-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SLxGnFGdOAYiMougzEFoX9bz6GiAAlsImAwKJ+O2/zGvczWdSL9sq8ygyMwa4iG6 BvkGBc1F+S7VsKdgzw9KyQ== 0000950152-98-001715.txt : 19980306 0000950152-98-001715.hdr.sgml : 19980306 ACCESSION NUMBER: 0000950152-98-001715 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980305 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIEBOLD INC CENTRAL INDEX KEY: 0000028823 STANDARD INDUSTRIAL CLASSIFICATION: CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS) [3578] IRS NUMBER: 340183970 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04879 FILM NUMBER: 98557680 BUSINESS ADDRESS: STREET 1: P.O. BOX 8230 STREET 2: 5995 MAYFAIR RD CITY: CANTON STATE: OH ZIP: 44711-8230 BUSINESS PHONE: 2164894000 MAIL ADDRESS: STREET 1: PO BOX 8230 CITY: CANTON STATE: OH ZIP: 44711-8230 10-K 1 DIEBOLD, INCORPORATED ANNUAL REPORT FORM 10-K 1 UNITED STATES 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, 1997 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 1-4879 DIEBOLD, INCORPORATED (Exact name of Registrant as specified in its charter) Ohio 34-0183970 - --------------------------------------- ------------------------------------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 5995 Mayfair Road, P.O. Box 3077, North Canton, Ohio 44720-8077 - --------------------------------------- ------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (330) 490-4000 - ------------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered: Common Shares $1.25 Par Value New York Stock Exchange - -------------------------------- -------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: None - ------------------------------------------------------------------------------- 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 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. [ ] State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 2, 1998. The aggregate market value was computed by using the closing price on the New York Stock Exchange on March 2, 1998 of $50.813 per share. Common Shares, Par Value $1.25 Per Share $3,474,306,517 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Class Outstanding at March 2, 1998 Common Shares $1.25 Par Value 69,067,165 Shares - ---------------------------------- ------------------------------------- 2 DOCUMENTS INCORPORATED BY REFERENCE (1) PROXY STATEMENT FOR 1998 ANNUAL MEETING --------------------------------------- OF SHAREHOLDERS TO BE HELD APRIL 15, 1998 -----------------------------------------
PART OF 10-K INTO WHICH CAPTION OR HEADING PAGE NO. INCORPORATED ITEM NO. ------------------ -------- ------------ -------- Information about Nominees for Election as Directors 4-8 III 10 Executive Compensation 9-17 III 11 Annual Meeting of Shareholders; Security Ownership of Directors and Management 2-7 III 12 Compensation Committee Interlocks and Insider Participation 8 III 13
2 3 PART I. ITEM 1. BUSINESS. - ----------------- (a) General Development - ----------------------- The Registrant was incorporated under the laws of the State of Ohio in August, 1876, succeeding a proprietorship established in 1859 and is engaged primarily in the sale, manufacture, installation and service of automated self-service transaction systems, electronic and physical security products, software and integrated systems. During 1997, no significant changes occurred in the manner of conducting the Registrant's business. (b) Financial Information about Industry Segments - ------------------------------------------------- The Registrant operates predominantly in one industry segment: financial systems and equipment. This segment accounts for more than 90% of the consolidated net sales, operating profit and identifiable assets. (c) Description of Business - --------------------------- The Registrant develops, manufactures, sells and services automated teller machines (ATMs), electronic and physical security systems, various products used to equip bank facilities, software and integrated systems for global financial and commercial markets. Sales of systems and equipment are made directly to customers by the Registrant's sales personnel and by manufacturer's representatives and distributors. The sales/support organization works closely with customers and their consultants to analyze and fulfill the customers' needs. Products are sold under contract for future delivery at agreed upon prices. In 1997, 1996, and 1995 the Registrant's sales and services of financial systems and equipment accounted for more than 90% of consolidated net sales. The principal raw materials used by the Registrant are steel, copper, brass, lumber and plastics which are purchased from various major suppliers. Electronic parts and components are also procured from various suppliers. These materials and components are generally available in quantity at this time. The Registrant had one customer, International Business Machines (IBM), who was its partner in the InterBold joint venture, that accounted for $173,751,000 of the total net sales of $1,226,936,000 in 1997, $146,103,000 of the total net sales of $1,030,191,000 in 1996, and $106,392,000 of the total net sales of $863,409,000 in 1995. On January 27, 1998, the Registrant completed its purchase of IBM's 30 percent minority interest in InterBold for $16.1 million, the value of IBM's tax capital account in InterBold. Backlog as of December 31, 1997 was $276,986,000 which was a 19% increase from December 31, 1996 backlog of $233,586,000. While this increase in backlog can be considered positive, order backlog is not the sole indicator of future revenue streams. There are numerous other factors which influence the amount and timing of revenue in future periods. 3 4 ITEM 1. BUSINESS. - (continued) - ----------------- All phases of the Registrant's business are highly competitive; some products being in competition directly with similar products and others competing with alternative products having similar uses or producing similar results. Registrant believes, based upon outside independent industry surveys, that it is the leading manufacturer of automated teller machines in the United States and is also a market leader internationally. In the area of automated transaction systems, the Registrant competes primarily with NCR Corporation, Triton, Siemens-Nixdorf, Dassault, Bull, Olivetti and Fujitsu. In serving the security products market for the financial services industry, the Registrant competes primarily with Mosler and Lefebure in the security equipment and systems field. Of these, some compete in only one or two product lines, while others sell a broader spectrum of products competing with the Registrant. However, the unavailability of comparative sales information and the large variety of individual products makes it impossible to give reasonable estimates of the Registrant's competitive ranking in or share of the market in its security product fields of activity. Many smaller manufacturers of safes, surveillance cameras, alarm systems and remote drive-up equipment are found in the market. The Registrant charged to expense approximately $45.1 million in 1997, $41.8 million in 1996, and $35.5 million in 1995 for research and development costs. Compliance by the Registrant with federal, state and local environmental protection laws during 1997 had no material effect upon capital expenditures, earnings or the competitive position of the Registrant and its subsidiaries. The total number of employee associates employed by the Registrant at December 31, 1997 was 6,714 compared with 5,980 at the end of the preceding year. (d) Financial Information about International and U.S. - ------------------------------------------------------ Operations and Export Sales --------------------------- Sales to customers outside the United States as a percent of total consolidated net sales approximated 26.1 percent in 1997, 22.3 percent in 1996, and 19.8 percent in 1995. ITEM 2. PROPERTIES. - ------------------- The Registrant's corporate offices are located in North Canton, Ohio. It owns facilities (approximately 1.5 million square feet) in Canton, Green and Newark, Ohio; Lynchburg, Staunton and Danville, Virginia; Lexington, North Carolina; Sumter, South Carolina; Melbourne, Australia; Mexico City, Mexico; and leases facilities (approximately .5 million square feet) in Akron, Canton, Canal Fulton, Massillon, Newark and Seville, Ohio; Rancho Dominguez, California; Caracas Venezuela; London England; Sydney, Australia; and Shanghai, China. These facilities house manufacturing, production, associated engineering, warehousing, testing, administration and development and distribution for all product lines. To keep its facilities both suitable and adequate for operations, the Registrant has announced the expansion of its Green, Ohio facility. ITEM 3. LEGAL PROCEEDINGS. - -------------------------- At December 31, 1997, the Registrant was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material in relation to the Registrant's financial position or results of operations. 4 5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of 1997. ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT. - ---------------------------------------------- Refer to pages 6 through 9. 5 6 EXECUTIVE OFFICERS OF THE REGISTRANT
Other Positions Year Elected Held Last Name Age Title Present Office Five Years - -------------------- ---- ---------------------- -------------- ------------------------- 1993-96 ------- Robert W. Mahoney 61 Chairman of the Board 1996 Chairman of the Board, and Chief Executive President and Chief Officer and Director Executive Officer and Director - Diebold 1989-93 ------- Chairman of the Board and Chief Executive Officer and Director - Diebold 1993-96 ------- Gregg A. Searle 49 President and Chief 1996 Executive Vice Operating Officer President - Diebold and Director 1991-93 ------- Vice President - Diebold General Manager - InterBold 1990-93 ------- Gerald F. Morris 54 Executive Vice President 1993 Senior Vice President and Chief Financial Officer and Chief Financial Officer - Diebold 1994-96 ------- Alben W. Warf 59 Senior Vice President, 1996 Group Vice President, Electronic Systems Self-Service Systems - Development and Diebold Manufacturing 1993 ---- Vice President - Diebold and General Manager - InterBold 1990-93 ------- Vice President Development and Manufacturing - Diebold and InterBold
6 7 EXECUTIVE OFFICERS OF THE REGISTRANT - (continued)
Other Positions Year Elected Held Last Name Age Title Present Office Five Years - ---------------------- --- ------------------------- ----------------- --------------------------- 1993-96 ------- David Bucci 46 Group Vice President, 1997 Vice President, North North American American Sales and Service Sales and Service Eastern Division - Diebold 1992-93 ------- Vice President, Major Accounts - Diebold Michael J. Hillock 46 Group Vice President, 1997 1993-97 International Sales ------- and Service Vice President and General Manager, Sales and Service, Europe, Middle East and Africa Charles J. Bechtel 52 Vice President, 1997 1990-97 Information Systems ------- Vice President, Marketing and Sales Operations Warren W. Dettinger 44 Vice President, 1989 -- General Counsel and Assistant Secretary
7 8 EXECUTIVE OFFICERS OF THE REGISTRANT - (continued)
Other Positions Year Elected Held Last Name Age Title Present Office Five Years - ------------------------- --- -------------------------- -------------- -------------------- 1996-97 ------- Reinoud G. J. Drenth 34 Vice President and 1997 Vice President Managing Director, Europe Worldwide Marketing Middle East, and Africa - Diebold 1987-96 ------- NCR Corporation 1995 - ---- Marketing Vice President, Financial Services Industry 1994 - ---- Executive Assistant, Worldwide Industry Marketing 1993 - ---- Marketing Director, Northern Europe 1991-93 - ------- District Manager, Financial and Retail Systems Division Donald E. Eagon, Jr. 55 Vice President, 1990 -- Corporate Communications Charee Francis-Vogelsang 51 Vice President and 1983 -- Secretary Bartholomew J. Frazzitta 55 Vice President and 1990 -- General Manager, Security Products
8 9 EXECUTIVE OFFICERS OF THE REGISTRANT - (continued)
Other Positions Year Elected Held Last Name Age Title Present Office Five Years - --------------------- --- ---------------------------- -------------- --------------------------- 1988-93 ------- Larry D. Ingram 51 Vice President, 1993 Divisional Vice President, Procurement and Services Materials Management - Diebold Charles B. Scheurer 56 Vice President, 1991 -- Human Resources Robert L. Stockamp 54 Vice President and 1990 -- Corporate Controller 1984-97 ------- Ernesto R. Unanue 56 Vice President and 1997 Vice President of Sales, Managing Director, Carribbean and South Latin America American Division Robert J. Warren 51 Vice President and 1990 -- Treasurer
There is no family relationship, either by blood, marriage or adoption, between any of the executive officers of the Registrant. 9 10 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND - ----------------------------------------------------- RELATED STOCKHOLDER MATTERS. ---------------------------- On January 30, 1997, the Board of Directors of the Registrant declared a three-for-two stock split which was effected in the form of a stock dividend, distributed on February 19, 1997, to shareholders of record on February 7, 1997. Accordingly, all numbers of Common Shares, except authorized shares and treasury shares, and all per share data have been restated to reflect this stock split in addition to the three-for-two stock split declared on January 26, 1996, distributed on February 23, 1996, to shareholders of record on February 9, 1996. The Common Shares of the Registrant are listed on the New York Stock Exchange with a symbol of DBD. The price ranges of Common Shares for the Registrant are as follows:
1997 1996 1995 ---------------- --------------- ---------------- High Low High Low High Low ------ ------ ------ ------ ------ ------ 1st Quarter $44.88 $36.38 $27.08 $22.44 $18.28 $14.67 2nd Quarter 43.63 28.00 32.17 24.17 19.67 15.45 3rd Quarter 50.63 39.75 39.08 27.75 21.95 19.22 4th Quarter 50.94 42.13 42.33 35.58 27.61 20.00 ----- ----- ------ ------ ------ ------ Full Year $50.94 $28.00 $42.33 $22.44 $27.61 $14.67 ====== ====== ====== ====== ====== ======
There were approximately 80,024 shareholders at December 31, 1997, which includes an estimated number of shareholders who have shares held for their accounts by banks, brokers, trustees for benefit plans and the agent for the dividend reinvestment plan. On the basis of amounts paid and declared the annualized quarterly dividends per share were $0.50 in 1997, $0.45 in 1996, and $0.43 in 1995. ITEM 6. SELECTED FINANCIAL DATA. - --------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993 ------------- ----------- ----------- ----------- ----------- Net Sales $1,226,936 $1,030,191 $863,409 $760,171 $623,277 Net Income 122,516 97,425 76,209 63,511 48,374 Basic earnings per share 1.78 1.42 1.11 0.93 0.71 Diluted earnings per share 1.76 1.40 1.10 0.93 0.71 Total Assets 991,050 859,101 749,795 666,174 609,019 Cash dividends paid per Common Share 0.50 0.45 0.43 0.39 0.36
10 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------------------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS The table below presents the changes in comparative financial data from 1995 to 1997. Comments on significant year-to-year fluctuations follow the table.
