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240.14a-12
PACIFIC SCIENTIFIC COMPANY
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(Name of Registrant as Specified In Its Charter)
KOLLMORGEN CORPORATION
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PRESS RELEASE
KOLLMORGEN REPORTS STRONG FINANCIAL RESULTS FOR 1997; FOURTH QUARTER AND FULL
YEAR SHOW OPERATING GAINS
Kollmorgen Again Urges Pacific Scientific Chairman/CEO Lester Hill to Enter
into 'Serious Merger Discussions'
WALTHAM, Mass., January 26--Kollmorgen Corporation (NYSE:KOL)
today reported strong operating results for 1997 and reaffirmed its intention
to acquire Pacific Scientific Company (NYSE:PSX).
For the year ended December 31, 1997, which was highlighted by a number of
important financial events and special items, Kollmorgen reported that net
income rose by 122% to $19.7 million, or $1.90 a share (diluted), on sales of
$222.2 million. These results compare to net income of $8.9 million, or
$0.86 a share (diluted), on sales of $230.4 million in 1996. Excluding
special items, net income for 1997 rose by 18% to $10.5 million, or $1.02 per
share (diluted).
For the fourth quarter, excluding special items, net income rose 17% to
$3.8 million, or $0.38 per share (diluted), on sales of $59.2 million, versus
net income of $3.2 million, or $0.32 per share (diluted), on sales of $60.8
million in comparable 1996 period. Excluding revenues from Macbeth, which
became part of a joint venture at the end of 1996, the Company's sales from
ongoing businesses increased by 15% for the fourth quarter and 13% for the
year.
After accounting for a change of $4.2 million for costs associated with
the tender offer for Pacific Scientific, earnings in the fourth quarter were
$200,000, or $0.02 per share (diluted).
These comparative results were affected by several special items.
- -- Results for 1997 include a gain after fees of $24.4 million from the sale
of the Company's share in its GretagMacbeth joint venture. GretagMacbeth was
brought public on the Swiss Stock Exchange in June.
- -- Results for 1997 reflect approximately $4.2 million in costs associated
with the Company's offer to purchase shares of Pacific Scientific, announced
in December. These costs are included as expenses in the fourth quarter.
- -- Results for 1997 include a charge of $11.4 million for acquired research
and development, principally associated with the Company's acquisitions of
Servotronix and Seidel in the second quarter.
- -- Results for 1997 reflect the effect of income taxes, whereas 1996 results
reflect a zero tax rate due to tax loss carry-forwards from earlier years.
Kollmorgen's Offer for Pacific Scientific
Kollmorgen said that it is determined to proceed with its $20.50 per share
offer to acquire Pacific Scientific Company despite the unwillingness of
Pacific Scientific to allow Kollmorgen to participate in the sale process it
has publicly stated it is pursuing.
Gideon Argov, Chairman, President and Chief Executive Officer of
Kollmorgen Corporation, said: "While apparently granting other parties the
right to do so, Pacific Scientific has refused to permit Kollmorgen to
conduct any due diligence unless Kollmorgen first agrees to abandon its offer
and cancel the special meeting of Pacific Scientific shareholders. We do not
believe this is in the best interest of the shareholders of either company.
"Despite Mr. Hill's statements as reported in the press that he is willing
to meet with Kollmorgen, and despite our repeated calls upon him to do so,
Pacific Scientific up to now has failed to contact us either to negotiate a
transaction or to more fully inform itself about our proposal.
"We continue to be willing to enter into serious discussions with Pacific
Scientific," Argov said, "with no preconditions whatsoever. While we have
made what we believe is a full and fair offer for Pacific Scientific, we are
prepared to consider increasing that offer if Pacific Scientific can
demonstrate greater value in the company than we have been able to identify
from public information. And, in that vein, in order to provide both of our
companies with the maximum amount of flexibility to negotiate a friendly
transaction in advance of the Pacific Scientific special meeting of
shareholders on February 13, 1998, we have decided to postpone the
Kollmorgen shareholders meeting until early February. We urge Pacific
Scientific to sit down with Kollmorgen, the only party with a firm offer on
the table, to negotiate a mutually advantageous transaction."
Kollmorgen said that the special meeting of Kollmorgen shareholders will
now take place on February 10, 1998, at 10 a.m. at BankBoston, 100 Federal
Street in Boston.
