1997, and $39.7 million in 1996. Sales to the
U.S. Government or for U.S. Government end-use amounted to $50.8 million, $47.8
million and $41.3 million in 1998, 1997 and 1996, respectively.
The Company has maintained its focus on high performance motion control,
and the Company in late 1997 reorganized its business around two market
channels, Industrial and Commercial, and Aerospace and Defense. Information
provided for 1997 and 1996 has been prepared as if the reorganization around
these two market segments had occurred at the beginning of each year.
44
The following table includes certain financial information relating to
each of the Company's segments in the last three fiscal years:
Industrial Aerospace Special
and and Corporate, Items and
Commercial Defense Interest Businesses
Group Group and Other Sold (1) Total
------------- -------------- ------------ ------------ -----------
1998
----
Bookings $135,492 $106,289 $ - $ - $241,781
Sales 135,715 108,224 - - 243,939
Profit (loss) before tax 10,202 13,598 (6,376) 7,477 24,901
Assets 74,017 68,986 25,630 - 168,633
Capital additions 4,456 4,649 554 - 9,659
1997
----
Bookings $117,447 $104,583 $ - $ - $222,030
Sales 120,244 102,002 - - 222,246
Profit (loss) before tax 10,193 10,548 (8,432) (15,726) (3,417)
Assets 56,517 67,716 21,211 - 145,444
Capital additions 2,816 3,348 52 - 6,216
1996
----
Bookings $ 91,717 $ 90,513 $ - $33,622 $215,852
Sales 90,222 107,167 - 33,035 230,424
Profit (loss) before tax 6,101 11,014 (11,017) 2,292 8,390
Assets 42,240 71,814 27,276 - 141,330
Capital additions 1,030 3,487 25 306 4,848
(1) Excludes the impact of the "Special Items" and "Businesses Sold"
more fully described in Management's Discussion and Analysis of
Financial Condition and Results of Operations and in the notes to
the financial statements.
Note 17. Quarterly Results of Operations (Unaudited)
Quarter
1998 First Second Third Fourth
--------------------------------------------------------------------------------------------------------------
Net sales $ 56,793 $ 60,340 $ 61,891 $ 64,915
Gross profit 17,127 18,952 19,481 20,878
Impairment of goodwill and assets held for sale 2,733 - - -
Tender offer costs 1,273 - - -
Intellectual property license, net of expenses 21,217 - - -
Reorganization of research and development
organization - - - 1,310
Net income before change in accounting principle 5,560 2,279 3,118 3,788
Cumulative effect of change in accounting principle - - - 438
Net income 5,560 2,279 3,118 3,350
Earnings per common share before cumulative effect
of change in accounting principle:
Basic $ 0.55 $ 0.23 $ 0.31 $ 0.37
Diluted $ 0.52 $ 0.21 $ 0.30 $ 0.36
Earnings per common share:
Basic $ 0.55 $ 0.23 $ 0.31 $ 0.33
Diluted $ 0.52 $ 0.21 $ 0.30 $ 0.32
45
Quarter
1997 First Second Third Fourth
--------------------------------------------------------------------------------------------------------------
Net sales $ 50,587 $ 55,757 $ 56,710 $ 59,192
Gross profit 15,513 17,600 17,066 19,791
Acquired research and development - 11,391 - -
Tender offer costs - - - 4,176
Gain on sale of investment in joint venture,
net of income taxes - 24,321 - -
Net income 2,010 15,459 2,067 184
Earnings per common share:
Basic $ 0.21 $ 1.58 $ 0.21 $ 0.02
Diluted $ 0.20 $ 1.52 $ 0.20 $ 0.02
46
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(i) to Form 10-Q filed on
November 13, 1998.
3(b) Restated and Amended By-Laws incorporated N/A
by Reference to Exhibit 3 to Form 10-Q
filed on August 13, 1998.
4(a) 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(b) Amended and Restated Rights Agreement dated N/A
as of October 22, 1998, between the Company and
BankBoston, N.A., as Rights Agent, incorporated
by reference to Exhibit 4 to Form 8-K filed on
November 4, 1998.
10(a) Fifth Amended and Restated Multicurrency N/A
Credit Agreement dated as of September 30,
1997, among Kollmorgen Corporation, BankBoston,
N.A., Certain Other Financial Institutions
Listed on Schedule 1, and BankBoston, N.A.,
as Agent, incorporated by reference to
Exhibit 10A of the Form 10-Q filed on
November 14, 1997.
10(b) Form of Limited Guaranty given by the Company
to secure ABN AMRO's credit facility of up to
$11,000,000 million provided to the Company's
wholly owned subsidiaries in France and
Germany. 50
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) 1998 Management Stock Incentive Plan N/A
incorporated by reference to Exhibit A of
the Company's Proxy Statement dated
April 3, 1998, for the Annual Meeting of
Shareholders held on May 13, 1998.
47
Page in this
Exhibit No. Description of Exhibit Form 10-K
10(f) Form of Retention Agreement, as amended, N/A
entered into between the Company and Messrs.
Argov, Cobuzzi, Desmond, Eder and Jones,
dated March 17, 1998, and incorporated by
Reference to Exhibit 10 of the Form 10-K
filed for the year ended December 31, 1997.
10(g) Kollmorgen Deferred Compensation Plan N/A
incorporated by reference to Exhibit 10B
of the Form 10-Q filed on or about
November 14, 1997.
