-----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, OAh8G78KumogrFj2ONjL64XxJ5yCpIDLZTia50X8JrmyGEsePzTSiv/X02g2QJFn gvUGi6HjcJk3stjhbqJaew== 0000912057-96-005714.txt : 19960402 0000912057-96-005714.hdr.sgml : 19960402 ACCESSION NUMBER: 0000912057-96-005714 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARMON INDUSTRIES INC CENTRAL INDEX KEY: 0000045635 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 440657800 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07916 FILM NUMBER: 96542481 BUSINESS ADDRESS: STREET 1: 1300 JEFFERSON CT CITY: BLUE SPRINGS STATE: MO ZIP: 64015 BUSINESS PHONE: 8162293345 MAIL ADDRESS: STREET 1: 1300 JEFFERSON INC CITY: BLUE SPRINGS STATE: MO ZIP: 64015 FORMER COMPANY: FORMER CONFORMED NAME: HARMON ELECTRONICS INC DATE OF NAME CHANGE: 19780823 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 1995 Commission file number 0-7916 HARMON INDUSTRIES, INC. IRS Employer Identification Number 44-0657800 State or other jurisdiction of incorporation or organization Missouri (Address of principal executive offices) 1300 Jefferson Court, Blue Springs, Missouri 64015 Registrant's telephone number, including area code: (816) 229-3345 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered --------------------- ---------------------------- None Securities registered pursuant to Section 12(g) of the Act: Common Stock - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ As of March 18, 1996, 6,805,626 common shares were outstanding, and the aggregate market value of the common stock (based upon the closing bid price of these shares per NASDAQ for Over-the Counter trading) of Harmon Industries, Inc. held by non-affiliates was approximately $88,042,000. The information required by Item 405 of Regulation S-K regarding late filings or failure to file in connection with Form 3, Form 4 or Form 5 is included herein under Part III, Item 12. 1 DOCUMENTS INCORPORATED BY REFERENCE PART II Item 6: Selected Consolidated Pages 14 and 15 of the Financial Data. Annual Report to Shareholders for the year ended December 31, 1995. Item 7: Management's Discussion Pages 16 through 21 of and Analysis of Financial the Annual Report to Condition and Results of Shareholders for the year Operations. ended December 31, 1995. Item 8: Financial Statements Page 22 through 37 of and Supplementary Data. the Annual Report to Shareholders for the year ended December 31, 1995. PART III Item 10: Directors and Executive Pages 3 through 6 of the Officers of the Registrant. Company's Proxy Statement, dated April 1, 1996 Item 11: Executive Compensation Pages 7 through 14 of and Other Information. the Company's Proxy Statement dated April 1, 1996. Item 12: Security Ownership of Pages 2 and 3 of the Certain Beneficial Owners Company's Proxy Statement and Management. dated April 1, 1996. Item 13: Certain Relationships and Page 6 (last paragraph Related Transactions of Election of Directors) and page 6 ("Certain Transactions") of the Company's Proxy Statement dated April 1, 1996. 2 HARMON INDUSTRIES, INC. ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 PART I ITEM 1. BUSINESS The Company is a leading supplier of signal and train control products to railroads throughout North America and the world. The Company sells its products to Class I and short line freight railroads and to mass rail transit customers. Harmon designs, manufactures, markets and services a broad line of products beneficial to the operating efficiency and safety of its customers. The products include an extensive line of railroad signal and train control systems and related components and services. The Company emphasizes innovation and technology to develop timely and sophisticated solutions to problems that confront its customers. It also provides customized asset management services through a warehousing and distribution business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." A rapidly growing share of the Company's sales now involve combining and customizing individual products to meet specific customer applications, representing an evolution for the Company from a supplier of separate component products to an integrator of systems able to provide customers with solutions to complex problems. INDUSTRY FREIGHT RAILROADS The domestic freight railroad industry includes Class I, regional and short line railroads. However, the industry is dominated by the 10 large freight carriers that the Interstate Commerce Commission defines as Class I railroads because of their significant annual operating revenues. From the 1930's to the 1980's, the Class I freight railroads endured a nearly constant decrease in their share of the total inter-city freight transportation market.(1) The reversal of this trend is a result of their ability to offer customers a lower cost and higher quality method of transporting freight than was provided in the past. Freight railroads achieved this result through strict cost controls, reductions in train crew sizes and other employment expenses, divestiture of unprofitable track segments and other assets unrelated to the railroad industry and a more marketing oriented operating strategy. The Company has traditionally sold its products to the freight railroad industry. Many Harmon products are designed to assist the railroads in cutting costs. For example, the 37% decrease in Class I employment levels from 1985 to 1994 required the Class I railroads to look to products like those manufactured by Harmon to monitor the condition of moving trains, help ensure the safe switching and passage of trains and facilitate better communication among crew members on a train and between moving trains and railroad traffic controllers. Class I railroads have also used Harmon products to increase asset utilization and productivity. The 32% reduction from 1985 to 1994 in the number of Class I railroad freight cars in service required the Class I railroads to - ------------------------------- (1)This fact and the other statistical information about the Class I railroads in this Annual Report come from RAILROAD FACTS, 1995 EDITION, a recognized industry source for information on Class I railroads. 3 look to products like those manufactured by Harmon which permit the railroads to track more closely the location and performance of a particular train. This improved utilization of cars and the reduction in employment levels have caused the freight revenue ton miles per employee hour for Class I railroads to increase by 110% from 1985 to 1994. The Class I railroads have become more profitable despite an 18% reduction (in constant 1985 dollars) from 1985 to 1994 in revenue per ton mile. Many Class I railroads have entered into alliances with large trucking organizations that have resulted in an increase in the shipment of "intermodal" freight (i.e., containerized freight that moves from truck to train and back to truck) for which the railroads have retained the long haul segment. The amount of intermodal traffic has increased 78% from 1985 to 1994. The Company believes that the willingness of the Class I railroads to enter into such alliances with their former competitors is a positive development. The Company believes that the cost reductions and improved efficiencies described above will permit the Class I railroads to better compete in the long haul segment of the freight transportation market. While final figures are not yet available for the year ended December 31, 1995, the total volume of intermodal shipments is estimated to have decreased approximately 1% to 2% from 1994. The Company does not believe this to be significant to the overall momentum of the Class I railroads, as the trucking industry has felt a similar, if not greater, downturn in business. The growth momentum of the Class I railroads is important to the success of Harmon. Class I railroads also have improved profitability by divesting themselves of assets viewed as unprofitable, including large portions of under-utilized track. From 1985 to 1994, the Class I railroads have reduced their track miles by 24%, to approximately 184,000 miles. These divestitures permit the Class I railroads to spend more money on products like those manufactured by Harmon for their high-traffic corridors. From 1985 to 1994, capital expenditures by Class I railroads per mile of track owned has increased from approximately $14,300 to $17,100 per mile of track. Many of these expenditures are for products, such as the Company's Electro Code product, that reduce the significant maintenance expenses otherwise incurred by Class I railroads. Federal legislation in the early 1980's permitted the Class I railroads to sell some of their lines to short line railroads rather than abandon such track. Such sales have increased the number