1997 1996 1995 ---------------------------- ------------------------- ------------------- Percent Percent Percent Percent of Net Increase of Net Percent of Net (Dollars in thousands) Amount Sales (Decrease) Amount Sales Increase Amount Sales ==================================================================================================================================== Net sales Products............................. $825,125 67.3% 21.5% $679,053 65.9% 22.7% $553,622 64.1% Services............................. 401,811 32.7 14.4 351,138 34.1 13.3 309,787 35.9 --------------------------------------------------------------------------------------------- 1,226,936 100.0 19.1 1,030,191 100.0 19.3 863,409 100.0 Cost of sales Products............................. 507,322 61.5 20.4 421,261 62.0 20.9 348,560 63.0 Services............................. 289,514 72.1 15.2 251,418 71.6 14.1 220,418 71.2 --------------------------------------------------------------------------------------------- 796,836 64.9 18.5 672,679 65.3 18.2 568,978 65.9 --------------------------------------------------------------------------------------------- Gross profit.......................... 430,100 35.1 20.3 357,512 34.7 21.4 294,431 34.1 Selling and administrative expense.... 191,842 15.7 15.2 166,572 16.2 15.3 144,490 16.7 Research, development and engineering expense................. 54,397 4.4 7.6 50,576 4.9 17.3 43,130 5.0 --------------------------------------------------------------------------------------------- 246,239 20.1 13.4 217,148 21.1 15.7 187,620 21.7 --------------------------------------------------------------------------------------------- Operating profit....................... 183,861 15.0 31.0 140,364 13.6 31.4 106,811 12.4 Other income, net...................... 6,894 0.5 (34.5) 10,533 1.0 59.3 6,612 0.8 Minority interest...................... (5,096) (0.4) 16.0 (4,393) (0.4) 2,096.5 (200) 0.0 --------------------------------------------------------------------------------------------- Income before taxes.................... 185,659 15.1 26.7 146,504 14.2 29.4 113,223 13.1 Taxes on income........................ 63,143 5.1 28.7 49,079 4.7 32.6 37,014 4.3 --------------------------------------------------------------------------------------------- Net income............................. $122,516 10.0% 25.8% $ 97,425 9.5% 27.8% $ 76,209 8.8% ====================================================================================================================================
11 12 NET SALES Net sales for 1997 totaled $1,226,936, which represented growth of $196,745 or 19.1 percent from 1996 and $363,527 or 42.1 percent from 1995. This was the Registrant's eighth consecutive year of record sales as well as the second year in the Registrant's 138-year history that sales have exceeded the $1 billion mark. Product net sales of $825,125 grew $146,072 or 21.5 percent from 1996 and $271,503 or 49.0 percent from 1995. During 1997, the Registrant continued to experience a significant growth in global sales of ATMs. Sales also increased in most other major product categories. Total U.S. product revenue was up 14.5 percent from 1996. Sales of products outside the United States increased 38.3 percent in 1997 from 1996, as well as in 1996 from 1995. Service net sales of $401,811 increased $50,673 or 14.4 percent from 1996 and were up $92,024 or 29.7 percent from 1995. The major factors contributing to the service revenue gain in 1997 were the growth of the installed base of equipment resulting from new product installations and continued growth of service offerings such as first-line maintenance. Total product backlog of unfilled orders was $276,986 at December 31, 1997, compared with $233,586 at the end of 1996 and $168,754 at the end of 1995. While this increase in backlog can be considered positive, backlog is not the sole indicator of future revenue streams. There are numerous factors which influence the amount and timing of revenue in future periods. COST OF SALES AND EXPENSES Cost of sales for 1997 was $796,836, compared with $672,679 in 1996 and $568,978 in 1995. Gross profits on product sales increased $60,011 in 1997 from 1996 and $112,741 in 1997 from 1995, to a 1997 level of $317,803. Product gross margins in 1997 were 38.5 percent of product sales, compared with 38.0 percent in 1996 and 37.0 percent in 1995. The continued increase in product gross profits was a result of increased sales volumes and cost reduction efforts. Service gross profits of $112,297 in 1997 increased from $99,720 in 1996 and $89,369 in 1995. Service gross margins as a percentage of service sales were 27.9 percent in 1997, compared with 28.4 percent in 1996 and 28.8 percent in 1995. While U.S. service gross margins have remained steady, international service gross margins have declined due to an increase in service sales to IBM, which has contractually low margins. Supporting the Registrant's volume growth and market expansion, operating expenses increased $29,091 or 13.4 percent from 1996 and were $58,619 or 31.2 percent above 1995. Total operating expenses of $246,239 or 20.1 percent of net sales in 1997 represented a decrease from the 1996 and 1995 levels of 21.1 and 21.7 percent, respectively. Operating profit of $183,861 in 1997 represented an increase of $43,497 or 31.0 percent from 1996 and $77,050 or 72.1 percent from 1995. Operating profit again grew faster than net sales as manufacturing cost reductions and operating expense controls continue to cause the operating profit margin to widen from 13.6 percent and 12.4 percent in 1996 and 1995, respectively, to 15.0 percent in 1997. OTHER INCOME, NET AND MINORITY INTEREST Other income, net decreased $3,639 or 34.5 percent from 1996 and increased $282 or 4.3 percent from 1995. Investment income decreased in 1997 as compared with 1996 due to decreases in the investment asset base. This was offset by a continuing growth in interest income from finance receivables. Minority interest of $5,096 increased from $4,393 in 1996 and $200 in 1995. Minority interest consisted primarily of income or losses allocated to the minority ownership of InterBold, Diebold Financial Equipment Company, Ltd. (China) and Diebold OLTP Systems C.A. (Venezuela). Minority interests for all companies are calculated as a percentage of profits of the joint ventures based on formulas defined in the relevant agreements establishing each venture. INCOME Income before taxes amounted to $185,659 in 1997. This was an increase of $39,155 or 26.7 percent from 1996 and $72,436 or 64.0 percent from 1995. Income before taxes also improved as a percentage of net sales, representing 15.1 percent in 1997, compared with 14.2 percent in 1996 and 13.1 percent in 1995. The effective tax rate was 34.0 percent in 1997, compared with 33.5 percent in 1996 and 32.7 percent in 1995. The primary reason for the higher tax rate in 1997 was a reduction in tax-exempt interest as a percentage of pretax income and tax law changes that affected insurance contracts. Details of the reconciliation between the U.S. statutory rate and the effective tax rate are included in Note 13 of the 1997 Consolidated Financial Statements. Net income increased to $122,516 or 10.0 percent of net sales, compared with income of $97,425 or 9.5 percent of net sales in 1996 and $76,209 or 8.8 percent of net sales in 1995. 12 13 MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION The Registrant continued to enhance its financial position during 1997. Total assets increased $131,949 or 15.4 percent to a 1997 year-end level of $991,050. Asset turnover (excluding cash, cash equivalents and short- and long-term investment securities) was 1.69 in 1997 and 1.70 in 1996. Total current assets at December 31, 1997, of $549,837 represented an increase of $62,314 or 12.8 percent from the prior year-end. The increase in trade receivables and inventories comprised the majority of this increase and was a result of higher sales volumes and continued expansion of international operations and other new business operations in 1997. Trade receivables increased $46,313 or 18.1 percent to a level of $302,885 at December 31, 1997. As a percentage of net sales, trade receivables were 24.7 percent in 1997, 24.9 percent in 1996, and 22.8 percent in 1995. Inventories at year-end 1997 totaled $128,082 which represented an increase of $18,650 or 17.0 percent from 1996. This increase in inventory was caused primarily by the growth of product sales. Short-term investments and long-term securities and other investments declined by $7,317 or 4.0 percent to a level of $174,335 at December 31, 1997, largely due to maturities being used to assist the funding of capital expenditures and Diebold Credit Corporation financing activities. The Registrant anticipates being able to meet both short- and long-term operational funding requirements without liquidating individual securities prior to maturity by varying the timing of maturities within the portfolio. However, since most of these securities are marketable, they could readily be converted into cash and cash equivalents if needed to fund future acquisitions, joint ventures and strategic alliances throughout the world as part of a continuing strategy to strengthen the Registrant's global competitiveness. Total property, plant and equipment, net of accumulated depreciation, was $143,901 at the end of 1997, which represented a net increase of $47,967 or 50.0 percent over prior year-end. Capital expenditures were $67,722 in 1997, compared with $33,581 in 1996. The 1997 capital expenditures resulted primarily from the need to meet higher manufacturing capacity requirements; expansion of facilities for research, software development, management development and support services; and continued investment in internal applications hardware and software. The accounting for the Registrant's investment in projects related to internal applications hardware and software has been done in accordance with EITF Issue 97-13, "Accounting for Business Process Reengineering Costs." Accordingly, the Registrant has expensed as incurred, when applicable, business process reengineering costs as well as expenditures incurred for preliminary software project activities. The Registrant has capitalized external costs related to application development stage activities, post-implementation/operation stage activities and fixed asset acquisitions, such as new computer equipment, office furniture and work stations, related to these projects. In 1996, the Registrant announced the expansion of Diebold Credit Corporation, to manage the growing business of financing to customers. Finance receivables increased from $46,030 in 1996 to $74,529 in 1997 due to shipment of additional equipment under finance agreements. Total current liabilities at December 31, 1997, were $242,080, which represented an increase of $13,860 or 6.1 percent from the prior year-end. The primary cause for the increase in current liabilities was due to an increase in accounts payable of $9,334 or 9.9 percent to a level of $104,043 from $94,709 at the prior year-end. The Registrant's current ratio was 2.3 at the end of 1997, compared with 2.1 at the end of 1996. At December 31, 1997, the Registrant had unused lines of credit totaling $150,000, all unrestricted as to use. In addition, the Registrant issued $20,800 of industrial development revenue bonds in 1997. The proceeds of these bonds were used to finance the Registrant's three new manufacturing facilities located in Staunton and Danville, Virginia, and in Lexington, North Carolina. The Registrant's financial position provides it with sufficient resources to meet projected future capital expenditures, dividends and working capital requirements. However, if the need arises, the Registrant's strong financial position should ensure the availability of adequate additional financial resources. Pension liabilities were $20,615 at December 31, 1997, representing an increase of $307 or 1.5 percent over prior year-end. The net periodic pension costs of $4,646 charged to income in 1997 represented a decrease of $23 from the prior year. Minority interests of $16,941 represented the minority interest in InterBold owned by IBM, the minority interests in Diebold Financial Equipment Company, Ltd. (China) owned by the Aircraft Industries of China and the Industrial and Commercial Bank of China, Shanghai Pudong Branch and the minority interests in Diebold OLTP Systems C.A. (Venezuela), owned by five individual investors. On January 27, 1998, the Registrant completed its purchase of IBM's 30 percent interest in InterBold for $16.1 million, which represented the value of IBM's tax capital account in InterBold. 