On January 22, Kollmorgen announced that it will receive a $27.2 million
settlement from a third party with respect to Kollmorgen's electronic motion
control patents. As it is doing with other companies in the industry,
Kollmorgen has formally notified Pacific Scientific that certain of Pacific
Scientific's motion-control products, representing a substantial percentage
of Pacific Scientific's motion-control revenues, infringe Kollmorgen patents.
Kollmorgen said that it has offered to Pacific Scientific the opportunity to
enter into licensing arrangements in regard to these patents.
1997 Full-Year and Fourth-Quarter Highlights
Commenting on the Company's performance during the year, Argov called 1997
"an outstanding and strategically important year for Kollmorgen. The Company
remained on target financially," he said, "with bookings growing steadily
right through the fourth quarter in both the Industrial and Commercial and
the Aerospace and Defense groups, Bookings for the year were up 27% over 1998.
"Early in the year, we divested ourselves of a non-core Kollmorgen
business, Macbeth, through a merger and public offering in Switzerland. This
helped us to improve our balance sheet and greatly reduce our outstanding
debt. In addition, it allowed us to better concentrate on our core business
of high-performance motion control.
"We also made two important acquisitions during 1997," Argov said. "We
completed the acquisition of Servotronix to add an industry-leading software
and
controls capability, and we acquired Seldel, a leading provider of digital
servo drives, to accelerate our expansion into the European market for
integrated motion control equipment."
"Following the divestiture of Macbeth and the acquisitions, the Company
also realigned its worldwide businesses into two operating groups: the
Industrial and Commercial Group and the Aerospace and Defense Group.
"Kollmorgen also introduced several key products in 1997," Argov said,
"products that have already had a impact on the marketplace. Most notable is
the new Platinum (TM) DDL direct-drive linear motors and drives, which give
customers unparalleled speed and precision by eliminating the traditional
gearing and ballscrew mechanisms. The reception from customers has been
outstanding, and Kollmorgen linear systems are already being fitted into
coordinate measurement machines, x-y tables, and other precision assembly
equipment for the production of semiconductors and electronic components.
"In the Aerospace and Defense business, the Company has advanced the state
of technology with a first-of-its-kind aircraft power management system. The
system, which enables aircraft designers to reduce weight and lower production
costs, was developed for the tiltrotor V-22 Osprey, now being built by Bell
Boeing. We also continued development of an innovative Photonics mast for
the U.S. Navy's newest generation of submarines. The new system will use
advanced imaging and eletronics to replace the familiar through-the-hull
periscope design of traditional submarines.
"In Asia, we successfully established a low-cost manufacturing center in
Vietnam," Argov said. "And, we further improved manufacturing operations at
our high-volume production center in India.
"In our Engineering Services business, Kollmorgen Proto-Power turned in
another standout year. The business continued to grow in the areas of
service and software with several major customers added to the division's
client list. The division also moved into new and larger facilities during
the year to accommodate the steady growth of the business.
"As we begin the new year," Argov said, "we are preparing several exciting
new products for introduction, including our first general purpose multi-axis
controllers, a new cost-effective line of servo motors, the CLAWS(TM) weapons
control system for the military marketplace, and a new Kollmorgen SERVOSTAR
(TM) product line specially designed for the needs of our European customers."
Kollmorgen's primary business is high-performance electronic motion
control. Additional information can be found on the World Wide Web at
http://www.kollmorgen.com.
Cautionary Statement
With respect to statements about future company performance that may be
deemed to be forward-looking statements under the federal securities laws,
the Company cautions investors and others that numerous factors could cause
actual results to differ materially. Please refer to the "Forward-Looking
Statements" and "Risk Factors" included in the Registration Statement on Form
S-4, dated January 15, 1998.