10(h) 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 and James A. Eder. 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(i) Form of 1995 and 1996, Incentive Stock N/A
Option Agreement under the Long-Term
Incentive Plan for Gideon Argov, Robert J.
Cobuzzi, Daniel F. Desmond, James A. Eder,
and Keith D. Jones. 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.
10(j) Form of 1998 Non-Qualified Stock Option Agreement 53
under the 1998 Management Stock Incentive
Plan for Gideon Argov, Robert J. Cobuzzi,
Daniel F. Desmond, James A. Eder and Keith
Jones. Each agreement is identical except
for the number of shares and the date of grant.
10(k) Form of 1999 Restricted Stock Units 61
Subscription Agreement for Gideon Argov,
Robert J. Cobuzzi, Daniel F. Desmond, James
A. Eder and Keith Jones. Each agreement is
identical except for the number of shares of
restricted stock units.
48
Page in this
Exhibit No. Description of Exhibit Form 10-K
10(l) 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(m) Form of Non-Qualified Stock Option Agreement N/A
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,
incorporated by reference to Exhibit 10(i) to
the Annual Report on Form 10-K of the Company
for the year ended December 31, 1996.
10(n) Kollmorgen 1999 Corporate Incentive Plan 65
for Corporate Officers and other key
corporate employees.
10(o) 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(p) Letter employment agreement dated July 1, 1991 N/A
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(q) 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(r) 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.
10(s) Supplemental Retirement Income Plan for key N/A
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(t) Master Equipment Lease Agreement dated as of N/A
April 19, 1996, between Provident Commercial
Group, Inc. and Kollmorgen Corporation
incorporated by reference to Exhibit 10 to
Form 10-Q filed on or about November 12, 1996.
49
Page in this
Exhibit No. Description of Exhibit Form 10-K
21 Subsidiaries of the Company 66
23 Consent of Independent Accountants - 67
PricewaterhouseCoopers LLP
24 Powers of Attorney 68
27 Financial Data Schedule 75
50
EXHIBIT 10(b)
LIMITED CORPORATE GUARANTY
ABN AMRO Bank N.V.
One Post Office Square
Boston, MA 02109
THIS GUARANTY (the "Guaranty") dated as of May 13, 1998 is executed in
favor of ABN AMRO BANK N.V., Boston Branch (the "Bank") and any of its offices,
subsidiaries or affiliates.
W I T N E S S E T H:
WHEREAS, the Bank may from time to time make loans and other financial
accommodations to PMI Motion Technologies GmbH Fur Servoantribssysteme (the
"Company"); and
WHEREAS, the undersigned is willing to guaranty the Liabilities (as
defined below) as hereinafter set forth;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned hereby
unconditionally and irrevocably, as primary obligor and not merely as surety,
guarantees the full and prompt payment when due, whether by acceleration or
otherwise, and at all times thereafter, of all obligations of the Company to the
Bank (including principal, interest and charges). All such obligations being
herein collectively called the "Liabilities". The Guarantor's liability
hereunder in respect of principal shall not exceed at any one time the aggregate
sum of the equivalent of
US$7,000,000 (Seven Million U.S. Dollars)
(maximum principal amount guaranteed)
The undersigned agrees that, in the event of the dissolution or
insolvency of the Company or the undersigned, or the inability or failure of the
Company or the undersigned to pay debts as they become due, or an assignment by
the Company or the undersigned for the benefit of creditors, and if such event
shall occur at a time when any of the Liabilities may not then be due and
payable, the undersigned will pay to the Bank forthwith the full amount which
would be payable hereunder by the undersigned if all Liabilities were then due
and payable.
This Guaranty shall in all respects be a continuing, irrevocable,
absolute and unconditional guaranty, and shall remain in full force and effect
(notwithstanding, without limitation, the dissolution of the undersigned or that
at any time or from time to time no Liabilities are outstanding) until all
commitments to create Liabilities have terminated and all Liabilities have been
paid in full.
The undersigned further agrees that if at any time all or any part of
any payment theretofore applied by the Bank to any of the Liabilities is or must
be rescinded or returned by the Bank for any reason whatsoever (including the
insolvency, bankruptcy or reorganization of the Company or the undersigned),
such Liabilities shall, for the purposes of this Guaranty, to the extent that
such payment is or must be rescinded or returned, be deemed to have continued in
existence, notwithstanding such application by the Bank, and this Guaranty shall
continue to be effective or be reinstated, as the case may be, as to such
Liabilities, all as though such application by the Bank had not been made.
51
The Bank may, from time to time, at its sole discretion and without
notice to the undersigned, take any or all of the following actions: (a) retain
or obtain the primary or secondary obligation of any obligor or obligors, in
addition to the undersigned, with respect to any of the Liabilities, (b) extend
or renew any of the Liabilities for one or more periods (whether or not longer
than the original period), alter or exchange any of the Liabilities, or release
or compromise any obligation of the undersigned hereunder or any obligation of
any nature of any other obligor with respect to any of the Liabilities, and (c)
resort to the undersigned for payment of any of the Liabilities when due,
whether or not the Bank shall have resorted to any obligation hereunder or shall
have proceeded against any other obligor primarily or secondarily obligated with
respect to any of the Liabilities.