of short line railroads to 519, with 32 of these short line railroads being above the threshold of either $40.0 million annual revenues or 350 miles of railroad track. Short line railroads are able to profitably operate sections of track deemed unprofitable by Class I railroads because the short line railroads generally have smaller administrative, maintenance and engineering staffs, are not required to meet the same maintenance and operating standards as the Class I railroads and are typically not burdened with collective bargaining agreements. The manner in which the short line railroads operate creates significant opportunities for Harmon. These railroads typically do not have substantial engineering or maintenance staffs and, therefore, frequently look to Harmon to provide complete pre-engineered systems. Sales to these customers have become a meaningful portion of the Company's sales. Harmon expects to continue to develop products and services that will meet the evolving maintenance and operating needs of these railroads. The market in the freight railroad industry for Harmon products is influenced by the availability of government funding, the relative health of the freight railroad industry and the changing needs that such industry has for various Harmon products. The Intermodel Surface Transportation Efficiency Act of 1991 (ISTEA) provides federal funds through 1997 for railroad crossing warning systems in the same amount each year as existed under previous federal 4 legislation. For many years this funding has been dedicated solely to railroad crossing warning systems. Current discussion in Washington is to convert the 1997 funding, like most other funding, to block grants to the states to be used for highway safety. If this occurs, it is unknown whether the states would continue to spend all of these funds on railroad crossing warning systems or spend all or a portion of them on other highway safety projects. Harmon expects the Class I railroads to continue their recent favorable financial performance. Accordingly, Harmon expects the equipment maintenance and capital improvement expenditures of Class I railroads to grow, or at least remain stable, in coming years. MASS TRANSIT RAILROADS The mass rail transit industry includes AMTRAK and numerous existing and proposed commuter and urban transit rail systems. The development of such systems is generally enhanced by the federal funding provided by ISTEA, which nearly doubled the federal funding available annually for mass transit projects. The aggregate amount of federal funds appropriated by ISTEA that is expected to be made available for such projects between January 1992 and September 1997 is $31.5 billion. Current expectations are that the 1996 rail transit project funding will approximate the 1995 level. In addition, ISTEA permits local governments to shift funds otherwise allocated for highway construction into mass transit projects. Harmon's participation in the expansion of existing or construction of new mass rail transit systems will generally require a long selling cycle and generally result in multi-year contracts. In addition, the selling process requires Harmon to consult regularly with engineers responsible for designing such systems. Such consultation permits Harmon to better understand the requirements of proposed projects and help insure that such projects are designed in a way that will permit use of many Harmon products. See "Business-Marketing and Sales." In addition to the mass rail transit projects expected to be expanded or originated in the next several years, Harmon has targeted existing mass rail transit systems as potential customers. These systems are under pressure to increase their capacity and maintain or improve passenger safety. These dual objectives are met through the increasing use of Harmon products containing advanced technology to control passenger trains and to install in such trains equipment that guards against human error. An example of the Harmon ability to swiftly address safety concerns is the development by Harmon of its Ultra Cab product after a highly publicized 1987 passenger train accident in the Northeast Corridor. As a result of that accident, federal regulators required that all trains operating in the Northeast Corridor be equipped with automatic devices to guard against human error in responding to signals. Conrail, the major freight railroad most affected by this requirement, solicited bids from Harmon and its competitors for development of a product like Ultra Cab. Harmon won this bid and completed development of Ultra Cab, which now enjoys a substantial share of the market in the Northeast Corridor. Another example of Harmon addressing safety concerns arose in 1991, when an over-speeding subway train derailed in New York City and caused several fatalities. As a result, the New York City Transit Authority embarked on a program of installing speed measurement and enforcement systems at critical locations along the subway track. Under sub-contract, Harmon developed a computer-based system for this application and has since been awarded two additional sub-contracts for the supply of 23 systems to date. Additional contracts are anticipated. 5 Harmon's first major contract for new construction in the mass rail transit market was the St. Louis Metro Link project, which totalled $4.7 million, the first phase of which entered service in July 1993. This project has served as a visible and successful entry by Harmon into the transit market as a major contractor. The Company's transit business has grown to include active transit projects in many major cities in North America. Harmon's largest single contract to date was with the Chicago Transit Authority (CTA) for reconstruction of the signal and train control system for the Green Line elevated line. This contract, totalling over $13 million, was also Harmon's first as a prime contractor, with construction under its direction. The project was completed successfully and on time under an extremely aggressive schedule, and establishes Harmon as a major contender in this market. It is difficult to estimate the potential size of this market, particularly since railroad track used extensively by a mass rail transit operator in some metropolitan areas may be owned and maintained by a Class I railroad. Accordingly, sales to Class I railroads of Harmon products expected to upgrade certain areas of railroad track may well be sales that are related to or result from growth in the mass rail transit industry. INTERNATIONAL OPPORTUNITIES The Company has identified certain international markets as opportunities for growth. Standards for the railroad industry in Latin America, Canada, Australia, and certain parts of eastern Asia are generally consistent with the standards of the United States railroad industry. In addition, some nationalized railroads in Latin America are now being privatized and United States freight railroads, many of which are Harmon customers, are potential purchasers or operators of large portions of such track. Harmon expects that its current relationships with such railroads will provide it the opportunity to sell its products through its existing customers for international use. Harmon is also pursuing strategic alliances with other railroad industry suppliers to assist Harmon's efforts to penetrate the international markets. The North American Free Trade Agreement is also expected to provide opportunities for Harmon in Mexico and Canada because the expected growth in trade will increase the railroad traffic in both directions across the borders. In December 1994, Harmon acquired the railroad division of SERVO Corporation of America (SERVO), including SERVO's distributors in Europe, Africa and the Middle East. These marketing relationships should enable the Harmon products to become more widely represented in these markets. BUSINESS STRATEGY Harmon's business strategy is to utilize its technological expertise, ability to install turnkey systems, broad product lines, extensive sales network and customer service orientation to provide high quality products and services to its customers. Harmon plans to continue to expand and improve its product lines and services to meet its customers' needs. Harmon expects that the continued development of its product lines may be accomplished, in part, by strategic acquisitions of product lines or companies that compliment the Company's current product lines. Internal development of new products will continue, consistent with Harmon's desire to expand its product base. The Company intends to improve its leadership position as a vendor to the freight railroad industry by continuing to expand its long-standing relationships with Class I