Contacts:
Robert Cobuzzi Roy Winnick-Mark Semer
Kollmorgen Corporation or Kekst and Company
781-890-5655 212-521-4842 or 4802
###
-Tables Follow-
KOLLMORGEN CORPORATION and SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
For the Three Months For the Twelve Months
ended December 31, ended December 31,
1997 1996 1997 1996
Net sales (1) $59,192 $60,766 $222,246 $230,424
Cost of sales 39,616 40,179 153,206 152,928
------------------ --------------------
Gross profit 19,576 20,587 69,040 77,496
Selling, general and
administrative expense 12,041 13,061 44,456 51,918
Research and development
expense 2,413 3,119 9,662 12,143
Acquired research and
development (2) - - 11,391 -
Merger costs (2) 4,176 - 4,176 -
------------------ -------------------
Income (loss) before interest,
minority interest,
and taxes 946 4,407 (645) 13,435
Interest and other
income (expenses) 96 (1,280) (2,772) (5,045)
Tax provision (860) - (2,338) -
Equity in earnings of
joint venture and
minority interest,
net of income taxes 2 96 1,654 514
Gain on sale of investment
in joint venture, net of
income taxes (2) - - 24,321 -
------------------ --------------------
Net income $ 184 $ 3,223 $ 19,720 $ 8,904
------------------ --------------------
------------------ --------------------
Earnings per share:
Basic $0.02 $0.33 $2.00 $0.89
Diluted $0.02 $0.32 $1.90 $0.86
------------------ --------------------
------------------ --------------------
(1)-Excluding businesses previously sold, revenues were $51,442 and $197,389
for the three and 12 months ended December 31, 1996, respectively.
(2)-Excluding these special items, net income was $3,760, or $0.36 per share
(diluted), and $10,522 or $1.02 per share (diluted) for the three and 12
months ended December 31, 1997, respectively.
KOLLMORGEN CORPORATION and SUBSIDIARIES
Condensed Balance Sheets
(In thousands)
December 31, December 31,
1997 1996
------------ ------------
Assets
Cash and cash equivalents $ 14,854 $ 13,445
Accounts receivable, net 39,528 43,189
Recoverable amounts on
long-term contracts 5,762 4,973
Inventories 25,162 22,450
Prepaid expenses 2,041 1,645
-------- --------
Total current assets 87,347 85,702
Property, plant &
equipment, net 26,673 25,147
Other assets 31,424 30,481
-------- --------
$145,444 $141,330
-------- --------
-------- --------
Liabilities and Shareholders' Equity
Notes payable and current
portion of long-term debt $ 12,098 $ 12,487
Accounts payable and
accrued liabilities 54,219 48,521
Total current liabilities 66,317 61,008
Long-term debt 31,525 53,054
Other liabilities 5,874 5,202
Minority interest 136 287
Shareholders' equity 41,592 21,779
-------- --------
$145,444 $141,330
-------- --------
-------- --------
Kollmorgen Fourth-quarter and Year-end 1997 Results Conference Call
January 26, 1998 at 11:00 a.m.
Conference call operator introduces GIDEON ARGOV and BOB COBUZZI and proceeds to
turn the call over to GIDEON ARGOV.
GIDEON ARGOV:
Welcome
Good Morning. Thank you for joining us this morning to discuss Kollmorgen's
fourth-quarter and year-end 1997 financial results and our offer to acquire
Pacific Scientific. After we've made some opening comments, we'd be happy to
take your questions.
Safe Harbor Statement
Let me begin with a small legal chore. In this conference call, we will be
making some forward-looking statements as defined by the federal Securities
Laws. Such forward-looking statements could include general or specific
comments by company officials about future company performance, as well as
certain responses to questions posed to company officials about future
operating matters. The company wishes to caution participants in this
conference call that numerous factors could cause actual results to differ
materially from any forward-looking statements made by the company. Please
refer to the "Forward-Looking Statements" and "Risk Factors" included in the
Registration Statement on Form S-4 dated January 15, 1998.
Now let's turn to the quarter and year.
Financial Objectives
From the beginning of the year, we had targeted 10 percent revenue growth and 15
to 20 percent EPS growth for 1997. As you can see from our announcement this
morning, we were successful in this pursuit as we achieved 13 percent revenue
growth from continuing businesses and 19 percent EPS growth. With the sale of
the GretagMacbeth joint venture on the Swiss Stock Exchange during the third
quarter, we also accomplished our long-term objective of a 1 to 1 debt to equity
ratio.
Operational Objectives
The divestiture of Macbeth also helped us achieve another critical objective,
which is the centerpiece of our growth strategy: to strengthen our motion
technologies business. Our high-performance electronic motion control products
and systems include the motors, drives and electronic controllers and systems,
which are automating our factory, office and home environments. Kollmorgen's
products are part of everything from machine tools, industrial robotics and
equipment handlers to medical devices, desktop computer drives, and office
printers.