13 14 Shareholders' equity increased $93,011 or 16.2 percent to $668,581 at December 31, 1997. Shareholders' equity per share was $9.69 at the end of 1997, compared with $8.36 in 1996. The Common Shares of the Registrant are listed on the New York Stock Exchange with a symbol of DBD. There were approximately 7,594 registered shareholders of record as of December 31, 1997. The Board of Directors declared a first-quarter 1998 cash dividend of $0.14 per share. This amount, which represents a 12 percent increase from the prior year's quarterly dividend rate, will be paid on March 27, 1998, to shareholders of record on March 6, 1998. Comparative quarterly cash dividends paid in 1997 and 1996 were $0.125 and $0.1133, respectively. MANAGEMENT'S ANALYSIS OF CASH FLOWS During 1997, the Registrant generated $111,330 in cash from operating activities, compared with $96,456 in 1996 and $79,991 in 1995. In addition to net income of $122,516 adjusted for depreciation, amortization and other charges of $28,450, increases in accounts payable and certain other assets and liabilities of $20,730 also increased cash provided by operations. Cash was utilized in operations for increases in inventory levels and trade receivables as a result of additional sales volumes and growth of international operations. Expressed as a percentage of total assets employed, the Registrant's cash yield from operations was 11.2 percent in 1997 and 1996, compared with 10.7 percent in 1995. Net cash generated from operating activities in 1997 was used to reinvest $102,725 in assets of the Registrant, compared with $55,299 in 1996 and $52,012 in 1995. The Registrant returned $34,473 to shareholders in the form of cash dividends paid during 1997, which was a 10.5 percent increase from 1996 and a 17.7 percent increase from 1995. OTHER BUSINESS INFORMATION - YEAR 2000 DISCLOSURE The Registrant has begun to modify its information systems to enable proper processing of transactions relating to the year 2000 and beyond. Project completion is planned for the first quarter of 1999. The Registrant is expensing as incurred all costs associated with these system changes. These costs are not expected to have a material effect on the Registrant's financial position or results of operations. 14 15 CONSOLIDATED BALANCE SHEETS DIEBOLD, INCORPORATED AND SUBSIDIARIES DECEMBER 31, 1997 AND 1996 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997 1996 =================================================================================================================================== ASSETS Current assets Cash and cash equivalents........................................................ $ 20,296 $ 21,885 Short-term investments (Note 3).................................................. 36,473 43,249 Trade receivables................................................................ 302,885 256,572 Inventories (Note 4)............................................................. 128,082 109,432 Finance receivables (Note 6)..................................................... 13,559 7,931 Deferred income taxes (Note 13).................................................. 32,159 34,801 Prepaid expense and other current assets......................................... 16,383 13,653 - ----------------------------------------------------------------------------------------------------------------------------------- Total current assets.......................................................... 549,837 487,523 - ----------------------------------------------------------------------------------------------------------------------------------- Securities and other investments (Note 3).......................................... 137,862 138,403 Property, plant and equipment, at cost (Note 5).................................... 259,634 203,103 Less accumulated depreciation and amortization................................... 115,733 107,169 - ----------------------------------------------------------------------------------------------------------------------------------- 143,901 95,934 Deferred income taxes (Note 13)................................................... 8,654 7,426 Finance receivables (Note 6)...................................................... 60,970 38,099 Other assets...................................................................... 89,826 91,716 - ----------------------------------------------------------------------------------------------------------------------------------- $991,050 $859,101 =================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable................................................................. $104,043 $ 94,709 Estimated income taxes........................................................... 12,721 11,300 Accrued insurance................................................................ 18,972 17,274 Accrued installation costs....................................................... 12,909 10,066 Deferred income.................................................................. 60,891 69,094 Other current liabilities........................................................ 32,544 25,777 - ----------------------------------------------------------------------------------------------------------------------------------- Total current liabilities..................................................... 242,080 228,220 - ----------------------------------------------------------------------------------------------------------------------------------- Bonds payable (Note 8)............................................................. 20,800 --- Pensions (Note 11)................................................................. 20,615 20,308 Postretirement benefits (Note 11).................................................. 22,033 21,863 Minority interest (Note 2)......................................................... 16,941 13,140 Commitments and contingencies (Note 14)............................................ --- --- Shareholders' equity (Note 9) Preferred Shares, no par value, authorized 1,000,000 shares, none issued.................................................. --- --- Common Shares, par value $1.25; authorized 125,000,000 shares; issued 69,275,714 and 68,997,276 shares, respectively; outstanding 69,004,838 and 68,840,591 shares, respectively.................... 86,595 86,246 Additional capital............................................................... 38,247 28,110 Retained earnings................................................................ 566,710 478,667 Treasury shares, at cost (270,876 and 156,685 shares, respectively).............. (12,882) (7,170) Other............................................................................ (10,089) (10,283) - ----------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity..................................................... 668,581 575,570 - ----------------------------------------------------------------------------------------------------------------------------------- $991,050 $859,101 ===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 15 16 CONSOLIDATED STATEMENTS OF INCOME DIEBOLD, INCORPORATED AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (In thousands except per share amounts)
1997 1996 1995 ============================================================================================================================= Net sales Products............................................................... $825,125 $679,053 $553,622 Services............................................................... 401,811 351,138 309,787 - ----------------------------------------------------------------------------------------------------------------------------- 1,226,936 1,030,191 863,409 - ----------------------------------------------------------------------------------------------------------------------------- Cost of sales Products............................................................... 507,322 421,261 348,560 Services............................................................... 289,514 251,418 220,418 - ----------------------------------------------------------------------------------------------------------------------------- 796,836 672,679 568,978 - ----------------------------------------------------------------------------------------------------------------------------- Gross profit............................................................. 430,100 357,512 294,431 Selling and administrative expense....................................... 191,842 166,572 144,490 Research, development and engineering expense............................ 54,397 50,576 43,130 - ----------------------------------------------------------------------------------------------------------------------------- 246,239 217,148 187,620 - ----------------------------------------------------------------------------------------------------------------------------- Operating profit......................................................... 183,861 140,364 106,811 Other income (expense) Investment income...................................................... 19,109 19,307 16,111 Miscellaneous, net..................................................... (12,215) (8,774) (9,499) Minority interest (Note 2)............................................... (5,096) (4,393) (200) - ----------------------------------------------------------------------------------------------------------------------------- Income before taxes...................................................... 185,659 146,504 113,223 Taxes on income (Note 13)................................................ 63,143 49,079 37,014 - ----------------------------------------------------------------------------------------------------------------------------- Net income............................................................... $122,516 $ 97,425 $ 76,209 ============================================================================================================================= Weighted-average number of shares outstanding: * Basic.................................................................. 68,939 68,796 68,649 Diluted................................................................ 69,490 69,350 69,022 Basic earnings per share*................................................ $ 1.78 $ 1.42 $ 1.11 Diluted earnings per share*.............................................. $ 1.76 $ 1.40 $ 1.10 - -----------------------------------------------------------------------------------------------------------------------------
* See Notes 9 and 10 See accompanying Notes to Consolidated Financial Statements. 16 17 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY DIEBOLD, INCORPORATED AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands)
Common Shares -------------------- Par Additional Retained Treasury Number* Value Capital Earnings Shares Other* Total =================================================================================================================================== Balance, January 1, 1995............................. 30,515,146 $38,144 $68,940 $365,513 $(3,186) $(9,572) $459,839 - ----------------------------------------------------------------------------------------------------------------------------------- Net income - 1995............................ 76,209 76,209 Stock options exercised...................... 46,149 58 961 1,019 Unearned compensation........................ 9,000 11 294 344 649 Performance shares (Note 9).................. 55,050 69 1,755 1,824 Dividends declared (Note 9).................. (29,290) (29,290) Pensions (Note 11)........................... (1,087) (1,087) Translation adjustment....................... (2,982) (2,982) Treasury shares.............................. (445) (663) (1,108) Unrealized gain on investment securities (Note 3)............. 2,607 2,607 Three-for-two stock split.................... 15,268,333 19,085 (19,085) --- - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995.......................... 45,893,678 $57,367 $52,420 $412,432 $(3,849) $(10,690) $507,680 - ----------------------------------------------------------------------------------------------------------------------------------- Net income - 1996............................ 97,425 97,425 Stock options exercised...................... 86,918 108 1,208 1,316 Unearned compensation........................ 3,000 4 104 414 522 Performance shares (Note 9).................. 67,892 85 3,060 3,145 Dividends declared (Note 9).................. (31,190) (31,190) Pensions (Note 11)........................... 185 185 Translation adjustment....................... 240 240 Treasury shares.............................. (3,321) (3,321) Unrealized loss on investment securities (Note 3)............. (432) (432) Three-for-two stock split.................... 22,945,788 28,682 (28,682) --- - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996.......................... 68,997,276 $86,246 $28,110 $478,667 $(7,170) $(10,283) $575,570 - ----------------------------------------------------------------------------------------------------------------------------------- Net income - 1997............................ 122,516 122,516 Stock options exercised...................... 180,247 226 5,821 6,047 Unearned compensation........................ 11,000 14 430 (171) 273 Performance shares (Note 9).................. 87,191 109 3,886 3,995 Dividends declared (Note 9).................. (34,473) (34,473) Pensions (Note 11)........................... 217 217 Translation adjustment....................... (185) (185) Treasury shares.............................. (5,712) (5,712) Unrealized gain on investment securities (Note 3)............. 333 333 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997.......................... 69,275,714 $86,595 $38,247 $566,710 $(12,882) $(10,089) $668,581 - -----------------------------------------------------------------------------------------------------------------------------------