The undersigned hereby expressly waives: (a) notice of the acceptance
by the Bank of this Guaranty, (b) notice of the existence or creation or
non-payment of all or any of the Liabilities, (c) presentment, demand, notice of
dishonor, protest, and all other notices whatsoever, and (d) all diligence in
collection or protection of or realization upon any Liabilities or any security
for or guaranty of any Liabilities.
Notwithstanding any payment made by or for the account of the
undersigned pursuant to this Guaranty, the undersigned shall not be subrogated
to any right of the Bank until such time as the Bank shall have received final
payment in cash of the full amount of all Liabilities.
The undersigned further agrees to pay all expenses (including the
reasonable attorneys' fees and charges) paid or incurred by the Bank in
endeavoring to collect the Liabilities, or any part thereof, and in enforcing
this Guaranty against the undersigned.
The creation or existence from time to time of additional Liabilities
to the Bank is hereby authorized, without notice to the undersigned, and shall
in no way affect or impair the rights of the Bank or the obligations of the
undersigned under this Guaranty, including the undersigned's guaranty of such
additional Liabilities.
The Bank may from time to time with notice to the undersigned, assign
or transfer any or all of the Liabilities or any interest therein.
Notwithstanding any such assignment or transfer or any subsequent assignment or
transfer thereof, such Liabilities shall be and remain Liabilities for the
purposes of this Guaranty, and each and every immediate and successive assignee
or transferee of any of the Liabilities or of any interest therein shall, to the
extent of the interest of such assignee or transferee in the Liabilities, be
entitled to the benefits of this Guaranty to the same extent as if such assignee
or transferee were the Bank.
No delay on the part of the Bank in the exercise of any right or remedy
shall operate as a waiver thereof, and no single or partial exercise by the Bank
of any right or remedy shall preclude other or further exercise thereof or the
exercise of any other right or remedy; nor shall any modification or waiver of
any provision of this Guaranty be binding upon the Bank, except as expressly set
forth in a writing duly signed and delivered by the Bank. No action of the Bank
permitted hereunder shall in any way affect or impair the rights of the Bank or
the obligations of the undersigned under this Guaranty. For purposes of this
Guaranty, Liabilities shall include all obligations of the Company to the Bank,
notwithstanding any right or power of the Company or anyone else to assert any
claim or defense as to the invalidity or lack of enforceability of any such
obligation, and no such claim or defense shall affect or impair the obligations
of the undersigned hereunder.
This Guaranty shall be binding upon the undersigned and the successors
and assigns of the undersigned. To the extent that the Company or the
undersigned is a partnership or a corporation, all references herein to the
Company and to the undersigned, respectively, shall be deemed to include any
successor or successors, whether immediate or remote, to such partnership or
corporation.
This Guaranty shall be governed by and construed in accordance with and
governed by the laws of the State of New York applicable to contracts made and
to be fully performed in such State. Wherever possible, each provision of this
Guaranty shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Guaranty shall be prohibited by or
invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Guaranty.
52
This Guaranty may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, and each such counterpart
shall be deemed to be an original but all such counterparts shall together
constitute one and the same Guaranty.
ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS GUARANTY, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF
THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN
DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT
AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE BANK'S OPTION,
IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE
FOUND. THE UNDERSIGNED HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH
LITIGATION AS SET FORTH ABOVE. THE UNDERSIGNED FURTHER IRREVOCABLY CONSENTS TO
THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS SET
FORTH OPPOSITE ITS SIGNATURE HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE
SPECIFIED IN WRITING TO THE BANK AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY
PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE UNDERSIGNED HEREBY
EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH
LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY
SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
THE UNDERSIGNED, AND THE BANK (BY ACCEPTING THE BENEFITS HEREOF),
HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE
OR DEFEND ANY RIGHTS UNDER THIS GUARANTY AND ANY AMENDMENT, INSTRUMENT, DOCUMENT
OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION
HEREWITH OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH
ANY OF THE FOREGOING, AND AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE
TRIED BEFORE A COURT AND NOT BEFORE A JURY.
IN WITNESS WHEREOF, this Guaranty has been duly executed and delivered
as of the day and year first above written.
Kollmorgen Corporation
By:_____________________________
Address: Title:________________________
Reservoir Place
1601 Trapelo Rd.
Waltham, MA 02154
53
EXHIBIT 10(j)
NON-QUALIFIED STOCK OPTION AGREEMENT
* * * * * *
This AGREEMENT, entered into as of this day of 199 ,
(hereinafter called the "Option Date") between KOLLMORGEN CORPORATION,
a corporation organized under the laws of the State of New York (hereinafter
called the "Corporation"), and of an employee
of the Corporation or of a subsidiary or affiliate of the Corporation
(hereinafter called the "Optionee").