railroads, continuing to explore opportunities with short line railroads, developing new technologies to meet customer needs, and by adding value through its engineering, installation and asset management services capabilities. The Company has seen and expects to continue to see a shift in its revenue mix from revenues generated strictly from the sale of its individual products to revenues resulting from the sale of complete systems that are 6 designed, installed and, potentially, maintained by the Company. In 1995, for the first time, systems sales represented over 50% of total sales. The Company plans to utilize its extensive experience and expertise in the freight railroad industry to expand its presence in the mass rail transit market. The Company has successfully adapted several of its products to the needs of the mass rail transit industry and plans to add to the products and services that it can offer to the mass rail transit market. In international markets, the Company intends to continue forming strategic alliances with entities resident in such markets that are familiar with the local customers, the railroad standards and the individuals making the decisions to purchase equipment. In addition, the ownership or operation by domestic Class I and short line railroads of railroad track in other countries provides Harmon the opportunity to sell its products through its existing customers for international use. The Company will continue its cost control system that subjects all research and development, acquisition and capital expenditure programs to a return on investment analysis. If the anticipated return from any such expenditure meets objectives set by the Company, such expenditure will generally be considered for implementation. The Company is continuing the process of upgrading its fully integrated financial, manufacturing and inventory control computer system that will assist its efforts to further contain costs. The Company continued its training and education efforts to finalize implementation of its Total Quality System program and to complete its ISO 9000 certification efforts in 1996. The Company's Jacksonville, Florida facility and the train control portion of its Riverside, California facility became ISO 9000 certified in 1995. Finally, the Company will continue to enhance its Total Quality System, promoting continuous improvement in all aspects of the Company's operations. The Company was one of the first in its industry to institute such a program. PRODUCT CLASSIFICATIONS The products of the Company can generally be separated into six categories. TRAIN CONTROL SYSTEMS include all Company products related to the control of train movement. These include the Company's signal control track circuits (Electro Code); interlocking control equipment (Electro Logic, HLC and VHLC); car-borne equipment (Ultra Cab); and computer-based traffic control systems (TTM). SIGNAL SYSTEMS include all Company products related to rail/highway crossing warning systems including: motion detectors (the Company's PMD and HXP products, among others); flashing lights and cantilevers; and the design, wiring and installation of these products. ASSET MANAGEMENT SERVICES involve a single-source, rapid delivery service for railroad components by warehousing commonly-used parts and equipment that are manufactured by the Company and other vendors. TRAIN INSPECTION SYSTEMS include all Company products related to monitoring information regarding a moving train as it passes by a train inspection site. PRINTED WIRING BOARDS include production of customer designed printed wiring boards for use by other electronics manufacturers. OTHER sales include products that do not readily fit into the other five categories. 7 PROFILE OF CURRENT OPERATIONS The Company's current products are summarized by product category in the following table. The table shows yearly sales and percentages of total sales for each of the past three years. Sales by Product or Service Function(1)
Years Ended December 31, 1993 1994 1995 ------------------- -------------------- --------------------- (dollars in thousands) Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Train Control Systems $37,585 38.0% $ 45,711 38.4% $ 55,437 40.7% Signal Systems 36,034 36.5% 35,449 29.8% 42,374 31.1% Asset Management Services 10,223 10.3% 20,894 17.5% 14,194 10.4% Train Inspection Systems 4,510 4.6% 5,054 4.2% 11,360 8.4% Printed Wiring Boards 6,180 6.3% 6,307 5.3% 6,752 5.0% Other 4,252 4.3% 5,712 4.8% 5,999 4.4% ------- ------ -------- ------ -------- ------ Total $98,784 100.0% $119,127 100.0% $136,116 100.0% ------- ------ -------- ------ -------- ------ ------- ------ -------- ------ -------- ------
(1)Sales volumes shown above are gross totals and do not include cash discounts or deferred contract revenue. As a result, there are small differences between the figures in this table and those presented in the "Consolidated Statements of Operations". See "Financial Statements." The differences do not affect the validity of the discussion and analysis. PRODUCTS While the Company's principal products and services have been grouped for purposes of discussion by primary product or service function, each product and service interrelates or is complementary to other Company products and services. Substantially all products and services (except printed wiring boards) are marketed to the railroad industry. TRAIN CONTROL SYSTEMS include all Company products and services related to the control of train movement. These include the Company's signal control track circuits (Electro Code); interlocking control equipment such as Electro Logic, the Harmon Logic Controller (HLC) and the Vital Harmon Logic Controller (VHLC); car-borne equipment (Ultra Cab); and computer-based dispatch and traffic control systems (TTM). Signal control track circuits control signals regulating train traffic by sending and receiving coded electrical impulses using the rails for transmission. The primary advantage of this method is the elimination of overhead transmission lines between signal locations. The product also eliminates the need for some of the expensive electro-mechanical signal relays. Signal control track circuits are the principal product of our subsidiary, Electro Pneumatic Corporation (EPC). Computer-based dispatch systems monitor and control train movement over designated tracks from a central location. These 8 systems provide important information enabling the railroads to direct the movement of trains over large sections of track, thereby reducing the number of control towers and related personnel otherwise required. Although the technology is similar, each system requires individualized design and specialized software. Interlocking control equipment controls the track switches and train signals at intersections or junction points (interlockings) where main tracks cross or merge, or where trains may cross over between adjacent main tracks at running speeds. Interlockings generally employ data telemetry to and from a remote location (site of the computer-based dispatch system) and also frequently interface to signal control track circuits. Interlockings use standard products but often require extensive application engineering to define a site-specific configuration. Ultra Cab communicates speed commands directly to moving locomotives through electrical currents in the rails, displays the resulting speed requirements to the engine crew using colored light signals in the cab, and enforces compliance with the speed commands by initiating an automatic brake application if the engineer fails to stay within prescribed limits. These products are being purchased for several specialized requirements including a Federal Railroad Administration safety ruling that affects trains operating in the Northeast Corridor. A more advanced system called Incremental Train Control System (ITCS) is being developed by the Company. It uses radio data communications rather than currents in the rails to exchange data between trains and the wayside equipment, and provides many added features. An initial installation of ITCS is being done on an Amtrak line in southern Michigan under an FRA grant to demonstrate enhanced train control technology for High Speed Rail corridors. SIGNAL SYSTEMS include all Company products and services related to rail/highway crossing warning systems including: motion detectors (the Company's PMD and HXP products, among others); flashing lights and cantilevers; and the design, wiring and installation of complete systems utilizing these products. Rail/highway crossing warning systems activate flashing lights and audible bells, and initiate the lowering of crossing gates to provide traffic barriers in installations so equipped. While