*See Note 9 See accompanying Notes to Consolidated Financial Statements. 17 18 CONSOLIDATED STATEMENTS OF CASH FLOWS DIEBOLD, INCORPORATED AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands)
1997 1996 1995 =================================================================================================================================== Cash flow from operating activities: Net income..................................................... $122,516 $97,425 $76,209 - ----------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Minority share of income..................................... 5,096 4,393 200 Depreciation and amortization................................ 18,701 20,984 14,174 Other charges and amortization............................... 9,749 11,979 15,284 Deferred income taxes........................................ 1,118 (5,252) (4,527) Loss on disposal of assets, net.............................. 1,113 610 1,786 Loss (gain) on sale of investments, net...................... --- 10 (810) Cash provided (used) by changes in certain assets and liabilities: Trade receivables.......................................... (46,313) (59,427) (44,038) Inventories................................................ (18,650) (18,430) (5,459) Prepaid expenses and other current assets.................. (2,730) (3,948) (2,450) Accounts payable........................................... 9,334 27,805 5,942 Other certain assets and liabilities....................... 11,396 20,307 23,680 - ----------------------------------------------------------------------------------------------------------------------------------- Total adjustments.............................................. (11,186) (969) 3,782 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities...................... 111,330 96,456 79,991 Cash flow from investing activities: Proceeds from maturities of investments........................ 52,109 55,023 64,008 Proceeds from sales of investments............................. --- 5,675 16,184 Payments for purchases of investments.......................... (44,486) (69,498) (66,052) Capital expenditures........................................... (67,722) (33,581) (35,308) Increase in net finance receivables............................ (28,499) (2,821) (8,839) Increase in other certain assets............................... (14,068) (10,223) (22,131) Other.......................................................... (59) 126 126 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities.......................... (102,725) (55,299) (52,012) Cash flow from financing activities: Dividends paid................................................. (34,473) (31,190) (29,290) Distribution of affiliate's earnings to minority interest holder....................................................... (1,295) (5,719) (2,527) Proceeds from issuance of Common Shares........................ 4,774 1,248 1,177 Proceeds from long-term borrowings............................. 20,800 --- --- Other.......................................................... --- 691 1,074 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities.......................... (10,194) (34,970) (29,566) - ----------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents................. (1,589) 6,187 (1,587) Cash and cash equivalents at the beginning of the year........... 21,885 15,698 17,285 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at the end of the year................. $20,296 $21,885 $15,698 ===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 18 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DIEBOLD, INCORPORATED AND SUBSIDIARIES (Dollars in thousands except per share amounts) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include the accounts of the Registrant and its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. STATEMENTS OF CASH FLOWS For the purposes of the Consolidated Statements of Cash Flows, the Registrant considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash paid during 1997, 1996 and 1995 for income taxes amounted to $60,738 $47,293 and $40,487, respectively. INTERNATIONAL OPERATIONS The Registrant translates the assets and liabilities of its non-U.S. subsidiaries at the exchange rates in effect at year-end and the results of operations at the average rate throughout the year. The translation adjustments are recorded directly as a separate component of shareholders' equity, while transaction gains (losses) are included in net income. Sales to customers outside the United States approximated 26.1 percent of net sales in 1997, 22.3 percent in 1996, and 19.8 percent in 1995. FINANCIAL INSTRUMENTS The carrying amount of financial instruments including cash and cash equivalents, trade receivables and accounts payable approximated fair value as of December 31, 1997 and 1996, because of the relatively short maturity of these instruments. TRADE RECEIVABLES AND SALES Revenue, after provision for installation, is generally recognized based on the terms of the contracts which, for product sales, is usually when material to be installed for customer orders is shipped from the plants. The equipment that is sold is usually shipped and installed within one year. Installation that extends beyond one year is ordinarily attributable to causes not under the control of the Registrant. The concentration of credit risk in the Registrant's trade receivables with respect to the banking and financial services industries is substantially mitigated by the Registrant's credit evaluation process, reasonably short collection terms and the geographical dispersion of sales transactions from a large number of individual customers. The Registrant maintains allowances for potential credit losses, and such losses have been minimal and within management's expectations. INVENTORIES Inventories are valued at the lower of cost or market applied on a first-in, first-out basis. Cost is determined on the basis of actual cost. INVESTMENT SECURITIES Investment in debt and equity securities with readily determinable fair values are accounted for at fair value due to the fact that the Registrant's investment portfolio is classified as available-for-sale. DEPRECIATION AND AMORTIZATION Depreciation of property, plant and equipment is computed using the straight-line method for financial statement purposes. Accelerated methods of depreciation are used for federal income tax purposes. Amortization of leasehold improvements is based upon the shorter of original terms of the lease or life of the improvement. RESEARCH AND DEVELOPMENT Total research and development costs charged to expense were $45,184, $41,797 and $35,470 in 1997, 1996 and 1995, respectively. 19 20 OTHER ASSETS Other assets primarily consist of the costs in excess of the net assets of acquired businesses (goodwill), pension assets and certain other assets. These assets are stated at cost and, if applicable, are amortized ratably over a period of three to 25 years. The Registrant periodically monitors the value of goodwill by assessing whether the asset can be recovered over its remaining useful life through undiscounted cash flows generated by the underlying businesses. DEFERRED INCOME Deferred income is recognized for customer billings in advance of the period in which the service will be performed and is recognized in income on a straight-line basis over the contract period. STOCK-BASED COMPENSATION Prior to January 1, 1996, the Registrant accounted for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Registrant adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, FAS 123 also allows entities to continue to apply the provisions of APB Opinion 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair value based method defined in FAS 123 had been applied. The Registrant has elected to continue to apply the provisions of APB Opinion 25 and provide the pro forma disclosure provisions of FAS 123. TAXES ON INCOME Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The Registrant adopted this standard, as required, for its December 31, 1997 Financial Statements. For the years presented, the Registrant presents both basic and diluted earnings per share. Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents were exercised and then shared in the earnings of the Registrant. USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS The Registrant has reclassified the presentation of certain prior-year information to conform with the current presentation format. NOTE 2: RELATED PARTY TRANSACTIONS INTERBOLD JOINT VENTURE The Consolidated Financial Statements include the accounts of InterBold, a joint venture between the Registrant and IBM, of which the Registrant owns 70 percent. The joint venture provides ATMs and other financial self-service systems worldwide. IBM's ownership interest in InterBold is reflected in "minority interest" on the Registrant's Consolidated Balance Sheets. Net profits of InterBold are allocated based upon a formula as specified in the partnership agreement. On June 27, 1997, the Registrant announced that InterBold would discontinue its international marketing and distribution agreement with IBM. 20 21 On July 2, 1997, IBM informed the Registrant that it was exercising its option pursuant to the InterBold contractual arrangements to sell its 30 percent minority interest in InterBold to the Registrant. On January 27, 1998, the Registrant completed its purchase of IBM's 30 percent minority interest in InterBold for $16,100 which represented IBM's tax capital account on July 2, 1997. The Registrant financed the purchase with its cash reserves. This transaction did not have a material effect on the Registrant's financial position or results of operations. The Registrant will continue its discussions with IBM as well as other companies to ensure efficient international distribution for self-service products. NOTE 3: INVESTMENT SECURITIES At December 31, 1997 and 1996, the investment portfolio was classified as available-for-sale. The marketable debt and equity securities are stated at fair value, and the Registrant includes as a separate component of shareholders' equity until realized net unrealized holding gains of $859 (net of taxes of $464) and net unrealized holding gains of $526 (net of taxes of $283) at December 31, 1997 and 1996, respectively. The fair value of securities and other investments is estimated based on quoted market prices. The Registrant's investment securities, excluding insurance contracts, at December 31, are summarized as follows:
Amortized Fair Cost Basis Value - ------------------------------------------------------------------- 1997: =================================================================== Short-term investments: Tax-exempt municipal bonds $ 36,331 $ 36,473 Securities and other investments: Tax-exempt municipal bonds $ 85,245 $ 86,247 Equity securities.......... 28,668 28,847 - ------------------------------------------------------------------- $ 113,913 $115,094 - -------------------------------------------------------------------
Amortized Fair Cost Basis Value - ------------------------------------------------------------------- 1996: =================================================================== Short-term investments: Tax-exempt municipal bonds $ 39,944 $ 40,137 Certificates of deposit......... 3,112 3,112 - ------------------------------------------------------------------- $ 43,056 $ 43,249 - ------------------------------------------------------------------- Securities and other investments: Tax-exempt municipal bonds $ 94,473 $ 95,280 Equity securities.......... 26,787 26,596 - ------------------------------------------------------------------- $ 121,260 $121,876 - -------------------------------------------------------------------
The contractual maturities of tax-exempt municipal bonds at December 31, 1997, are as follows:
Amortized Fair Cost Basis Value =============================================================== Due within one year........... $ 36,331 $ 36,473 Due after one year through five years........... 85,245 86,247 - --------------------------------------------------------------- $ 121,576 $122,720 - ---------------------------------------------------------------
NOTE 4: INVENTORIES Major classes of inventories at December 31 are summarized as follows:
1997 1996 =============================================================== Finished goods and service parts........... $ 44,776 $ 40,348 Work in process........... 82,985 68,967 Raw materials............. 321 117 - --------------------------------------------------------------- $128,082 $ 109,432 - ---------------------------------------------------------------