WITNESSETH THAT:
WHEREAS, the Corporation by due corporate action and with the written
consent of the holders of at least a majority of the stock of the Corporation
entitled to vote adopted the Plan (such Plan, as amended, hereinafter called
the "Plan"); and
WHEREAS, the Plan is administered by the Personnel and Compensation
Committee of the Corporation's Board of Directors (hereinafter called the
"Committee"), which is composed of individuals who are not employees of the
Corporation or otherwise eligible to receive stock options; and
WHEREAS, the Committee has determined on the date hereof that it would
be in the best interests of the Corporation to grant to the Optionee the option
contained in this Agreement because of the incentives it will generate in the
Optionee to promote the long range interests of the Corporation; and
WHEREAS, the Optionee wishes to accept such option, upon the terms and
conditions hereinafter provided; and
WHEREAS, the Committee has determined that the option price hereinafter
provided for is not less than 100% of the fair market value of the Common Stock
of the Corporation on the date hereof;
NOW, THEREFORE, in consideration of the premises it is agreed as
follows:
1. Option Grant. Subject to the terms and conditions hereof and to
the terms and conditions of the Plan, which are hereby incorporated herein by
reference, the Corporation hereby grants to the Optionee, and the Optionee
hereby accepts, a non-qualified stock option (hereinafter called the "Option")
to purchase shares of Common Stock, $2.50 par value, of the
Corporation (hereinafter called the "Optioned Shares") at a price of $
per share (hereinafter called the "Option Price"). Such Option is not intended
to qualify as an incentive stock option under Section 422 of the Internal
Revenue Code of 1986, as amended.
54
2. Period of Option, and Conditions of its Exercise.
(a) Unless the Option be terminated earlier as provided in this
Option Agreement, the term of the Option and of this Option Agreement shall
commence as of the date hereof and terminate at the close of business on the
day immediately preceding the tenth anniversary of such date. Upon any
termination of the Option, all rights of the Optionee hereunder shall cease.
Except as expressly provided in paragraph 3, this Option may be exercised as
follows:
i) up to 10% of the Optioned Shares on or after twelve
(12) months following the Option Date;
ii) up to an additional 10% of the Optioned Shares on or
after eighteen (18) months following the Option Date;
iii) up to an additional 20% of the Optioned Shares on or
after twenty-four (24) months following the Option
Date; and,
iv) up to an additional 20% of the Optioned Shares on or
after the third, fourth and fifth anniversary of the
Option Date;
provided, however, that the Committee may accelerate the date upon which the
option may be first exercisable if in its opinion such acceleration is
advisable in order to effectuate the purposes for which the Option was
granted. Events which the Committee may consider in arriving at such an
opinion shall include, by way of example and not limitation, any merger or
consolidation of the Corporation or any transfer by the Corporation of
substantially all of its assets or any change or proposed change in the control
of the Corporation. Notwithstanding the foregoing, upon a determination by
the Committee that there has been a sale of substantially all of the
Corporation's assets or a dissolution or liquidation of the Corporation, or a
"Change in Control" of the Corporation (as defined below) this Option shall
immediately become exercisable in full. For this purpose a "Change in Control"
shall mean a change in control of a nature that would be required to be
reported or disclosed by the Corporation in response to the requirements of any
rule or regulation promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), as in effect
on the Option Date; provided, however, a Change in Control shall be deemed to
have occurred if and when (i) any person [including a "Person" as used in Sec.
14(d) of the 1934 Act] is or becomes a beneficial owner (as such term is
defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of
securities of the Corporation representing 10% or more of the combined voting
power of the Corporation's then outstanding securities (a) if the beneficial
ownership of such person is not approved by the Board of Directors of the
Corporation either before or within 30 days after receipt of notice that such
person is or has become such a beneficial owner, or (b) if, at any time within
twenty-four (24) months thereafter, the employment of the person employed as
Chief Executive Officer of the Corporation terminates involuntarily (other than
for cause) or (ii) during any period of twenty-four (24) consecutive months,
commencing before or after the Option Date, individuals who at the beginning of
such twenty-four (24) month period were directors of the Corporation cease for
any reason, other than solely because of death, retirement or disability, to
constitute at least a majority of the Board of Directors of the Corporation and
55
the nominations of their replacements are not approved by a majority of the
members of the original Board of Directors who continue on the Board.
(b) Nothing in this Option Agreement shall confer upon the Optionee
any right to continue in the employ of the Corporation or any subsidiary or
affiliate thereof or interfere in any way with the right of the Corporation or
any subsidiary or affiliate thereof to terminate the employment of the Optionee
at any time.
3. Death or Termination of Employment of Optionee.
(a) If the employment of the Optionee by the Corporation or a
subsidiary or affiliate thereof shall terminate by reason of his death, the
Option may be exercised prior to the earlier of (i) the expiration date of the
Option or (ii) the expiration of one year after the date of the Optionee's
death (or such longer period, not exceeding one additional year, as the
Committee may approve), by the person or persons (hereinafter called the
"Beneficiary") to whom the Optionee's rights under the Option pass by will
or the laws of descent or distribution (including his estate during the period
of administration), provided, however, that the Beneficiary shall be entitled
to exercise the Option only to the same extent exercisable by the Optionee on
the date of his death.
(b) If, prior to the first anniversary of the Option Date, the
Optionee's employment with the Corporation or any subsidiary or affiliate
thereof shall be terminated for any reason, this Option Agreement, the Option
and all rights to purchase Optioned Shares pursuant hereto shall forthwith
terminate and become null and void.
(c) If, on or after the first anniversary of the Option Date, the
full-time employment of the Optionee by the Corporation or any subsidiary or
affiliate thereof shall terminate for any reason other than (i) the death of
the Optionee or (ii) circumstances which, in the sole and absolute opinion of
the Committee, constitute cause for discharge of the Optionee, the Option may
be exercised by the Optionee at any time prior to the earlier of (i) the
expiration date of the Option or (ii) the expiration of three months after the
date of such termination of employment, to the extent the Option was
exercisable by the Optionee on the date of such termination of employment.