the Company offers complete systems, the more sophisticated electronic equipment that activates the warning lights or crossing gates is often sold separately. The Harmon Railroad Crossing Processor (HXP) and the Phase Motion Detector (PMD) are the trade names for the electronic controllers used in most of these systems. The HXP is the Company's most sophisticated device for control of railroad crossing warning devices, and is protected by U.S. patent #4,581,700. It uses microprocessors to calculate the train's speed and distance to the crossing and provides a consistent warning time. The less-costly PMD activates the warning device when the approaching train is within a predefined distance from the crossing and may be used over a wider range of trackside conditions. The latest versions of these two products, HXP-3 and PMD-3, represent an additional leap in technology and performance and offer the convenience of modular interchangeability between the two products. ASSET MANAGEMENT SERVICES involve a single-source, rapid delivery service for railroad components by warehousing commonly-used parts and equipment that are manufactured by the Company and other vendors. Asset management services include a portion of the revenues of our subsidiary, Consolidated Asset Management Company, Inc. (CAMCO). In late 1988, CAMCO received its first orders and began providing services for the railroad industry including assembly and storage of materials for track projects. CAMCO provides other services including purchasing and distribution of communication and signal inventory. One of the predominant services is the assembly of containerized construction kits including 9 all material needed for a signal installation project, some of which is not made by Harmon. These kits greatly improve the productivity of the railroad's construction crews and are finding growing acceptance in the industry. CAMCO's success has helped Harmon diversify from a predominantly manufacturing operation into the service portion of the railroad supply industry. TRAIN INSPECTION SYSTEMS include all Company products and services related to monitoring information regarding a moving train as it passes by a train inspection site. The Company's acquisition of the transportation division of SERVO Corporation of America in December 1994 has significantly increased its market share of this product line. The principal product used in these systems is a hot-bearing detector, which is installed beside the track and is designed to detect overheated bearings of passing rail cars. Overheated bearings, if not detected in time, may cause derailments, resulting in substantial expense and potential liability to the railroads. Some hot bearing detectors include an auxiliary function to provide hot wheel detection. Hot wheels can result from sticking brakes on a car and can cause severe wheel damage and even derailments if left unchecked. Other train inspection products include a device to detect when a rail car is dragging an unwanted object and a sensor to monitor high or wide loads. PRINTED WIRING BOARDS include production of customer designed printed wiring boards (PWB) for shipment to other electronics manufacturers. A substantial portion of the plant capacity for PWB is used in the Company's own products. The category OTHER includes a variety of items. One of these is radio communication equipment which includes mobile and stationary two-way radios specifically designed for railroad applications involving transmission of voice and/or data messages. PRODUCT DEVELOPMENT AND PATENTS The Company considers product development essential to both maintaining its market position and to future growth. Product innovation has been a major contributor to the Company's profitability during the past few years, as the railroads have sought more cost effective methods of controlling and monitoring train operations. Frequently, a customer's technical staff works closely with the Company's staff on the design of a system or component parts. The Company will continue to focus on rapid response to customer needs in its introduction of new products. The Company anticipates increasing its efforts and expenditures for product development. The Company continues to develop new products and new variations of previously successful products, where market demands and competition dictate the need. Major development efforts have recently concentrated on several key areas: (i) the new Incremental Train Control System (ITCS) for initial application to the FRA funded demonstration project in Michigan, (ii) a communication-based train control system called UltraBlock which is intended for Rail Transit applications, (iii) a new data radio for use in various telemetry applications including ITCS, (iv) a new two-way voice radio for locomotive use, and (v) ongoing enhancements to most of the existing products including crossing warning systems, interlocking controls, signal control track circuits, train inspection systems, and Ultra Cab. Development of these products is expected to maintain the Company's position in the freight railroad market and improve the Company's ability to compete in the mass rail transit market. Consistent with its objective of protecting its position as a leading developer of technologically advanced products, the Company spent approximately 10 $3,442,000, $4,561,000 and $5,218,000 in the years ended December 31, 1993, 1994 and 1995, respectively, on research and development activities related either to the improvement of existing products or to the development of new products. While the dollar amount classified as research and development has fluctuated over the years, the number of engineers in the Company's employ has increased. A significant portion of the engineering resources are involved in applying developed products to specific customer needs. In addition to expanding its product line by means of internal research and development, the Company will consider acquisitions of complementary product lines like those that have previously allowed the Company rapid entry into new areas of the railroad equipment market. In conjunction with the purchase of the railroad division of SERVO, the Company obtained their technology and R&D projects along with a significant research workforce that is already in place. Although the Company believes that its patents and patent applications have value, the Company relies primarily on trade secrets to protect its technology. Rapidly changing technology makes the Company's future success dependent on the technical competence and creative skill of its personnel. MARKETING AND SALES The Company's products are sold to the freight railroads and rail transit industries through experienced direct sales employees who work closely with the Company's customers to identify existing or potential products to improve the efficiency and enhance the safety of their operations. The Company's sales force is organized along industry lines. A separate group is primarily responsible for sales to each of the market segments: Class I, short line, rail transit and international. The international marketing organization is assisted by a distributor in which the Company has a minority interest. Henkes-Harmon Industries, Pty. Ltd. is based in Melbourne, Victoria, Australia and sells the Company's products in Australia and New Zealand. The Company also utilizes foreign nationals to assist the Company's sales staff with sales in other foreign markets. The addition of the distributor network associated with the SERVO hot box detector product line acquisition should enable Harmon to increase its penetration in the international market, particularly in Europe. The Company considers Mexico and Canada to be a portion of its domestic market and these countries are serviced by its domestic marketing group. This effort is enhanced in Canada by using Vale-Harmon Enterprise Ltd., which is based in Quebec, Canada and sells Harmon products to the Canadian railroads. Harmon has a minority equity interest in Vale-Harmon. Harmon is considering strategic alliances with entities that design and manage the construction and expansion of track systems to assist Harmon with sales in the United States and elsewhere. The Company's products are sold individually or are packaged together as a system to provide a broad array of combined products and services. Although sales of some of the Company's products are seasonal, the Company does not consider its business generally to be seasonal. 