We are now sharply focused on motion control technology. We further
strengthened that mission during the second quarter with the acquisition of
Seidel Elektro-Automatik. The acquisition of Seidel significantly enhances our
access to the growing European market.
We also strengthened our motion technology group and enhanced our global
presence with the acquisition in the second quarter of Servotronix, which
previously had been an affiliate of Kollmorgen. Working with engineers at
Servotronix specializing in digital controls and software, Kollmorgen rapidly
developed a new line of digital Servostar drives, which will serve as the
foundation form further product innovations.
The development of this exciting new family of products relates to our final
objective for 1997: to bring new technologies online. During the year, we added
several important technologies to our already broad portfolio of motion control
solutions. Among the most significant are the new Platinum DDL linear motors
and drives.
On the aerospace and defense side of our business, Kollmorgen's revolutionary
regulated TR aircraft power management technology took flight in the first
quarter aboard the tiltrotor V-22 Osprey. In addition, we continued to
successfully develop the US Navy's innovative Photonics/UMM mast for the new
generation of attack submarines.
2
Pacific Scientific Combination
The achievement of our objectives in 1997 opens the door to many exciting
opportunities for growth in 1998. One such opportunity is our proposed business
combination with Pacific Scientific Company. With the next few weeks, the
shareholders of both Pacific Scientific and Kollmorgen Corporation will be
voting on an offer that we believe represents a very attractive opportunity for
the shareholders, customers and employees of both companies. The combination of
Kollmorgen and Pacific Scientific would create an industry leader in the field
of high-performance electronic motion control.
The transaction that was proposed on December 15, values Pacific Scientific
common stock at $20.50 per share. If that offer is approved by the
shareholders of both companies, Pacific Scientific shareholders would receive
an immediate cash payment of $20.50 per share for half of the company's
outstanding common stock. Additionally, Pacific Scientific shareholders
would continue to participate in the future growth of the combined company
through an equity stake of approximately 43 percent of the combined company.
The meeting of Kollmorgen's stockholders has been delayed until Tuesday,
February 10, and the meeting of Pacific Scientific's stockholders is
scheduled for February 13.
There are many ways in which the combination of Kollmorgen and Pacific
Scientific would benefit the shareholders of both companies.
First, the combined company would create a leader in the high-performance
motion control market. Due to the complementary product lines of Kollmorgen
and Pacific Scientific, we would be well positioned to offer a more complete
array of products and support services to a broader customer base.
Second, based on the hard, direct consolidation synergies it would create, this
transaction would be accretive to earnings per share in 1999, and increasingly
so thereafter. We have identified more than $15 million of annual operating
synergies that the combined company can be expected to achieve in 1999, rising
to more than $20 million in the year 2000 and increasing in subsequent years.
3
Another important reason to combine Kollmorgen and Pacific Scientific relates to
the environment in which both companies currently operate. With the increasing
consolidation of the motion control marketplace, a company with increased size
and global scope would have a better ability to capitalize on the opportunities
in this industry. The combined company would be better able to effectively
market its products to customers around the world, offer on-site product
support, and conduct more effective and cost-efficient research and development,
marketing, production and sourcing.
Additionally, Kollmorgen's strong management team has proven its ability to
succeed in this marketplace. We have delivered year-over-year growth in sales
and operating income from continuing operations from 1994 through 1997, and we
expect that trend to continue in 1998. We have achieved this through focusing
on our core operations and maximizing returns from non-strategic operations. We
also have expertise in managing debt as proven by the reduction of Kollmorgen's
debt and preferred stock obligations by more than 40 percent during the past
three fiscal years and the transition from fully secured to unsecured credit
arrangements.
Finally, the combined Kollmorgen/Pacific Scientific would realize greatly
enhanced growth opportunities. We believe that the company would be well
positioned, strategically, operationally and financially, to aggressively
pursue attractive opportunities for external and internal growth. We are
confident that the combined company's increased size and scope would enable it
to be a leader in the accelerating consolidation of the motion control industry
and raise its visibility in the business and financial communities.