21 22 NOTE 5: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, together with annual depreciation and amortization rates, consisted of the following:
Annual 1997 1996 Rates ================================================================= Land and land improvements......... $ 5,305 $ 4,805 5-20% Buildings.............. 42,552 36,004 2-34% Machinery, equipment and rotatable spares............... 150,972 134,398 5-40% Leasehold improvements......... 2,981 2,278 Lease Term Construction in progress............. 57,824 25,618 --- - ----------------------------------------------------------------- $ 259,634 $ 203,103 - ----------------------------------------------------------------- NOTE 6: FINANCE RECEIVABLES The components of finance receivables for the net investment in sales-type leases are as follows: 1997 1996 ============================================================== Total minimum finance receivables.. $93,043 $65,403 Estimated unguaranteed residual values...... 3,051 254 - -------------------------------------------------------------- 96,094 65,657 Less: Unearned interest income....... (20,469) (19,543) Unearned residuals (1,096) (84) - -------------------------------------------------------------- (21,565) (19,627) $74,529 $46,030 - --------------------------------------------------------------
Future minimum finance receivables due from customers under sales-type leases as of December 31, 1997, are as follows: - -------------------------------------------------------------- 1998...................... $16,391 1999...................... 16,883 2000...................... 17,187 2001...................... 17,316 2002...................... 15,549 Thereafter................ 9,717 - -------------------------------------------------------------- $93,043 - --------------------------------------------------------------
NOTE 7: SHORT-TERM FINANCING At December 31, 1997, bank credit lines approximated $150,000 with various banks for short-term financing. The Registrant had no outstanding borrowings under these agreements at December 31, 1997 and 1996. The Registrant has informal understandings with certain banks to maintain compensating balances which are not legally restricted as to withdrawal. The lines of credit can be withdrawn at each bank's option. NOTE 8: BONDS PAYABLE Bonds payable at December 31 consisted of the following:
1997 1996 =============================================================== Industrial Development Revenue Bond due January 1, 2017............... $ 5,800 $--- Industrial Development Revenue Bond due April 1, 2017.................. 7,500 --- Industrial Development Revenue Bond due June 1, 2017................... 7,500 --- - --------------------------------------------------------------- $20,800 $--- - ---------------------------------------------------------------
In 1997, three industrial development revenue bonds were issued on behalf of the Registrant. The proceeds from the bond issuances were used to construct new manufacturing facilities in Danville and Staunton, Virginia, and Lexington, North Carolina. The Registrant guaranteed the payments of principal and interest on the bonds by obtaining letters of credit. Each industrial development revenue bond carries a variable interest rate which is reset weekly by the remarketing agents. The Registrant is in compliance with the covenants of its loan agreements and believes that the covenants will not restrict its future operations. Interest paid on these bonds charged to expense was $176 in 1997. NOTE 9: SHAREHOLDERS' EQUITY On January 30, 1997, the Board of Directors declared a three-for-two stock split effected in the form of a stock dividend, distributed on February 19, 1997, to shareholders of record on February 7, 1997. Prior to the 1997 stock split, on January 26, 1996, the Board of Directors declared a three-for-two stock split effected in the form of a stock dividend, distributed on February 23, 1996, to shareholders of record on February 9, 1996. Accordingly, all numbers of Common Shares, except authorized shares and treasury shares, and all per share data have been restated to reflect these stock splits. 22 23 On the basis of amounts declared and paid, the annualized quarterly dividends per share were $0.50 in 1997, $0.45 in 1996 and $0.43 in 1995. At December 31, 1997, the Registrant had three stock-based compensation plans. As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Registrant applies APB Opinion 25 and related interpretations in accounting for its plans. Under the guidelines of APB Opinion 25, compensation cost for fixed and variable stock-based awards is measured by the excess, if any, of the market price of the underlying stock over the exercise price of the option at the grant date. In the following chart, the Registrant provides net income and basic earnings per share reduced by the pro forma amounts calculating compensation cost for the Registrant's fixed stock option plan consistent with FAS 123. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 5.7, 5.5 and 6.5 percent; dividend yield of 2.2 percent in 1997 and 1996, and 3.0 percent in 1995; expected lives of seven, six and four years for options granted in 1997, 1996 and 1995; and volatility of 19, 21 and 20 percent.
1997 1996 1995 -------- --------- -------- Net income As reported............. $122,516 $ 97,425 $ 76,209 Pro forma............... $120,556 $ 97,030 $ 76,096 Basic earnings per share As reported............. $ 1.78 $ 1.42 $ 1.11 Pro forma............... $ 1.75 $ 1.41 $ 1.11
Pro forma net income reflects only options granted since January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under FAS 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to January 1, 1995, is not considered. FIXED STOCK OPTIONS Under the 1991 Equity and Performance Incentive Plan, as Amended and Restated (1991 Plan), Common Shares are available for grant of options at a price not less than 85 percent of the fair market value of the Common Shares at the time of grant. The exercise price of options granted since January 1, 1995, was equal to the market price at the grant date, and accordingly, no compensation cost has been recognized. In general, options are exercisable in cumulative annual installments over five years, beginning one year from the date of grant. The number of Common Shares that may be issued or delivered pursuant to the 1991 Plan is 6,265,313, of which 5,224,066 shares were available for issuance at December 31, 1997. The 1991 Plan will expire on April 2, 2002. The 1991 Plan replaced the Amended and Extended 1972 Stock Option Plan (1972 Plan), which expired by its terms on April 2, 1992. Awards already outstanding under the 1972 Plan are unaffected by the adoption of the 1991 Plan. In 1997, the Registrant announced the 1997 Milestone Stock Option Plan (Milestone Plan). The purpose of the Milestone Plan is to reward the Registrant's employee associates for their part in helping the Registrant reach $1 billion in revenues in 1996, and to foster the interest of the employee associates in the growth and development of the Registrant by encouraging stock ownership. The Milestone Plan granted options on March 3, 1997, for 100 Common Shares to all eligible salaried and hourly employee associates. The exercise price of the options granted under the Milestone Plan was equal to the market price at the grant date, and accordingly, no compensation cost has been recognized. In general all options are exercisable beginning two years from the date of grant. The number of Common Shares that may be issued or delivered pursuant to the Milestone Plan is 600,000 of which 559,900 shares were available for issuance at December 31, 1997. The Milestone Plan will expire on March 2, 2002. 23 24 The following is a summary with respect to options outstanding at December 31, 1997, 1996 and 1995, and activity during the years ending on those dates:
1997 1996 1995 ----------------------- ----------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at the beginning of year 1,529,545 $ 18 1,180,283 $ 12 996,366 $ 11 Options granted 829,500 41 500,438 29 308,476 16 Options exercised (203,260) 10 (130,377) 10 (103,836) 8 Options expired or forfeited (34,562) 40 (20,799) 17 (20,723) 14 - --------------------------------------------------------------------------------------------------------------------------- Outstanding at the end of year 2,121,223 $ 27 1,529,545 $ 18 1,180,283 $ 12 - --------------------------------------------------------------------------------------------------------------------------- Options exercisable at the end of year 694,448 577,198 472,712 Weighted-average fair value of options granted during the year $ 7 $ 6 $ 4
The following table summarizes pertinent information regarding fixed stock options outstanding and options exercisable at December 31, 1997:
--------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------ ------------------------------------- Weighted- Average Number Remaining Weighted- Number Weighted- of Contractual Average of Average Options Life Exercise Options Exercise Range of Exercise Prices Outstanding (In years) Price Exercisable Price - ----------------------------------------------------------------------------------------------------------------------------- $ 11 - 15 22,780 0.33 $ 12 22,780 $ 12 6 - 18 46,371 1.00 11 37,509 10 7 - 16 80,469 2.00 10 60,213 8 6 - 36 103,144 3.00 15 68,971 9 9 - 42 748,975 4.00 37 98,425 10 13 - 13 154,394 5.00 13 117,934 13 17 - 18 126,410 6.00 17 70,070 17 15 - 19 247,820 7.00 16 119,569 16 24 - 38 333,960 8.00 27 76,477 24 33 - 38 256,900 9.00 38 22,500 38 --------- ---------- 2,121,223 6.00 $27.17 694,448 $14.49 --------- ----------
24 25 RESTRICTED SHARE GRANTS The 1991 Plan also provides for the issuance of restricted shares without cost to certain employee associates. Outstanding shares granted at December 31, 1997, totaled 35,748 restricted shares. The shares are subject to forfeiture under certain circumstances. Unearned compensation representing the fair market value of the shares at the date of grant will be charged to income over the three-to-five-year vesting period. PERFORMANCE SHARE GRANTS The 1991 Plan also provides for the issuance of Common Shares based on certain management objectives achieved within a specified performance period of at least one year as determined by the Board of Directors. The management objectives set in 1997 are based on a three-year performance period ending December 31, 1999. The management objectives for the period ended December 31, 1997, were set in April 1995. The objectives were exceeded and a payout was made in the form of cash in 1998. The compensation cost that has been charged against income for its performance-based share grant plan was $10,400, $13,534 and $7,201 in 1997, 1996 and 1995, respectively. In February 1989, the Board of Directors declared a dividend distribution of one right for each outstanding Common Share of the Registrant. Pursuant to the Rights Agreement covering the Shareholder Rights Plan, each right entitles the registered holder to purchase one one-hundredth of a share of Cumulative Redeemable Serial Preferred Shares, without par value, at a price of $130. The rights become exercisable 20 days after a person or group acquires 20 percent or more of the Registrant's shares. At that time, rights certificates would be issued and could be traded independently from the Registrant's shares. If the Registrant is involved in certain mergers or other business combination transactions at any time after the rights become exercisable, then the rights will be modified so as to entitle the holder to buy a number of an acquiring Registrant's shares having a market value of twice the exercise price of each right. In addition, if a holder of 20 percent or more acquires the Registrant by means of a reverse merger in which the Registrant and its shares survive, or engages in certain other self-dealing transactions with the Registrant, each right not owned by the acquirer will become exercisable for a number of Common Shares of the Registrant with a market value of two times the exercise price of the right. The rights are redeemable for $0.01 per right at any time before 20 percent or more of the Registrant's shares have been acquired, and will expire on February 10, 1999, unless redeemed earlier by the Registrant. As a result of the stock split effected on February 19, 1997, each Common Share is currently accompanied by one-fifth of a right. NOTE 10: EARNINGS PER SHARE (In thousands except per share amounts) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The Registrant adopted this standard, as required for its December 31, 1997 Financial Statements. For the years presented, the Registrant presents both basic and diluted earnings per share. The following data show the amounts used in computing earnings per share and the effect on the weighted-average number of shares of dilutive potential common stock.