11 The Company is actively pursuing opportunities on freight and passenger railroads in both the United States and international markets. Sales in the rail transit market are usually large multi-year contracts for major new installations compared with shorter term projects or individual product sales that typically occur in the freight market. If the Company is successful in obtaining such contracts, which are generally awarded on a fixed price bid basis, significant variations in overall sales and backlog may result. BACKLOG The Company's backlog of orders was approximately $49.1 Million at December 31, 1995. Approximately, $1.5 million of these orders have delivery dates in 1997 and 1998. Management believes the remaining $47.6 million in orders are firm and will be filled in 1996. The backlog of orders was approximately $44.6 million at December 31, 1994, the majority of which were filled during 1995. Although the Company has historically experienced few order cancellations or delays in filling orders, cancellations could occur and delivery dates could be extended due to customer requests or production scheduling. COMPETITION The Company's business is highly competitive. The Company competes effectively on the basis of the reliability and design of its products, customer service and price. Competition will require the Company to continue to introduce new products and services to its customers. The Company's three major competitors, all of which are subsidiary units of foreign companies, appear to have greater financial resources than the Company. Nonetheless, the Company has demonstrated its ability to develop and introduce new products and expects that a continuation of such ability will permit it to maintain its competitive position. WARRANTY AND FIELD SERVICE The Company provides a high level of customer support through warranty and customer service departments. The Company's engineers and technicians provide field service support, repairs and customer training in the use and maintenance of the Company's products. These efforts are important to maintain customer satisfaction and learn of customer needs, but do not now directly generate significant revenue for the Company. MANUFACTURING Manufacturing consists of the assembly of component parts either purchased from others or produced internally and the production of printed wiring boards. The Company generally manufactures products in response to specific customer orders and specifications and, as a result, does not maintain a significant finished goods inventory. Furthermore, an increasing number of the products sold by the Company are incorporated into a complete system that is assembled by the Company and delivered as a package. The Company's employees participate in the Total Quality System, working in teams to improve processes and products. Harmon was one of the first vendors to the railroad industry to institute a total quality program and considers its program to be an important part of its continuing efforts to improve its manufacturing process and products. The Company is dependent upon a continuing supply, both domestic and foreign, of some component parts and materials. The Company occasionally experiences some delays in the availability of certain component parts and 12 materials, and in many cases suppliers require long lead times. In recent years, there has been no significant interruption of the Company's business due to a shortage of components or manufacturing materials. EMPLOYEES As of December 31, 1995, the Company had 1078 full-time employees. There were 954 employees in manufacturing, 31 in marketing and sales and 93 in general and administrative services. Some of the 954 manufacturing employees are engaged in research and development. The Company estimates that the time expended on research and development equals approximately 63 full-time employees. In addition, the Company estimates that approximately 87 full-time employees are involved in applications engineering. In general, the Company believes its relations with its employees are excellent. The Company's employees are not covered by a collective bargaining agreement. ITEM 2. PROPERTIES The Company owns or leases an aggregate of approximately 500,000 square feet of space for manufacturing, warehousing, research and general office use. In addition, the Company owns 32 acres of land zoned for industrial use, on which the Grain Valley manufacturing and research facilities, and the Warrensburg component plant are located. All real property owned or leased by the Company is subject to liens arising from the Company's long term debt, as described in Note 3 of Notes to the Consolidated Financial Statements. The following table summarizes the Company's principal facilities.
FLOOR SPACE ANNUAL LEASE EXPIRATION LOCATION PRINCIPAL USE (SQUARE FEET) PAYMENT (1) DATE OF LEASE -------- ------------- ------------- ------------ ------------- Grain Valley, Design and manufacture of 77,750 Owned Owned(2) Missouri electronic products and (2 facilities) railroad signal systems Warrensburg, Manufacture of railroad 48,000 Owned Owned Missouri crossing warning systems and hardware Warrensburg, Manufacture of printed 30,400 Owned Owned Missouri wiring boards Jacksonville, Design and manufacture of 86,800 $203,410 12-31-96 Florida railroad crossing warning systems and hardware Omaha, Design of railroad 2,000 $ 20,100 3-02-98 Nebraska crossing warning systems Louisville, Design of railroad 9,765 $ 57,500 8-31-99 Kentucky crossing warning systems Atlanta, Design and assembly 35,364 Owned Owned Georgia of railroad crossing warning systems Riverside, Administration and product 88,027 $ 344,949 9-30-2001(3) California design, management (3 facilities) information service operations and manufacture of electronic products
13
FLOOR SPACE ANNUAL LEASE EXPIRATION LOCATION PRINCIPAL USE (SQUARE FEET) PAYMENT (1) DATE OF LEASE -------- ------------- ------------- ------------ ------------- Hauppauge, Design of electronic 10,000 $100,000 5-1-2000(4) New York products for the railroad industry Riverside, Assembly, storage and 47,000 $103,402 2-01-97 California distribution of products for the railroad industry Lee's Summit, Assembly storage and 20,000 $ 66,000 7-01-99(5) Missouri distribution of products for the railroad industry Lee's Summit, Assembly, storage and 10,000 $ 33,000 8-31-96(6) Missouri distribution of products for the railroad industry Blue Springs, Corporate Headquarters 14,166 $135,930 11-01-99(7) Missouri
(1) For additional discussion and information concerning the Company's lease commitments, see "Financial Statements - Note 6 of Notes to the Consolidated Financial Statements." (2) See "Financial Statements - Note 4 of Notes to the Consolidated Financial Statements." (3) Consumer price indexed increases (maximum 4% per year) are effective October 1, 1998 and October 1, 1999. Upon notice by January 1, 1998, the Company has the right to terminate this lease on October 1, 1998 subject to an early termination penalty. (4) Lease payments are as follows: May 1, 1995 through April 30, 1996 - $100,000/year May 1, 1996 through April 30, 1997 - $103,612/year May 1, 1997 through April 30, 1998 - $107,368/year May 1, 1998 through April 30, 1999 - $111,275/year May 1, 1999 through April 30, 2000 - $115,338/year (5) The annual lease payment increases to $70,000, $73,000 and $77,000 effective July 1, 1997, 1998 and 1999, respectively. The Company may terminate this lease in June 1997 upon payment of a predetermined early termination fee. (6) The Company has the option to extend and renew this lease for four successive one year terms after June 30, 1996. (7) The Company has the option to renew the lease for up to two successive five year terms. In addition to these facilities, the Company also leases office space in Grain Valley and Blue Springs, Missouri. The Company owns all significant machinery and equipment used in its manufacturing operations. Management believes that its facilities are adequate for current and foreseeable needs. 