(d) If the employment of the Optionee by the Corporation or any
subsidiary or affiliate thereof shall terminate under circumstances which, in
the sole and absolute opinion of the Committee, constitute cause for discharge,
this Option Agreement, the Option, and all rights to purchase shares pursuant
hereto, shall forthwith terminate and become null and void.
(e) If the Optionee is employed by a subsidiary or affiliate of the
Corporation which ceases to be such a subsidiary or affiliate, the Optionee's
employment shall be deemed to terminate upon the date of such cessation, unless
he forthwith becomes or remains an employee of the Corporation or of another
subsidiary or affiliate thereof.
(f) To the extent that the Option is not exercised within the
applicable periods in the cases set forth in subparagraphs (a), (b) and (c) of
this paragraph 3, this Option Agreement, the Option, and all rights to purchase
shares pursuant thereto, shall forthwith terminate and become null and void.
56
(g) Whether employment has been terminated for the purposes of this
Agreement shall be determined by the Committee, whose determination shall be
final, binding and conclusive.
(h) Anything in the Plan or herein contained notwithstanding, to the
extent that (i) any formal written employment or termination agreement between
the Corporation and the Optionee which is formally executed by both the
Corporation and the Optionee contains terms governing the Options hereunder
specifically or options in general in the event of a termination of the
Optionee's employment and (ii) the terms of such employment or termination
agreement applicable to such options in the event of a termination of the
Optionee's employment are more favorable to the Optionee than the terms of this
Agreement, then such terms of such employment or termination agreement shall
control the terms of this Agreement.
4. Non-Transferability. During the Optionee's lifetime the
Option shall be exercisable only by him (or other rightful holder of the
Option) and neither the Option nor any other right granted to the Optionee
hereunder shall be transferable by the Optionee otherwise that by will or the
laws of descent and distribution. Notwithstanding the foregoing, the Optionee
may transfer the Option to members of his immediate family (defined as his
children, grandchildren and spouse) or to one or more trusts for the benefit of
such family members or partnerships in which such family members are only
partners if the Optionee does not receive any consideration for the transfer;
provided that such transferred Option shall continue to be subject to the same
terms and conditions that were applicable to such Option immediately prior to
its transfer (except that such transferred Option shall not be further
transferable by the transferee inter vivos); and provided further, that the
Committee consents in writing to such transfer. In the event of an attempt by
the Optionee to alienate, assign, pledge, hypothecate or otherwise dispose of
this Option or of any right hereunder, except as provided for herein, or in the
event of any levy of any attachment, execution or similar process upon the
rights or interests hereby conferred, the Corporation may terminate this Option
Agreement by notice to the Optionee and it shall thereupon become null and void.
5. Manner of Exercising Option. The Option shall be exercised in
the following manner: the Optionee (or the Beneficiary) shall give to the
Corporation notice in writing, substantially in the form set forth in Exhibit A
hereto, of his intention to purchase, specifying the number of Optioned Shares
as to which he desires to exercise the Option, the number and denomination of
the stock certificates that he desires, and the date on which he desires to
complete his purchase (the "Completion Date"), which shall not be less than
five business days thereafter. The Optionee (or the Beneficiary) shall pay the
Corporation on the Completion Date either (i) in cash by Federal Reserve Wire
Transfer or by check, or (ii) through the delivery of shares of the
Corporation's Common Stock having a fair market value on the date of exercise
equal to the full purchase price of the shares purchased, or (iii) by a
combination of (i) and (ii) above, against delivery of one or more certificates
therefor.
6. Issuance and Delivery of Shares. Against payment for the shares
purchased, the Corporation will issue and deliver to the Optionee (or the
Beneficiary) on the Completion Date, one or more certificates for the shares
purchased. If and so long as any Common Stock of the Corporation is listed on
any securities exchange, any other provisions of this Option Agreement
notwithstanding, the Corporation shall not be required to make delivery to the
Optionee (or the Beneficiary) of certificates for shares so purchased until
such shares have been listed (or authorized for listing upon official notice of
issuance) on the securities exchange on which outstanding shares of Common
Stock of the Corporation are then listed nor (whether listed or not) until
there has been compliance with such laws and regulations as the Corporation may
deem applicable, including, without limitation, the Securities Act of 1933, the
1934 Act and the rules and regulations issued thereunder.
57
7. Rights as Shareholder. The Optionee or a transferee of the
Option shall have no rights as a shareholder with respect to any share covered
by the Option until he shall have become the holder of record of such share,
and, subject to paragraph 8 hereof, no adjustment shall be made for dividends
or distributions or other rights in respect of such share for which the record
date is prior to the date upon which he shall become the holder of record
thereof.
8. Recapitalizations, Reorganizations, etc.
(a) The existence of the Option shall not affect in any way the right
or power of the Corporation or its shareholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Corporation's capital structure or its business, or any merger or consolidation
of the Corporation, or any issue of stock or of options, warrants or rights to
purchase stock or of bonds, debentures, preferred or prior preference stocks
ahead of or affecting the stock or the rights thereof or convertible into or
exchangeable for stock, or the dissolution or liquidation of the Corporation,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.