1997 1996 1995 - -------------------------------------------------------------------------- NUMERATOR: Income available to common shareholders used in basic and diluted earnings per share $122,516 $ 97,425 $ 76,209 DENOMINATOR: Weighted-average number of Common Shares used in basic earnings per share 68,939 68,796 68,649 Effect of dilutive securities: Fixed stock options 551 486 323 Performance share grants -- 68 50 ------------------------------------ Weighted-average number of Common Shares and dilutive potential Common Shares used in diluted earnings per share 69,490 69,350 69,022 ------------------------------------ BASIC EARNINGS PER SHARE $ 1.78 $ 1.42 $ 1.11 DILUTED EARNINGS PER SHARE $ 1.76 $ 1.40 $ 1.10
Fixed stock options on 179 Common Shares were not included in computing diluted earnings per share in 1996, because their effects were antidilutive. NOTE 11: PENSION PLANS AND POSTRETIREMENT BENEFITS The Registrant has several pension plans covering substantially all employee associates. Plans covering salaried employee associates provide pension benefits that are based on the employee associate's 25 26 compensation during the 10 years before retirement. The Registrant's funding policy for those plans is to contribute annually at an actuarially determined rate. Plans covering hourly employee associates and union members generally provide benefits of stated amounts for each year of service. The Registrant's funding policy for those plans is to make at least the minimum annual contributions required by applicable regulations. Approximately 90 percent of the plan assets at September 30, 1997 and 1996, were invested in listed stocks and investment grade bonds. A summary of the components of net periodic pension costs follows:
1997 1996 1995 ==================================================== Benefit earned during the year $ 7,795 $ 7,140 $ 6,360 Interest accrued on projected benefit obligation 14,260 13,405 12,268 Actual return on plan assets (59,071) (21,546) (42,503) Net amortization and deferral 41,662 5,670 27,403 - ---------------------------------------------------- Net periodic pension costs $ 4,646 $ 4,669 $ 3,528 - ----------------------------------------------------
Assumptions used to measure the projected benefit obligation and the expected long-term rate of return on plan assets at September 30, 1997 and 1996, and December 31, 1995, include a discount rate of 7.25 percent, an expected long-term rate of return on assets of 9 percent, and a rate of increase in compensation levels of 5 percent. Minimum liabilities have been recorded in 1997, 1996 and 1995 for the plans whose total accumulated benefit obligation exceeded the fair value of the plan's assets. The Registrant offers an employee associate 401(k) Savings Plan (Savings Plan) to encourage eligible employee associates to save on a regular basis by payroll deductions, and to provide them with an opportunity to become shareholders of the Registrant. Under the Savings Plan from January 1, through March 31, 1997, the Registrant matched 80 percent of a participating employee associate's first 4 percent of contributions and 40 percent of a participating employee associate's second 4 percent of contributions. Under the Savings Plan from April 1 through December 31, 1997, the Registrant matched 100 percent of a participating employee associate's first 4 percent of contributions and 40 percent of a participating employee associate's second 4 percent of contributions. 26 27 The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheets at December 31, for the Registrant's defined benefit pension plans:
1997 1996 =============================================================================================================================== Plan Assets Accumulated Plan Assets Accumulated in Excess of Benefits in in Excess of Benefits in Accumulated Excess of Accumulated Excess of Benefits Plan Assets Benefits Plan Assets =============================================================================================================================== Fair value of plan assets......................... $256,426 $ 15,217 $205,962 $ 11,724 Less: Actuarial present value of projected benefit obligation: Vested employee associates.................... 126,832 29,255 117,974 24,399 Nonvested employee associates................. 11,827 2,730 6,405 4,843 - ------------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation................ 138,659 31,985 124,379 29,242 Amounts related to future salary increases............................ 41,664 2,347 36,037 2,249 - ------------------------------------------------------------------------------------------------------------------------------- Total projected benefit obligation................ 180,323 34,332 160,416 31,491 - ------------------------------------------------------------------------------------------------------------------------------- Plan assets less projected benefits............... 76,103 (19,115) 45,546 (19,767) Unrecognized prior service costs, net........... 5,133 2,191 5,718 2,667 Unamortized net transition (asset) obligation.................................... (11,319) 179 (12,863) 240 Unrecognized net (gain) loss.................... (51,624) 4,258 (19,016) 4,597 Adjustment required to recognize minimum liability............................. --- (4,281) --- (5,255) - ------------------------------------------------------------------------------------------------------------------------------- Prepaid pension costs (accrued obligations)..... $18,293 $(16,768) $19,385 $(17,518) ===============================================================================================================================
27 28 In addition to providing pension benefits, the Registrant provides healthcare and life insurance benefits for certain retired employee associates. Eligible employee associates may be entitled to these benefits based upon years of service with the Registrant, age at retirement and collective bargaining agreements. Presently, the Registrant has made no commitments to increase these benefits for existing retirees or for employee associates who may become eligible for these benefits in the future. Currently there are no plan assets, and the Registrant funds the benefits as the claims are paid. A summary of the components of net periodic postretirement (life and healthcare) benefit costs follows:
1997 1996 1995 ======================================================================== Interest cost............. $1,788 $1,806 $2,104 Service cost.............. 62 57 61 Amortization ............. -- -- 207 - ------------------------------------------------------------------------ Net periodic postretirement benefit cost............. $1,850 $1,863 $2,372 - ------------------------------------------------------------------------
The effect of a one percentage point annual increase in the assumed healthcare cost trend rate would increase the service and interest cost components of the healthcare benefits from $1,620 to $1,750, an 8.0 percent increase. Measurement of the accumulated postretirement benefit obligation at September 30, 1997 and 1996, was based on a discount rate of 7.25 percent in 1997 and 1996. The following table sets forth the components of the accumulated postretirement benefit obligation at December 31:
1997 1996 ============================================================= Retirees ..................... $ 19,560 $ 24,545 Fully eligible active plan participants ........ 288 209 Other active plan participants 930 841 - ------------------------------------------------------------- Accumulated postretirement benefit obligation ....... 20,778 25,595 Unrecognized net gain (loss) . 4,551 (778) - ------------------------------------------------------------- Accrued postretirement benefit obligation ....... $ 25,329 $ 24,817 - -------------------------------------------------------------
The postretirement benefit obligation was determined by application of the terms of medical and life insurance plans together with relevant actuarial assumptions and healthcare cost trend rates projected at annual rates declining from 8.5 percent in 1997 to 4.5 percent through the year 2005 as well as the following years. The effect of a one percentage point annual increase in these assumed healthcare cost trend rates would increase the healthcare accumulated postretirement benefit obligation from $18,339 to $19,850, an 8.2 percent increase. NOTE 12: LEASES The Registrant's future minimum lease payments due under operating leases for real and personal property in effect at December 31, 1997, are as follows:
Real Vehicles and Expiring Total Estate Equipment =================================================== 1998 ........... $25,056 $ 7,941 $17,115 1999 ........... 18,246 6,103 12,143 2000 ........... 12,033 5,197 6,836 2001 ........... 6,720 4,402 2,318 2002 ........... 3,922 3,916 6 Thereafter ..... 9,085 9,085 -- - --------------------------------------------------- $75,062 $36,644 $38,418 - ---------------------------------------------------
Rental expense for 1997, 1996 and 1995 under all lease agreements amounted to approximately $30,900, $28,100 and $22,000, respectively. NOTE 13: INCOME TAXES Income tax expense attributable to income from continuing operations consists of:
1997 1996 1995 ==================================================== Federal and international Current............ $54,348 $45,082 $33,127 Deferred........... (265) (2,696) (1,113) - ---------------------------------------------------- 54,083 42,386 32,014 State and local Current.......... 9,368 7,203 5,339 Deferred......... (308) (510) (339) - ---------------------------------------------------- 9,060 6,693 5,000 - ---------------------------------------------------- $63,143 $49,079 $37,014 - ----------------------------------------------------
In addition to the 1997 income tax expense of $63,143, certain deferred income tax expenses of $296 were allocated directly to shareholders' equity. 28 29 A reconciliation of the difference between the U.S. statutory tax rate and the effective tax rate is as follows:
1997 1996 1995 =========================================================== Statutory tax rate .... 35.0% 35.0% 35.0% State and local income taxes, net of federal tax benefit ......... 3.2 3.0 2.9 Exempt income ......... (2.5) (2.7) (3.2) Insurance contracts ... (2.1) (2.3) (3.9) Other ................. 0.4 0.5 1.9 - ----------------------------------------------------------- Effective tax rate .... 34.0% 33.5% 32.7% - -----------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Registrant's deferred tax assets and liabilities are as follows:
1997 1996 ================================================== DEFERRED TAX ASSETS: Postretirement benefits.... $13,882 $13,194 Accrued expenses........... 17,110 16,686 Inventory.................. 6,712 6,396 Partnership income......... 4,860 4,079 Deferred revenue........... 4,694 6,566 Net operating loss carryforwards...... 1,685 1,362 State deferred taxes....... 6,841 6,316 Other...................... 10,619 8,639 - -------------------------------------------------- 66,403 63,238 Valuation allowance....... (1,777) (1,441) - -------------------------------------------------- Net deferred tax assets... 64,626 61,797 - -------------------------------------------------- DEFERRED TAX LIABILITIES: Pension................... 7,728 7,021 Amortization.............. 4,093 3,973 Depreciation.............. 2,569 2,483 Other..................... 9,423 6,093 - -------------------------------------------------- Net deferred tax liabilities............. 23,813 19,570 - -------------------------------------------------- Net deferred tax asset.... $40,813 $42,227 - --------------------------------------------------
At December 31, 1997, the Registrant's international subsidiaries had deferred tax assets relating to net operating loss carryforwards of $1,685, $973 of which expires in years 1999 through 2004, and $712 of which has an indefinite carryforward period. For financial reporting purposes, a valuation allowance of $1,685 has been recognized to offset the deferred tax assets relating to the net operating loss carryforwards. NOTE 14: COMMITMENTS AND CONTINGENCIES At December 31, 1997, the Registrant was a party to several lawsuits that were incurred in the normal course of business, none of which individually or in the aggregate is considered material by management in relation to the Registrant's financial position or results of operations. NOTE 15: SEGMENT INFORMATION The Registrant operates predominantly in one industry segment, financial systems and equipment. This industry segment accounts for more than 90 percent of the consolidated revenues, operating profit and identifiable assets. The Registrant had one customer, IBM, its minority partner in the InterBold joint venture, that accounted for $173,751 of the total net sales of $1,226,936 in 1997, $146,103 of the total net sales of $1,030,191 in 1996, and $106,392 of the total net sales of $863,409 in 1995. NOTE 16: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) See "Comparison of Selected Quarterly Financial Data (Unaudited)" on page 31 of this Annual Report on Form 10-K. FORWARD-LOOKING STATEMENT DISCLOSURE In the Registrant's written or oral statements, the use of the words "believes," "anticipates," "expects" and similar expressions is intended to identify forward-looking statements which have been made and may in the future be made by or on behalf of the Registrant, including statements concerning future operating performance, the Registrant's share of new and existing markets, and the Registrant's short-and long-term revenue and earnings growth rates. Although the Registrant believes that its outlook is based upon reasonable assumptions regarding the economy, its knowledge of its business, and on key performance indicators which impact the Registrant, there can be no assurance that the Registrant's goals will be realized. Readers are cautioned not to place undue reliance on 29 30 these forward-looking statements, which speak only as of the date hereof. The Registrant's uncertainties could cause actual results to differ materially from those anticipated in forward-looking statements. These include, but are not limited to: - - competitive pressures, including pricing pressures and technological developments; - - changes in the Registrant's relationships with customers, suppliers, distributors and/or partners in its business ventures; - - changes in political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the worldwide business in each of the Registrant's operations; - - acceptance of the Registrant's product and technology introductions in the marketplace; and - - unanticipated litigation, claims or assessments. 30 31 COMPARISON OF SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER (Dollars in thousands 1997 1996 1997 1996 1997 1996 1997 1996 except per share amounts) ======================================================================================================================== Net sales ...... $264,608 $215,886 $303,202 $248,337 $317,778 $271,796 $341,348 $294,172 Gross profit ... 92,359 73,816 106,203 87,529 108,522 94,279 123,016 101,888 Net income ..... 23,733 18,039 30,690 24,427 33,056 26,673 35,037 28,286 Basic earnings per share .... 0.34 0.26 0.45 0.36 0.48 0.39 0.51 0.41 Diluted earnings per share * .. 0.34 0.26 0.44 0.35 0.47 0.38 0.50 0.41 ========================================================================================================================