14 ITEM 3. LEGAL PROCEEDINGS GRAIN VALLEY MATTER During the last quarter of 1987, officials of the Company discovered ground contamination from used solvents classified as hazardous waste at the Grain Valley, Missouri production facility that it owns. A voluntary report was made to the State of Missouri Department of Natural Resources ("MDNR"), and negotiations are ongoing regarding the extent of remedial or clean up actions and monitoring requirements. MDNR has approved the Company's Closure/Post-Closure Plan which sets forth the soil remediation and groundwater monitoring obligations at this site. The Company and MDNR also have entered into a Consent Decree which authorizes the Company to implement the approved Closure/Post-Closure Plan pending the issuance of a post-closure permit. The Company submitted a post-closure permit application to MDNR in October 1993. No permit has yet been issued by MDNR in draft or final form. Any groundwater or other remediation requirements will be set forth in the post-closure permit. To date, the exact extent of and cost of all remedial action or monitoring which may be mandated by the MDNR have not been finally determined. Nonetheless, the Company has designed and installed a system to begin soil remediation and expects that system will be required to continue in operation for some time. The Company completed closure work and submitted its closure report to MDNR for approval on February 1, 1996. The Company has established a trust fund to provide financial assurance for the anticipated post-closure costs of approximately $500,000 to be incurred over approximately 30 years. To date, the Company has contributed approximately $490,000 to a trust to cover these costs. On September 30, 1991, the EPA issued a Complaint against the Company alleging violations of the Resource Conservation and Recovery Act ("RCRA") and RCRA regulations in its disposal of the solvents that created the contamination described above. The Complaint initially sought penalties in the amount of $2,777,000 and proposed certain compliance actions. On December 6, 1993, EPA amended its Complaint to decrease the amount of proposed penalties to $2,343,706. The Company is vigorously defending the EPA Complaint and related proposed penalties under RCRA. Management believes that all of the allegations are for technical violations. The case proceeded to hearing before an Administrative Law Judge on January 12-14, 1994, on the issue of penalties. The Company presented evidence on a variety of penalty reduction theories, including good faith, minor potential harm to human health and the environment, and economic benefit. On December 12, 1994, the Administrative Law Judge issued an Initial Decision, in which he assessed penalties of $586,716 against the Company. Additionally, the Judge issued a Compliance Order requiring the Company to obtain liability coverage for sudden and non-sudden accidental occurrences, despite a Consent Decree with the Missouri Department of Natural Resources which excused the Company from this requirement as long as the Company continued to make semi-annual showings that the type of insurance required by the regulations was unattainable. On January 9, 1995, the Company filed a Notice of Appeal of the Initial Decision with the Environmental Appeals Board. On appeal, the Company will argue that the complaint is barred by the federal statute of limitations, that EPA lacks jurisdiction to bring the Complaint and that the penalties assessed against the Company are excessive in 15 light of the Company's discovery during an internal audit and subsequent voluntary disclosure and clean-up. The Company will also argue that the Judge's Order for the Company to obtain liability coverage is inconsistent with the State Consent Decree and violates the spirit of the RCRA state authorization provisions. EPA did not appeal the Initial Decision, but has filed briefs in support of the $586,716 penalty. Special legal counsel has advised that the penalties sought by EPA in this case are consistent with its applicable penalty guidelines that were adopted by the EPA in October, 1990. Based on the Company's cooperation with MDNR (which has original jurisdiction and, therefore, primary responsibility in the matters complained by the EPA), in voluntarily disclosing the alleged violations, and in promptly undertaking all remedial actions specified to date by the MDNR, the penalties appear to the Company's special legal counsel to be excessive. However, because so few analogous cases have been disposed of by settlement or by administrative or judicial proceedings since the new penalty guidelines were adopted, special legal counsel cannot express an opinion as to the ultimate amount, if any, of the Company's liability. Since the amount of the penalties cannot be reasonably determined at this time, no estimate is included here or in the financial statements. OTHER MATTERS The Company has been named as a defendant in several other lawsuits in the normal course of its business. In the opinion of management of the Company, after consulting with legal counsel, the liabilities, if any, resulting from these matters are not expected to have a material effect on the consolidated financial statements of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the quarter ended December 31, 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's common stock trades on The NASDAQ Market under the symbol HRMN. Stock price quotations can be found in major daily newspapers and in The Wall Street Journal. At February 1, 1996, the following securities firms were making a dual auction market in the Company's common stock: George K. Baum & Company Piper Jaffray Companies Inc. Paine Webber Inc. The approximate number of holders of record for the Company's common stock as of March 18, 1996 was 675. 16 ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements on accounting and financial disclosure as described in Item 304 of Regulation S-K. There has been no change in the Company's accountants within the preceding twenty-four months. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of the officers and key employees of the Company. This information should be read in connection with the Company's Proxy Statement (Pages 3 through 4).
PRINCIPAL OCCUPATION INDIVIDUAL OFFICE AGE FOR THE LAST FIVE YEARS - ---------- ------ --- ----------------------- Breshears, Ronald G. VP-Human Resources 49 VP-Human Resources of the Company since 7/1/81. Daniels, Richard A. VP-Transit Sales 55 Appointed VP-Transit Sales 2/1/93. Prior to that, Director Transit/Commuter Systems of the Company since April 1991; prior to that held several positions with the Company, including VP-Engineering of Harmon Electronics, since 1986. Foudree, Charles M. Exec. VP-Finance, 51 Exec. VP of the Company Secretary and since 9/9/86. Secretary Treasurer of the Company since 2/2/82. Treasurer of the Company since 2/5/74.
17
PRINCIPAL OCCUPATION INDIVIDUAL OFFICE AGE FOR THE LAST FIVE YEARS - ---------- ------ --- ----------------------- Harmon, Robert E. Chairman of the 56 Chairman of the Board of Board the Company since 2/4/75. Chief Executive Officer of the Company from 8/1/90 through 12/31/94. Prior to that, President of the Company from 11/17/69 through 7/31/90. Heggestad, Robert E. VP-Technology 57 VP-Technology of the Company since 10/2/86. John, James R. President of 47 President of CAMCO since March Consolidated Asset 1992. Prior to that VP-Manufacturing Management Co., Inc. of Harmon Electronics, Inc. (CAMCO) since February 1987. Johnson, John W. VP-Domestic Sales 49 Appointed VP-Domestic Sales 2/1/93. Prior to that Director-Product Support for the Company since March 1992; prior to that held several positions with the Company, including Sales Manager-Signal Products, Director of Engineering for Harmon Electronics, Director of Customer Service and Sales since 1972. Kaiser, Lloyd T. President of 44 President of Harmon Harmon Electronics, Electronics, Inc. since Inc. (HEI) March 1992; prior to that VP-Research & Development of Harmon Electronics, Inc. (HEI) since 4/1/91; prior to that President of Phoenix Data, Inc. since 7/15/89; prior to that General Manager of HEI Component Division since 9/15/86; prior to that Sales Mgr. of the Component Division since 6/9/86. Olsson, Bjorn E. President & Chief 50 Chief Executive Officer of the Executive Officer Company since 1/1/95. President of the Company since 8/1/90. Chief Operating Officer of the Company from 8/1/90 through 12/31/94. Prior to that VP of Corporate Development of Investment AB Cardo since 1987.
18
PRINCIPAL OCCUPATION INDIVIDUAL OFFICE AGE FOR THE LAST FIVE YEARS - ---------- ------ --- ----------------------- Rosewall, Raymond A. President of 44 President of Electro Pneumatic Electro Pneumatic Corporation and VP-Manufacturing Corporation (EPC) of Harmon Industries, Inc. since and VP-Manufacturing 12/27/95. Prior to that Executive of Harmon Industries, VP Worldwide Sales and Marketing Inc. for QMS, Inc. since 1992; prior to that Executive VP Operations for QMS, Inc. since 1989. Ryker, Gary E. Exec. VP-Marketing, 46 Appointed Exec. VP-Marketing, Sales and Service Sales and Service 2/1/93. Prior to that VP-Marketing and Sales of the Company since 9/1/92; prior to that Marketing and Operations Director and Marketing and Support Manager for Railroad Electronics for Rockwell International since 1979. Scheerer, William J. VP-Business 48 Appointed VP-Business Development Development 1/4/94. Prior to that held various positions with the CSX Railroad, the latest one being Chief Engineer Train Control for CSX Transportation. Schmitz, Stephen L. VP-Controller 42 VP-Controller of the Company since 11/1/83.