We have entered into a binding commitment letter with Salomon Smith Barney and
its affiliate Salomon Brothers Holding, in which they have agreed to provide,
subject to certain conditions, what Kollmorgen believes is a conservatively
financed secured bank facility to fully finance the transaction.
Prior to our tender offer and proxy solicitation, we had been rebuffed in
several attempts to persuade Pacific Scientific management to enter into
merger discussions. We remain hopeful that we will negotiate a friendly
transaction with their management and board of directors. We look forward to
the formation of this combined company in order that we may achieve these
greater goals and provide enhanced value to the shareholders of Kollmorgen
and Pacific Scientific.
4
Looking to 1998
In 1998, we will continue to follow our vision to profitably grow the company by
providing superior quality, value and service to our customers. Our goal is to
achieve at least 10 percent EPS growth and at least 15 to 20 percent revenue
growth.
To accomplish this, we have several key strategies. First, to provide
customers with total solutions through a full range of motion control
products. Second, to establish ourselves aggressively within key markets.
And third, to broaden our global reach by being the first to identify new and
emerging markets.
Our operational objectives for 1998 are consistent with this strategy:
First, to complete the acquisition and integration of Pacific Scientific.
Second, to introduce key new products, such as advanced controllers, digital
drives and brushless motors.
And third, to actively pursue the licensing of Kollmorgen's intellectual
property. I'd like to say just a few words about an important announcement
that we made last week. As you might have seen, we reached a $27.2 million
patent settlement with a third party that will be paid to us in cash, less
applicable taxes, during the first quarter.
Kollmorgen possesses a valuable portfolio of patents, and we believe that it's
vital to our business that we protect their value. That's why we are putting on
notice a number of third parties who we believe are using our patent estate
without proper authorization, including Pacific Scientific, to reach agreements
under which we will be compensated for previous use, and to grant licenses for
these parties to use our patented technologies in the future. While we have
litigated on these matters in the past, we believe that this approach is more
beneficial not only to Kollmorgen, but to the third parties that we are dealing
with.
One more point on the subject of Thursday's settlement: the material benefit to
Kollmorgen is approximately two dollars per share of incremental cash, which
clearly increases our liquidity, further strengthens our balance sheet and
significantly enhances our financial flexibility.
5
Introduction of Financials
At this point, I will turn the conference call over to Bob Cobuzzi, who will
briefly detail Kollmorgen's fourth-quarter and year-end financial results. Then
we'll take questions.
BOB COBUZZI:
Highlights
Thank you Gideon. I would like to begin by reviewing the financial highlights
of the fourth quarter and the year.
We are very pleased with the operating performance of the Company. In order
to provide a better understanding of the significance of our performance, I
will exclude in my review of the financial highlights, several special items
reported in our results.
For the quarter, these items include a charge of $4.2 million for costs related
to the Company's offer to purchase Pacific Scientific Company. For the year,
these special items also include a $24.3 million after tax gain on the sale of
the GretagMacbeth joint venture equity interest, and an $11.4 million charge for
acquired technology primarily associated with Seidel and Servotronix
acquisitions.
Excluding these special items, net income for the fourth quarter of 1997
increased 17 percent to $3.8 million, or $0.36 per share (diluted), as compared
to $3.2 million, or $0.32 per share (diluted), in 1996.
For the year, net income increased 18 percent to $10.5 million, or $1.02 per
share (diluted), as compared to $8.9 million, or $0.86 million per share,
(diluted) for 1996.
Bookings for the fourth quarter were $75.9 million, the strongest of the year,
and reflected strength in all areas of the business. For the year, 1997
bookings increased 27 percent over 1996 from $182.2 million to $230.7 million.
Strong results were recorded in both the industrial and commercial and aerospace
and defense businesses. Excluding the acquisitions, bookings increased 21
percent year over year.
Sales from ongoing businesses increases 15 percent to $59.2 million in the
fourth quarter of 1997 from $51.4 million in the fourth quarter of 1996, and
increased 13 percent for the year to $222.2 million from $197.4 million in 1996.
The 1997 results reflects a combined federal and state tax rate of approximately
28 percent as compared to No Taxes in 1996 due to net operating loss
carryforwards, further illustrating the significant improvement in earnings, on
a comparative basis, for the reporting period.