See Note 16 to Consolidated Financial Statements and 5-Year Summary 1997-1993. * Annual earnings per share do not equal the sum of individual quarters due to differences in the weighted-average number of shares outstanding during the respective periods. 31 32 REPORT OF MANAGEMENT The management of Diebold, Incorporated is responsible for the contents of the consolidated financial statements, which are prepared in conformity with generally accepted accounting principles. The consolidated financial statements necessarily include amounts based on judgments and estimates. Financial information elsewhere in the Form 10-K is consistent with that in the consolidated financial statements. The Registrant maintains a comprehensive accounting system which includes controls designed to provide reasonable assurance as to the integrity and reliability of the financial records and the protection of assets. An internal audit staff is employed to regularly test and evaluate both internal accounting controls and operating procedures, including compliance with the Registrant's statement of policy regarding ethical and lawful conduct. The role of KPMG Peat Marwick LLP, the independent auditors, is to provide an objective examination of the consolidated financial statements and the underlying transactions in accordance with generally accepted auditing standards. The report of KPMG Peat Marwick LLP accompanies the consolidated financial statements. The Audit Committee of the Board of Directors, composed of directors who are not members of management, meets regularly with management, the independent auditors and the internal auditors to ensure that their respective responsibilities are properly discharged. KPMG Peat Marwick LLP and the Internal Audit Organization have full and free independent access to the Audit Committee. Gerald F. Morris Executive Vice President and Chief Financial Officer 32 33 5-YEAR SUMMARY 1997-1993 DIEBOLD, INCORPORATED AND SUBSIDIARIES SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND RATIOS)
1997 1996 1995 1994 1993 ================================================================================================================================= OPERATING RESULTS Net sales ........................................... $ 1,226,936 $ 1,030,191 $ 863,409 $ 760,171 $ 623,277 Cost of sales ....................................... 796,836 672,679 568,978 504,489 413,239 Gross profit ........................................ 430,100 357,512 294,431 255,682 210,038 Selling and administrative expense .................. 191,842 166,572 144,490 128,309 106,110 Research, development and engineering expense ....... 54,397 50,576 43,130 36,599 34,838 Operating profit .................................... 183,861 140,364 106,811 90,774 69,090 Other income, net ................................... 6,894 10,533 6,612 5,152 5,664 Minority interest ................................... (5,096) (4,393) (200) (1,948) (4,239) Income before taxes ................................. 185,659 146,504 113,223 93,978 70,515 Taxes on income ..................................... 63,143 49,079 37,014 30,467 22,141 Net income .......................................... 122,516 97,425 76,209 63,511 48,374 Basic earnings per share (Note A) ................... 1.78 1.42 1.11 0.93 0.71 Diluted earnings per share (Note A) ................. 1.76 1.40 1.10 0.93 0.71 - --------------------------------------------------------------------------------------------------------------------------------- DIVIDEND AND COMMON SHARE DATA Basic weighted-average shares outstanding (Note A) .. 68,939 68,796 68,649 68,243 68,020 Diluted weighted-average shares outstanding (Note A) 69,490 69,350 69,022 68,595 68,307 Common dividends paid ............................... $ 34,473 $ 31,190 $ 29,290 $ 26,682 $ 24,191 Common dividends paid per share (Note A) ............ 0.50 0.45 0.43 0.39 0.36 - --------------------------------------------------------------------------------------------------------------------------------- YEAR-END FINANCIAL POSITION Current assets ...................................... $ 549,837 $ 487,523 $ 376,212 $ 329,658 $ 311,500 Current liabilities ................................. 242,080 228,220 189,078 159,755 138,571 Net working capital ................................. 307,757 259,303 187,134 169,903 172,929 Property, plant and equipment, net .................. 143,901 95,934 84,072 64,713 60,660 Total assets ........................................ 991,050 859,101 749,795 666,174 609,019 Long-term debt, less current maturities ............. 20,800 --- --- --- --- Shareholders' equity ................................ 668,581 575,570 507,680 459,839 427,391 Shareholders' equity per share (Note B) ............. 9.69 8.36 7.39 6.70 6.27 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS Pretax profit on net sales (%) ...................... 15.1% 14.2% 13.1% 12.4% 11.3% Current ratio ....................................... 2.3 to 1 2.1 to 1 2.0 to 1 2.1 to 1 2.3 to 1 - --------------------------------------------------------------------------------------------------------------------------------- OTHER DATA Capital expenditures ................................ $ 67,722 $ 33,581 $ 35,308 $ 22,641 $ 18,343 Depreciation and amortization ....................... 18,701 20,984 14,174 13,240 12,231 ================================================================================================================================= Note A -- After adjustment for stock splits. Note B -- Based on shares outstanding at year-end adjusted for stock splits.
33 34 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - -------------------------------------------------------------------- AND FINANCIAL DISCLOSURE. ------------------------- There have been no changes in accountants or disagreements with accountants on accounting and financial disclosures. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------ Information with respect to directors of the Registrant is included on pages 4 through 8 of the Registrant's proxy statement for the 1998 Annual Meeting of Shareholders ("1998 Annual Meeting") and is incorporated herein by reference. Refer to pages 6 through 9 of this Form 10-K for information with respect to executive officers. ITEM 11. EXECUTIVE COMPENSATION. - -------------------------------- Information with respect to executive compensation is included on pages 9 through 17 of the Registrant's proxy statement for the 1998 Annual Meeting and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------------------------------------------------------------------------ Information with respect to security ownership of certain beneficial owners and management is included on pages 2 through 7 of the Registrant's proxy statement for the 1998 Annual Meeting and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------- The information with respect to certain relationships and related transactions set forth under the caption "Compensation Committee Interlocks and Insider Participation" on page 8 of the Registrant's proxy statement for the 1998 Annual Meeting is incorporated herein by reference. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. - ------------------------------------------------------------------------- (a) Documents filed as a part of this report. 1. The following additional information for the years 1997, 1996, and 1995 is submitted herewith: Independent Auditors' Report on Consolidated Financial Statements and Financial Statement Schedule SCHEDULE II. Valuation and Qualifying Accounts All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 34 35 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. - -------- ---------------------------------------------------------------- (continued) - ----------- 2. Exhibits 3.1 (i) Amended and Restated Articles of Incorporation of Diebold, Incorporated -- incorporated by reference to Exhibit 3.1 (i) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 3.1 (ii) Code of Regulations -- incorporated by reference to Exhibit 4(c) to Registrant's Post-Effective Amendment No. 1 to Form S-8 Registration Statement No. 33-32960. 3.2 Certificate of Amendment by Shareholders to Amended Articles of Incorporation of Diebold, Incorporated -- incorporated by reference to Exhibit 3.2 to Registrant's Form 10-Q for the quarter ended March 31, 1996. 4. Rights Agreement dated as of February 10, 1989 between Diebold, Incorporated and The Bank of New York -- incorporated by reference to Exhibit 2.1 to Registrant's Registration Statement on Form 8-A dated February 10, 1989. * 10.1 Form of Employment Agreement as amended and restated as of September 13, 1990 -- incorporated by reference to Exhibit 10.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. * 10.2 Schedule of Certain Officers who are Parties to Employment Agreements in the form of Exhibit 10.1. * 10.3 (i) Supplemental Retirement Benefit Agreement with William T. Blair -- incorporated by reference to Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. * 10.3 (ii) Consulting Agreement with William T. Blair -- incorporated by reference to Exhibit 10.3 (ii) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. * 10.5 Supplemental Employee Retirement Plan (as amended January 1, 1994) -- incorporated by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. 10.6 Amended and Restated Partnership Agreement dated as of September 12, 1990 -- incorporated by reference to Exhibit 10 to Registrant's Form 8-K dated September 26, 1990. * 10.7 1985 Deferred Compensation Plan for Directors of Diebold, Incorporated -- incorporated by reference to Exhibit 10.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. * Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report. 35 36 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K. - ------------------------------------------------------------------------- (continued) - ----------- * 10.8 1991 Equity and Performance Incentive Plan as Amended and Restated -- incorporated by reference to Exhibit 10.8 to Registrant's Form 10-Q for the quarter ended March 31, 1997. * 10.9 Long-Term Executive Incentive Plan -- incorporated by reference to Exhibit 10.9 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. * 10.10 1992 Deferred Incentive Compensation Plan (as amended and restated as of July 1, 1993) -- incorporated by reference to Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. * 10.11 Annual Incentive Plan -- incorporated by reference to Exhibit 10.11 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. * 10.13 Forms of Deferred Compensation Agreement and Amendment No. 1 to Deferred Compensation Agreement - incorporated by reference to Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. 21. Subsidiaries of the Registrant. 23. Consent of Independent Auditors. 24. Power of Attorney. 27. Financial Data Schedule. * Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of 1997 36 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIEBOLD, INCORPORATED March 5, 1998 By: /s/Robert W. Mahoney - -------------- -------------------- Date Robert W. Mahoney Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/Robert W. Mahoney Chairman of the Board and March 5, 1998 - ------------------------ Chief Executive Officer ------------- Robert W. Mahoney (Principal Executive Officer) /s/Gerald F. Morris Executive Vice President March 5, 1998 - ------------------------ and Chief Financial Officer ------------- Gerald F. Morris (Principal Accounting and Financial Officer) /s/Louis V. Bockius III Director March 5, 1998 - ------------------------ ------------- Louis V. Bockius III /s/Daniel T. Carroll Director March 5, 1998 - ------------------------ ------------- Daniel T. Carroll /s/Richard L. Crandall Director March 5, 1998 - ------------------------ ------------- Richard L. Crandall * Director March 5, 1998 - ------------------------ ------------- Donald R. Gant /s/L. Lindsey Halstead Director March 5, 1998 - ------------------------ ------------- L. Lindsey Halstead * Director March 5, 1998 - ------------------------ ------------- Phillip B. Lassiter
37 38
Signature Title Date --------- ----- ---- * Director March 5, 1998 - ------------------------ ------------- John N. Lauer * Director March 5, 1998 - ------------------------ ------------- William F. Massy * Director March 5, 1998 - ------------------------ ------------- Gregg A. Searle /s/W. R. Timken, Jr. Director March 5, 1998 - ------------------------ ------------- W. R. Timken, Jr.