Although some of the above have employment agreements which provide for twelve months of continued employment on a rolling basis, all of the above serve as officers at the pleasure of the respective Board of Directors and are appointed for one year terms. 19 The following is a list of the Board of Directors of the Company: INDIVIDUAL AFFILIATION ---------- ----------- Robert E. Harmon Chairman of the Board Thomas F. Eagleton Attorney-at-Law, Thompson & Mitchell St. Louis, Missouri Bruce M. Flohr Chairman and CEO RailTex, Inc., San Antonio, Texas Charles M. Foudree Executive Vice President-Finance, Treasurer and Secretary Rodney L. Gray Chairman & CEO Enron International, Inc., Houston, Texas Herbert M. Kohn Attorney-at-Law, Bryan Cave Kansas City, Missouri Douglass Wm. List Management Consultant Baltimore, Maryland Gerald E. Myers Management Consultant Tempe, Arizona Bjorn E. Olsson Chief Executive Officer and President Donald V. Rentz President, Graham Wholesale Floral Graham, Texas Judith C. Whittaker Vice President-Legal, Hallmark Cards, Inc. Kansas City, Missouri ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following consolidated financial statements of Harmon Industries, Inc. and subsidiaries are incorporated by reference from the Company's 1995 Annual Report to Shareholders at the following pages: 20 PAGE ---- Independent Auditors' Report 37 Consolidated Balance Sheets - December 31, 1995 and 1994 22-23 Consolidated Statements of Earnings - Years ended December 31, 1995, 1994 and 1993 24 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1995, 1994 and 1993 25 Consolidated Statements of Cash Flows - Years ended December 31, 1995, 1994, and 1993 26 Notes to Consolidated Financial Statements 27-35 (a)(2) Financial Statement Schedules Selected Financial Data - for the years ended December 31, 1995, 1994 and 1993, are attached hereto at the following pages: Independent Auditors' Report on Financial Statement Schedule 24 Schedule VIII - Valuation and Qualifying Accounts 25 All other schedules are omitted as they are either not applicable or the required information is presented in the footnotes to the financial statements in the annual report. (a)(3) Exhibits:
EXHIBIT NO. PAGE ----------- ---- 3(ii)By Laws 26 thru 28 10 Stock Buy Back Plan 29 thru 30 10 Harmon Industries, Inc. 1996 Long Term Incentive Plan (See Proxy Statement Exhibit) 11 Computation of Weighted Average Shares Outstanding 31 thru 32 13 Sections of the 1995 Annual Report to Shareholders 33 thru 58 21 Listing of Subsidiaries 59 N/A Notice of Annual Meeting and Proxy Statement dated April 1, 1996 60 thru 98
(b) Reports on Form 8-K: There were no reports on Form 8-K for the three months ended December 31, 1995. 21 SIGNATURES Pursuant to the requirements of Section 13 and 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. HARMON INDUSTRIES, INC. Date: March 25, 1996 By: /s/ Bjorn E. Olsson ---------------------------- Bjorn E. Olsson President Date: March 25, 1996 By: /s/ Charles M. Foudree ---------------------------- Charles M. Foudree Executive Vice President- Finance Date: March 25, 1996 By: /s/ Stephen L. Schmitz ---------------------------- Stephen L. Schmitz Vice President-Controller 22 SIGNATURES 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 their capacities as directors and on the dates indicated: By: Date: March 25, 1996 ---------------------------- Thomas F. Eagleton, Director By: /s/ Bruce M. Flohr Date March 25, 1996 ---------------------------- Bruce M. Flohr, Director By: /s/ Charles M. Foudree Date: March 25, 1996 ---------------------------- Charles M. Foudree, Director By: Date: March 25, 1996 ---------------------------- Rodney L. Gray, Director By: /s/ Robert E. Harmon Date: March 25, 1996 ---------------------------- Robert E. Harmon, Director By: Date: March 25, 1996 ---------------------------- Herbert M. Kohn, Director By: /s/ Douglass Wm. List Date: March 25, 1996 ---------------------------- Douglass Wm. List, Director By: /s/ Gerald E. Myers Date: March 25, 1996 ---------------------------- Gerald E. Myers, Director By: /s/ Bjorn E. Olsson Date: March 25, 1996 ---------------------------- Bjorn E. Olsson, Director By: /s/ Donald V. Rentz Date: March 25, 1996 ---------------------------- Donald V. Rentz, Director By: /s/ Judith C. Whittaker Date: March 25, 1996 ---------------------------- Judith C. Whittaker, Director 23 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Harmon Industries, Inc.: Under date of February 2, 1996, we reported on the consolidated balance sheets of Harmon Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1995. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed under Item 14 of Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, this 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. KPMG Peat Marwick LLP Kansas City, Missouri February 2, 1996 24 SCHEDULE VIII HARMON INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
CHARGED TO BEGINNING COSTS AND RECOVERIES ENDING DESCRIPTION BALANCE EXPENSES (DEDUCTIONS) BALANCE ----------- ------- -------- ------------ ------- Year ended December 31, 1993: Allowance for doubtful trade accounts receivable $ 232 $ -- $ (9) $241 ------ ---- ------ ---- ------ ---- ------ ---- Reserve for assets of discontinued operations $2,456 $ -- $2,456 $ -- ------ ---- ------ ---- ------ ---- ------ ---- Year ended December 31, 1994: Allowance for doubtful trade accounts receivable $ 241 $ 1 $ 118 $360 ------ ---- ------ ---- ------ ---- ------ ---- Year ended December 31, 1995: Allowance for doubtful trade accounts receivable $ 360 $ -- $ 2 $362 ------ ---- ------ ---- ------ ---- ------ ----
25 EX-3.(II) 2 EXHIBIT 3(II) ITEM 3(ii) BYLAW AMENDMENT BYLAW AMENDMENT HARMON INDUSTRIES, INC. -- 3/25/96 RESOLVED, that the Board of Directors hereby amends the Bylaws of the Corporation by deleting in its entirety Section 13 of said Bylaws and inserting the following provisions in lieu thereof: SECTION 13: VACANCIES AND NEWLY CREATED DIRECTORSHIPS; NOMINATIONS OF DIRECTORS; ELECTION. (a) Newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board resulting from death, resignation, disqualification, removal, or other cause will be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board, or by a sole remaining Director. Any Director elected in accordance with the preceding sentence will hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and which the new directorship was created or the vacancy occurred and until such Director's successor is elected and qualified. No decrease in the number of Directors constituting the Board will shorten the term of an incumbent Director. (b) Other than persons nominated and elected pursuant to Paragraph (a), only persons who are nominated in accordance with the following procedures will be eligible for election as Directors of the Corporation. (c) Nominations of persons for election as Directors of the Corporation may be made at a meeting of stockholders (i) by or at the direction of the Board (including the Director Nomination and Compensation Committee thereof) or (ii) by any stockholder who is a stockholder of record at the time of giving of notice provided for in this Bylaw 13 who is entitled to vote for the election of such Director at the meeting and who