(b) The shares with respect to which the Option is granted are
shares of stock of the Corporation as presently constituted, but if, and
whenever, prior to the delivery by the Corporation of all of the shares of the
stock with respect to which the Option is granted, the Corporation shall effect
a subdivision or consolidation of shares, or other capital adjustment, the
payment of a stock dividend or other increase or reduction of the number of
shares of the stock outstanding, without receiving compensation therefor in
money, services or property, the number and price of shares remaining under the
Option shall be appropriately adjusted. Such adjustment shall be made by the
Committee, whose determination as to what adjustment shall be made, and the
extent thereof, shall be final, binding and conclusive. Any such adjustment
may provide for the elimination of any fractional share which might otherwise
become subject to the Option.
(c) Upon a merger or consolidation of the Corporation with any other
entity, pursuant to which the Corporation is not the surviving corporation or
pursuant to which the Corporation is the surviving corporation and holders of
Common Stock of the Corporation receive any consideration in exchange for their
shares of Common Stock of the Corporation, the Option shall be terminated
(whether or not vested) and the Optionee shall receive (i) the consideration to
which the Optionee would have been entitled pursuant to the terms of the
agreement of merger or consolidation, if immediately prior to such merger or
consolidation the Optionee had been the holder of record of a number of shares
of stock of the Corporation equal to the number of Optioned Shares to which the
Option relates, minus (ii) the Option Price. The Committee shall have the
authority to resolve any questions regarding the application of the foregoing
sentence and its determination shall be final, binding and conclusive.
In the event of a liquidation or dissolution of the Corporation
pursuant to which the Committee has not, under Section 2 of the Option
Agreement, caused the Option to vest at least 20 days prior to such liquidation
or dissolution, the Option shall be terminated (whether or not vested) and the
Optionee shall receive (i) the consideration to which the Optionee would have
been entitled, if immediately prior to the liquidation or dissolution the
Optionee had been the holder of record of a number of shares of stock of the
Corporation equal to the number of Optioned Shares to which the Option relates,
minus (ii) the Option Price. The Committee shall have the authority to resolve
any questions regarding the application of the foregoing sentence and its
determination shall be final, binding and conclusive.
(d) Except as hereinbefore expressly provided, the issue by the
Corporation of shares of stock of any class, or securities convertible into or
exchangeable for shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of options,
rights or warrants to subscribe therefor, or to purchase the same, or upon
conversion of shares or obligations of the Corporation convertible into such
shares or other securities, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of stock
subject to the Option.
58
9. Change in Option Terms. The Committee may, with the consent of
the Optionee (or the Beneficiary), modify or change the terms of this Option
Agreement, including the Option Price, in a manner which does not conflict with
the provisions of the Plan; provided that the Option Price as so changed or
modified shall not be less than 100% of the fair market value of the Common
Stock of the Corporation on the date of such modification or change.
10. Definition of "Year", "Subsidiary" and "Affiliate". For all
purposes of this Option Agreement:
(a) A "year" shall be a period of 365 consecutive days (or 366
consecutive days if a 29th of February shall fall during such
period). The first day of any period shall commence at 12:01
o'clock A.M., Eastern Standard Time, on such day, and the last
day of such period shall terminate at 12:00 o'clock midnight.
If the last day of any period shall fall on a Saturday, Sunday
or legal holiday in the State of New York, such period shall be
deemed to end on the next business day thereafter.
(b) A "subsidiary" shall be a corporation as defined in Section
424(f) of the Internal Revenue Code.
(c) An "affiliate" shall be a joint venture, partnership or other
entity (other than a corporation), 50 percent or more of which
is owned directly or indirectly by the Corporation.
11. Notices. Any notice given under this Option Agreement shall be
in writing and shall be deemed given when delivered personally, or when sent
by certified mail, postage prepaid, in the case of the Optionee to his address
hereinabove set forth or such other address as he may designate by notice given
to the Corporation, and in the case of the Corporation, to its Corporate Office
at 1601 Trapelo Road, Waltham, MA 02154, Attention: Secretary, or such other
address as may then be applicable by notice given to the Optionee.
12. Failure to Enforce not a Waiver. The failure of the Corporation
to enforce at any time any provision of this Option Agreement or the Plan shall
in no way be construed to be a waiver of such provision as to any future event
or of any other provision hereof or of the Plan.
13. Governing Law. This Option Agreement and its interpretation and
performance shall be controlled solely by the laws of the State of New York.
59
14. Date of Granting of the Option. The date of this Option
Agreement shall be deemed for all purposes the date of the granting of the
Option, unless and except where the grant is conditioned upon any event, in
which case the date of satisfaction on which such event occurs shall be deemed
the date of the granting of the Option.
15. Power of the Committee. The Committee shall have all the powers
delegated to it by the provisions of the Plan including, without limitation,
the power to construe this Option Agreement and the Plan, and the power to
determine whether a termination of the Optionee's employment was for reasons
constituting cause for discharge, and any determinations of the Committee shall
be conclusive.
16. Provisions of the Plan. The Option provided for herein is
granted pursuant to the Plan, and the Option and this Option Agreement are in
all respects governed by, and subject to all of the terms and provisions of,
the Plan. Any term used herein shall, unless the context plainly requires
otherwise, have the meaning assigned to it in the Plan. The Corporation agrees
to maintain a copy of the Plan during the term of this Option Agreement at its
principal office for inspection by the Optionee at any time during normal
business hours.