* The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the Powers of Attorney executed by the above-named officers and directors of the Registrant and filed with the Securities and Exchange Commissions on behalf of such officers and directors. Dated: March 5, 1998 *By: /s/Gerald F. Morris --------------- ------------------- Gerald F. Morris, Attorney-in-Fact 38 39 INDEPENDENT AUDITORS' REPORT ON ------------------------------- FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ----------------------------------------------------- The Board of Directors and Shareholders Diebold, Incorporated We have audited the accompanying consolidated balance sheets of Diebold, Incorporated and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 14 (a)(1) of Form 10-K of Diebold, Incorporated for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements and financial statement schedule are the responsibility of the Registrant's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diebold, Incorporated and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP Cleveland, Ohio January 20, 1998, except for the second paragraph of Note 2, which is as of January 27, 1998 39 40 DIEBOLD, INCORPORATED AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Balance at Balance beginning at end of period Additions Deductions of period --------- --------- ---------- ---------- Year ended December 31, 1997 - ---------------------------- Allowance for doubtful accounts $5,917,055 $1,727,130 $806,167 $6,838,018 Year ended December 31, 1996 - ---------------------------- Allowance for doubtful accounts $5,541,954 $2,273,553 $1,898,452 $5,917,055 Year ended December 31, 1995 - ---------------------------- Allowance for doubtful accounts $4,053,864 $1,733,449 $245,359 $5,541,954
40 41 EXHIBIT INDEX -------------
EXHIBIT NO. DOCUMENT DESCRIPTION PAGE NO. ----------- -------------------- -------- 10.2 Schedule of Certain Officers who 42 are Parties to Employment Agreements 21 Subsidiaries of the Registrant 43 23 Consent of Independent Auditors 44 24 Power of Attorney 45 27 Financial Data Schedule 46
41 EX-10.2 2 EXHIBIT 10.2 1 EXHIBIT 10.2 SCHEDULE OF CERTAIN OFFICERS WHO ARE PARTIES TO EMPLOYMENT AGREEMENTS Charles J. Bechtel David Bucci Warren W. Dettinger Reinoud G. J. Drenth Donald E. Eagon, Jr. Charee Francis-Vogelsang Bartholomew J. Frazzitta Michael J. Hillock Larry D. Ingram Robert W. Mahoney Gerald F. Morris Charles B. Scheurer Gregg A. Searle Robert L. Stockamp Alben W. Warf Ernesto R. Unanue Robert J. Warren 42 EX-21 3 EXHIBIT 21 1 Exhibit 21 LIST OF SIGNIFICANT SUBSIDIARIES The following are the significant subsidiaries of the Registrant included in the Registrant's consolidated financial statements at December 31, 1997. Other subsidiaries are not listed because such subsidiaries are inactive and in the aggregate are not considered to constitute a significant subsidiary.
Jurisdiction under Percent of voting securities which organized owned by Registrant --------------- ------------------- InterBold New York 70% (1) Diebold Holding Company, Inc. Delaware 100% SST Holding Company, Inc. Delaware 100% The Diebold Company of Canada Limited Canada 100% Diebold of Nevada, Inc. Nevada 100% Diebold Investment Company Delaware 100% DBD Investment Management Company Delaware 100% VDM Holding Company, Inc. Delaware 100% Diebold Foreign Sales Corporation St. Thomas, U.S. Virgin Islands 100% (2) Diebold Credit Corporation Delaware 100% Diebold Finance Company, Inc. Delaware 100% (2) Diebold International Limited United Kingdom 100% Diebold Pacific, Limited Hong Kong 100% InterBold Pacific Limited Hong Kong 70% (3) InterBold Germany GmbH Germany 70% (3) InterBold Singapore Pte Ltd Singapore 100% (4) Interbold Technologies, Inc. Delaware 70% (3) ATM Finance, Inc. Ohio 100% Diebold Mexico Holding Company, Inc. Delaware 100% Diebold Latin America Holding Company, Inc. Delaware 100% Diebold HMA Private Limited India 50% Diebold Mexico, S.A. de C.V. Mexico 100% (5) DBD Asset Management S.A. de C.V. Mexico 100% (6) Diebold OLTP Systems, C.A. Venezuela 50% Diebold OLTP Systems, A.V.V. Aruba, Dutch West Indies 50% Starbuck Computer Empire, A.V.V. Aruba, Dutch West Indies 50% Diebold China Security Holding Company, Inc. Delaware 100% China Diebold Financial Equipment Company LTD. (China) Peoples Republic of China 71% Central Security Systems, Incorporated Hawaii 100% Diebold Texas, Incorporated Texas 100% Griffin Technology Incorporated New York 100% Mayfair Software Distribution, Inc. Delaware 100% Diebold Australia Holding Company, Inc. Delaware 100% Diebold Australia Pty. Ltd. Australia 100% (7) Diebold Singapore Pte. Ltd Singapore 100%
(1) 70% of partnership interest is owned by Diebold Holding Company, Inc. which is 100% owned by the Registrant. On January 27, 1998, SST Holding Company, Inc. acquired the remaining 30% partnership interest in InterBold. 100% of voting securities of SST Holding Company, Inc. are owned by the Registrant. (2) 100% of voting securities are owned by Diebold Investment Company which is 100% owned by the Registrant. (3) 100% of voting securities are owned by InterBold which is 70% owned by Diebold Holding Company, Inc.; Diebold Holding Company, Inc. is 100% owned by the Registrant. On January 27, 1998, SST Holding Company, Inc. acquired the remaining 30% partnership interest in InterBold. 100% of voting securities of SST Holding Company, Inc. are owned by the Registrant. (4) 100% of voting securities are owned by InterBold Pacific Limited, which is 100% owned by InterBold. (5) 100% of voting securities are owned by Diebold Mexico Holding Company, Inc. which is 100% owned by the Registrant. (6) 100% of voting securities are owned by Diebold Mexico, S.A. de C.V. which is 100% owned by Diebold Mexico Holding Company, Inc. (7) 100% of voting securities are owned by Diebold Australia Holding Company, Inc. which is 100% owned by the Registrant. 43 EX-23 4 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Directors Diebold, Incorporated We consent to incorporation by reference in the Registration Statements (Nos. 2-44467, 2-92107, 33-32960, 33-39988, 33-55452, 33-54677, 33-54675, 333-32187 and 333-31993) on Form S-8 of Diebold, Incorporated of our report dated January 20, 1998, except for the second paragraph of Note 2, which is as of January 27, 1998, relating to the consolidated balance sheets of Diebold, Incorporated and subsidiaries as of December 31, 1997, and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, and related schedule, which report appears in the December 31, 1997 annual report on Form 10-K of Diebold, Incorporated. /s/KPMG PEAT MARWICK LLP KPMG PEAT MARWICK LLP Cleveland, Ohio March 5, 1998 44 EX-24 5 EXHIBIT 24 1 EXHIBIT 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, That the undersigned directors of Diebold, Incorporated, a corporation organized and existing under the laws of the State of Ohio, do for themselves and not for another, constitute and appoint Warren W. Dettinger, Charee Francis-Vogelsang or Gerald F. Morris, or any one of them, a true and lawful attorney in fact in their names, place and stead, to sign their names to the report on Form 10-K for the year ended December 31, 1997, or to any and all amendments to such reports, and to cause the same to be filed with the Securities and Exchange Commission; it being intended to give and grant unto said attorneys in fact and each of them full power and authority to do and perform any act and thing necessary and proper to be done in the premises as fully and to all intents and purposes as the undersigned by themselves could do if personally present. The undersigned directors ratify and confirm all that said attorneys in fact or either of them shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the date set opposite their signature. 45 2 Signed in the presence of: Signature Date --------- ---- /s/Charee Francis-Vogelsang /s/Donald R. Gant March 5, 1998 - ---------------------------- ----------------------------- ------------- Donald R. Gant, Director /s/Charee Francis-Vogelsang /s/Phillip B. Lassiter March 5, 1998 - ---------------------------- ----------------------------- ------------- Phillip B. Lassiter, Director /s/ Charee Francis-Vogelsang /s/John N. Lauer March 5, 1998 - ---------------------------- ----------------------------- ------------- John N. Lauer, Director /s/Charee Francis-Vogelsang /s/Gregg A. Searle March 5, 1998 - ---------------------------- ----------------------------- ------------- Gregg A. Searle, Director /s/Charee Francis-Vogelsang /s/William F. Massy March 5, 1998 - ---------------------------- ----------------------------- ------------- William F. Massy, Director EX-27 6 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 20,296 36,473 302,885 0 128,082 549,837 259,634 115,733 991,050 242,080 20,800 0 0 86,595 581,986 991,050 825,125 1,226,936 507,322 796,836 246,239 0 0 185,659 63,143 122,516 0 0 0 122,516 1.78 1.76
-----END PRIVACY-ENHANCED MESSAGE-----