6
Shares used in the calculations of fully diluted earnings increased
approximately 5 percent to 10.4 million from 10 million in 1996.
Statement of Operations
Moving on to our statement of operations, gross profit margins for the fourth
quarter were approximately 33 percent of sales, an increase of approximately
two percent over the fourth quarter of 1996 on sales from ongoing businesses.
Favorable product mix, primarily from the aerospace and defense group,
contributed to the increase. For the full year, margins were essentially
unchanged. We expect 1998 margins to show modest improvement over 1997.
Selling expenses from ongoing businesses for 1997 were 10 percent of sales,
consistent with 1996 but up from approximately nine percent in previous
quarters. This is the result of increased investment in or European sales
organization.
General and administrative expenses from ongoing businesses were 10.3 percent
of sales, essentially flat with previous quarters and down from approximately 11
percent in 1996.
Research and development expense declined to 4.1 percent in the fourth quarter
as compared to 4.8 percent in the fourth quarter of 1996 due to lower costs in
the European aerospace and defense operation.
Overall, operating margins improved in the fourth quarter of 1997 to 8.7 percent
from 7.3 percent in the comparable period of 1996 and to 6.7 percent from 5.8
percent for the full year.
Net interest expense declined by approximately $900 thousand in the fourth
quarter of 1997 from $1.5 million in the fourth quarter of 1996, and from $5.3
million to $3.6 million for the full year. The lower level of interest expense
is the result of improved liquidity and a reduction in debt (the repayment of
the term loan) with cash generated from the sale of the Macbeth division.
Balance Sheet
As we have previously stated, it is our goal to show year-to-year improvement in
the balance sheet. We are pleased with the significant improvement in our
balance sheet this year.
Funded debt to total capitalization declined from 73 percent at the end of 1996
to 45 percent at the end of 1997.
7
Cash has increased to $15 million from $13 million at year-end 1996, but
declined from $18 million at the end of September with the further funding of
long-term debt and the reduction of other liabilities.
Average days sales outstanding has improved to 60 days at year-end 1997 from 66
days at the end of the third quarter of 1997, and from 75 days at the end of
1996.
Inventory turns improved to 6.3 X in the fourth quarter of 1997 from 6.1 X in
1996.
Total current assets increased to $87 million from $86 million at year-end
1996.
Working capital ratio is essentially unchanged at 1.4X.
Capital expenses were approximately $1.7 million in the fourth quarter, compared
to $1.5 million in the third quarter of 1997 and $1.0 million in the fourth
quarter of 1996. They were approximately $6 million for the year 1997.
Long-term debt including current maturities declined $27 million to $33 million
from $60 million at year-end 1996 principally with the repayment of the $22
million term loan in the second quarter from the portion of the GretagMacbeth
proceeds.
One final point. As we enter 1998 with all the concern in the financial markets
regarding Asia, we do not anticipate any significant impact on our operating
performance as a result of this turmoil. Most of our exposure relates to
material sourcing and production as opposed to sales and distribution, this we
believe could prove to be beneficial to our cost of production sourced in Asia.
I'll now turn this back over to Gideon.
8
GIDEON ARGOV:
Summary
Thank you Bob. In just a moment I'll open this up to questions. Let me
just say once again that we would like nothing better that to sit down with
Buck Hill and his colleagues at Pacific Scientific and negotiate a friendly
deal. We are prepared to enter into such discussions with no preconditions
on either side. If they can demonstrate that there is greater value in
Pacific Scientific that we have been able to identify based on public
information, we are prepared to consider increasing our offer. We also are
prepared to sign a confidentiality agreement, so long as it does not require
us to, in effect, abandon our offer. Buck, if you're listening, this has gone
on long enough. It's time for us to enter into serious merger discussions.
Let's get together - now - and negotiate a merger agreement that will benefit
the shareholders of both companies. And now we'll take some questions.
Conference call operator introduces questions-and-answer portion of the call.
GIDEON ARGOV AND BOB COBUZZI:
Question-and-answer Portion of Conference Call
Conference Call operator introduces GIDEON ARGOV for closing comments.
GIDEON ARGOV:
Conclusion
I'd like to thank everyone for their interest and participation. We look
forward to speaking with you in the future. As always, if you have any
questions, please feel free to call me here at Corporate at (617) 890-5655.
9