IN WITNESS WHEREOF, the Corporation has caused this Option to be signed
by its corporate officer thereunto duly authorized, and the Optionee has signed
this Option Agreement, all as of the date first above written.
KOLLMORGEN CORPORATION
By ___________________________
Senior Vice President
___________________________
Optionee
S.S. #_____________________
60
EXHIBIT A
[Sample form of letter to be sent by Optionee (or Beneficiary)]
[ Date ]
Kollmorgen Corporation
Attention: Secretary
1601 Trapelo Road
Waltham, MA 02154
Re: Exercise of Stock Option
Dear Sirs:
Pursuant to the terms of the Option Agreement between us dated
________________, 19___, in which you have granted me an option to purchase a
certain number of shares of your Common Stock, of the par value of $2.50 per
share, on certain terms and conditions, I hereby give notice that I elect to
exercise such option to the extent of _____________ shares and that I desire to
complete this purchase on __________________, 19___. On that date I shall pay
you the sum of _____________________________________________ Dollars
($___________) in full payment for such shares. In addition, on that date I
shall pay you all amounts required under applicable federal, state and local
withholding tax rules and regulations. I request that such shares be evidenced
by __________ stock certificate(s) in the following denomination(s):
____________________________________.
Very truly yours,
[name and address]
S.S.#
NOTE: The above form should be appropriately modified in the case of use by a
person to whom the rights of a deceased Optionee have passed by will or
the laws of descent and distribution.
Optionee has signed this Option Agreement, all as of the date first above
written.
KOLLMORGEN CORPORATION
By ___________________________
Vice President
___________________________
Optionee
S.S. #_____________________
61
EXHIBIT 10(k)
RESTRICTED STOCK UNITS SUBSCRIPTION AGREEMENT, (the "Agreement"), dated as
of February , 1999 between Kollmorgen Corporation (the "Company"), and the
other party signatory hereto (the "Participant").
WHEREAS, pursuant to the Company's 1998 Management Stock Incentive Plan
(as the same may be amended from time to time, the "Plan"), the Company desires
to provide the Participant with an incentive to remain in its employ and to
increase the Participant's interest in the success of the Company by granting
to the Participant Restricted Stock Units (the "Restricted Shares") of Common
Stock, $2.50 par value per share, of the Company (the "Common Stock"), subject
to the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties hereto agree as follows:
1. DEFINITIONS; INCORPORATION OF PLAN TERMS. Capitalized terms used
herein without definition shall have the meanings assigned to them in the Plan,
a copy of which has been delivered to the Participant. This Agreement and the
Restricted Shares shall be subject to the Plan, the terms of which are hereby
incorporated herein by reference, and in the event of any conflict or
inconsistency between the Plan and this Agreement, the Plan shall govern. The
Date of Grant with respect to the Restricted Shares shall be the date of this
Agreement as specified above.
2. GRANT OF RESTRICTED SHARES. Subject to the terms and conditions
contained herein and in the Plan, the Company hereby grants to the Participant,
effective as of the Date of Grant, the number of Restricted Shares specified at
the signature page hereof. Except as may be required by law, the Participant
shall not be required to pay any additional consideration for the issuance of
the Restricted Shares granted pursuant to this Agreement.
3. NON-TRANSFERABILITY. The Restricted Shares, and any rights or
interests therein, may not be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of, until such Restricted Shares have vested in
accordance with the terms of the Plan and this Agreement. Notwithstanding the
preceding sentence, prior to vesting the Restricted Shares may be transferred
by will or the laws of descent and distribution or pursuant to a "qualified
domestic relations order" as defined in the Code or Title I of the Employee
Retirement Income Security Act of 1974, as amended, and the rules and
regulations thereunder.
62
4. TERMS AND CONDITIONS OF RESTRICTED SHARES. The Restricted Shares
granted hereby are subject to the following terms and conditions:
(a) Vesting. Except as vesting may be accelerated pursuant to
the terms of the Plan or this Agreement, the Restricted Shares shall
vest on the third anniversary of the Date of Grant.
(b) Termination of Employment. Except as the Committee may
otherwise determine in its sole discretion, in the event that the
Participant's employment with the Company terminates for any reason
prior to the vesting of any Restricted Shares granted pursuant to
this Agreement, then such Restricted Shares shall, as of the date of
such termination, be forfeited; provided, however the Participant
shall be entitled to receive the cash benefits described in the Plan
with respect to such unvested shares.
(c) Shareholder Rights; Dividends and Distributions. The
Participant shall have all rights of a shareholder with respect to
the vested Restricted Shares, including the right to vote the shares
and the right to receive any cash dividends as provided for in the
Plan. Cash dividends with respect to unvested Restricted Stock shall
be accounted for in accordance with the terms of the Plan. Any stock
dividends issued with respect to the Restricted Shares shall be
subject to the same restrictions and other terms and conditions that
apply to the Restricted Shares with respect to which such dividends
are issued, and all references to Restricted Shares hereunder shall
be deemed to include such shares.
(d) Issuance of Certificate. The Participant shall be issued a
certificate in respect of the vested Restricted Shares granted
pursuant to this Agreement.
5. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any
change in the outstanding Common Stock by reason of a stock dividend,
recapitalization, reorganization, merger, consolidation, stock split,
combination or exchange of shares or any other significant corporate event
affecting the Common Stock, the Committee, in its discretion, may make (i) such
proportionate adjustments as it considers appropriate (in the form determined
by the Committee in its sole discretion) to prevent diminution or enlargement
of the rights of the Participant with respect to the aggregate number of shares
of Common Stock covered by this Agreement and/or (ii) such other adjustments as
it deems appropriate. The Committee's determination as to what, if any,
adjustments shall be made shall be final and binding on the Company and the
Participant.
6. CHANGE IN CONTROL. In the event of a Change in Control and except as
the Committee may otherwise determine in its sole discretion, all Restricted
Shares granted pursuant to this Agreement shall immediately vest and all other
restrictions and conditions on the Restricted Shares shall lapse as of the date
of the Change in Control.
63
7. MISCELLANEOUS.
(a) Representation by the Participant. The Participant hereby
represents and agrees with the Company that the Participant is
acquiring the Restricted Shares without a view to distribution or
other disposition thereof.
(b) No Rights to Grants or Continued Employment. The Participant
shall not have any claim or right to receive grants of Restricted
Shares under the Plan. Neither the Plan nor this Agreement nor any
action taken or omitted to be taken hereunder or thereunder shall be
deemed to create or confer on the Participant any right to be
retained in the employ of the Company or any Subsidiary, or to
interfere with or to limit in any way the right of the Company or any
Subsidiary to terminate the employment of the Participant at any time.
(c) Tax Withholding. No later than the date as of which an
amount first becomes includable in the gross income of the
Participant for applicable income tax purposes with respect to the
Restricted Shares, the Participant shall pay to the Company or make
arrangements satisfactory to the Board regarding the payment of any
federal, state or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by
the Board, in accordance with rules and procedures established by the
Board, the minimum required withholding obligations may be settled
with Common Stock, including Common Stock that is part of the award
that gives rise to the withholding requirement. The obligation of
the Company under this Agreement shall be conditional upon such
payment or arrangements and the Company shall, to the extent
permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the Participant.
(d) Applicable Law. This Agreement shall be governed by and
subject to the laws of the State of New York and to all applicable
laws and to the approvals by any governmental or regulatory agency as
may be required.
(e) Severability. If any provision of this Agreement shall be
held illegal or invalid for any reason, such illegality or invalidity
shall not affect the remaining provisions of this Agreement, but this
Agreement shall be construed and enforced as if such illegal or
invalid provision had never been included herein.
64
8. SURVIVAL; ASSIGNMENT. All agreements, representations and warranties
made herein and in any certificates delivered pursuant hereto shall survive the
issuance to the Participant of the Restricted Shares and, notwithstanding any
investigation heretofore or hereafter made by the Participant or the Company or
on the Participant's or the Company's behalf, shall continue in full force and
effect. Without the prior written consent of the Company, the Participant may
not assign any of his rights hereunder except by will or the laws of descent
and distribution. Whenever in this Agreement any of the parties hereto is
referred to, such reference shall be deemed to include the heirs and permitted
successors and assigns of such party; and all agreements herein by or on behalf
of the Company, or by or on behalf of the Participant, shall bind and inure to
the benefit of the heirs and permitted successors and assigns of such parties
hereto.
9. NOTICES. All notices and other communications provided for herein
shall be in writing and shall be delivered by hand or sent by certified or
registered mail, return receipt requested, postage prepaid, addressed, if to
the Participant, to his attention at the mailing address set forth at the foot
of this Agreement (or to such other address as the Participant shall have
specified to the Company in writing) and, if to the Company, to it at its
principal offices which are currently located at 1601 Trapelo Road, Waltham,
Massachusetts 02451, Attn.: Secretary. All such notices shall be conclusively
deemed to be received and shall be effective, if sent by hand delivery, upon
receipt, or if sent by registered or certified mail, on the fifth day after the
day on which such notice is mailed.
10. WAIVER. The waiver by either party of compliance with any provision
of this Agreement by the other party shall not operate or be construed as a
waiver of any other provision of this Agreement, or of any subsequent breach by
such party of a provision of this Agreement.
11. ENTIRE AGREEMENT. This Agreement and the Plan set forth the entire
agreement and understanding between the parties hereto with respect to the
matters covered herein, and supersede all prior agreements and understandings
concerning such matters. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same agreement. The
headings of sections and subsections herein are included solely for convenience
of reference and shall not affect the meaning of any of the provisions of this
Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by its duly authorized officer and the Participant has executed this Agreement,
both as of the day and year first above written.
KOLLMORGEN CORPORATION
By:
Name:
Title:
PARTICIPANT
By:
Name:
Address:
Restricted Shares:
65
EXHIBIT 10(n)
1999 ANNUAL INCENTIVE BONUS PLAN
The 1999 Annual Incentive Bonus Plan (the "Plan") for corporate officers,
which is directly linked to the financial performance of the Corporation, is
designed to provide additional cash and stock compensation when specific
financial performances are achieved or exceeded. The Plan provides awards to
individuals when the Corporation meets its operating plan in terms of primary
earnings per share, revenues, cash flow, and critical objectives as follows:
40% of the bonus is dependent on earnings per share, 20% on revenue growth, 20%
on cash flow, and 20% on individual objectives. Bonuses for the officers may
range from a threshold of 15% of base pay to a cap of 100% of base pay. 80% of
the bonus is delivered in the form of cash compensation and 20% in the form of
restricted stock units issued pursuant to the 1998 Management Stock Incentive
Plan.