complies with the procedures set forth in this Bylaw 13. All nominations by stockholders must be made pursuant to timely notice in proper written form to the Secretary. (d) To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 1 calendar days prior to the meeting. To be in proper written form, such stockholder's notice must set forth or include (i) the name and address, as they appear on the Corporation's books, of the stockholder giving the notice and of the beneficial owner, if any, on whose behalf the nomination is made; (ii) a representation that the stockholder giving the notice is a stockholder of record of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting for such Director to nominate the person or persons specified in the notice; (iii) the number of shares of stock of the Corporation owned beneficially and of record by the stockholder giving the notice and by the beneficial owner, if any, on whose behalf the nomination is made; (iv) a description of all arrangements or understandings between or among any of (A) the stockholder giving the notice, (B) the beneficial owner, if any, on whose behalf the notice is given, (C) each nominee, and (D) any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder giving the notice; (v) such other information regarding each nominee proposed by the stockholder giving the notice as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board; and (vi) the signed consent of each nominee to serve as a Director of the Corporation if so elected. At the request of the Board, any person nominated by the Board for election as a Director must furnish to the Secretary that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. The presiding officer of the meeting for election of Directors will, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by this Bylaw 13, and if so determined, so declare to the meeting and the defective nomination will be disregarded. (e) Stockholders shall not have a right to cumulate their votes for Directors. Directors shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. FURTHER RESOLVED, that the Board of Directors hereby authorizes an amendment of Section 15 of the Bylaws to delete the Section 15, REMOVAL OF DIRECTORS, in its entirety and insert in lieu thereof the following: 2 SECTION 15. REMOVAL OF DIRECTORS: The Shareholders shall have the power by a two-thirds vote of the holders of shares at any regular meeting or special meeting expressly called for that purpose, to remove any director from office with or without cause; and FURTHER RESOLVED, that the Board of Directors hereby authorizes and directs the officers of the Corporation to make the foregoing changes in the Bylaws and to take any and all action necessary to carry out the authority granted in this resolution. 3 EX-10 3 EXHIBIT 10 ITEM 10 STOCK BUY-BACK PLAN OF HARMON INDUSTRIES, INC. STATEMENT OF PURPOSE The purpose of this Stock Buy-Back Plan (the "Plan") is to enable Harmon Industries, Inc. (the "Company"), to purchase outstanding Common Stock of the Company either through private negotiated transactions or through open market purchases. STATEMENT OF PLAN 1. ADMINISTRATION. The Plan shall be administered by a Stock Buy-Back Committee (the "Committee"), composed of three members. The committee shall consist of the President of the Company, the Executive Vice President-Finance of the Company and any one of the outside directors sitting on the Ad Hoc Committee on Change of Control. In the absence or unavailability of either the President or the Executive Vice President-Finance, an outside director sitting on the Ad Hoc Committee on Change of Control shall replace him during the period of absence or unavailability. Subject to the provisions of the Plan, the Committee is authorized to interpret the Plan, and to make all other determinations necessary or advisable for its administration. 2. SHARES SUBJECT TO THE PLAN. The Committee may provide for the purchase in the aggregate of up to 150,000 shares of the outstanding Common Stock of the Company with funds of the Corporation subject to (i) approval by securities counsel as to compliance with applicable federal and state securities laws, including but not limited to rule 10(b)-18 of the Securities and Exchange Act of 1934, as amended, and (ii) compliance with applicable state law regarding redemption or repurchase of shares of the corporation's stock. 3. PRICE. The price to be paid for purchase of outstanding Common Stock of the Company shall be within the parameters established by the Board of Directors from time to time and subject to authorization by the Committee. 4. PURCHASES. The officers of the Corporation shall execute and carry out purchases of outstanding Common Stock of the Company, as authorized by the Committee subject to compliance with applicable law. 5. RESTRICTION ON SHARES PURCHASED. Shares of the Company purchased pursuant to this Plan shall be held, initially, as 1 treasury shares. Such shares may, thereafter, be utilized for any purpose permitted by applicable law and the bylaws of the Company and approved by the Board of Directors. 6. NOTIFICATION. The Committee shall notify the Board of Directors of any stock purchases completed under this Plan as soon as practicable after such purchases. 7. EFFECTIVE DATE AND TERMINATION OF PLAN. This Plan has been adopted by the Board of Directors on August 10, 1995. The Board of Directors may terminate this Plan at any time. 8. AMENDMENT OF PLAN. The Board of Directors may at any time amend the Plan. 2 EX-11 4 EXHIBIT 11 EXHIBIT A --------- HARMON INDUSTRIES, INC. FORM 10-K DECEMBER 31, 1995 COMPUTATION OF EARNINGS PER SHARE (INSTRUCTION H(g)) Computation of the average number of shares of Common Stock outstanding for the three months ended December 31, 1995, 1994 and 1993.
(1) (2) (3) (4) Average number of shares outstanding as shown on consolidated statements Shares of Number of operations (3) common of days Share days divided by number stock outstanding (2 X 1) of days in period --------- ----------- ----------- ----------------------- 1995 October 1 - December 31 6,805,626 92 626,117,592 Equivalent shares under the Company's bonus plan 2,698 92 248,189 Equivalent shares under the Company's option plans 25,461 92 2,342,412 628,708,193 6,833,785 ----------- --------- ----------- --------- 1994 October 1 - December 31 6,459,052 92 594,232,784 Equivalent shares under the Company's bonus plan 2,110 92 194,118 Options exercised 8,500 4 34,000 2,200 2 4,400 Equivalent shares under the Company's option plans 97,880 92 9,004,960 Shares issued in acquisition 260,000 12 3,120,000 ----------- 606,590,262 6,593,372 ----------- --------- ----------- --------- 1993 October 1 - December 31 6,263,337 92 576,227,004 Equivalent shares under the Company's bonus plan 2,559 92 235,394 Options exercised 1,000 87 87,000 30,000 68 2,040,000 15,200 60 912,000 8,000 18 144,000 1,000 12 12,000 1,500 11 16,500 7,400 5 37,000 1,000 4 4,000 Equivalent shares under the Company's option plans 242,203 92 22,282,676 ----------- 601,997,574 6,543,452 ----------- --------- ----------- ---------
1 Computation of the average number of shares of Common Stock outstanding for the twelve months ended December 31, 1995, 1994 and 1993. 1995 Quarter 1 weighted average 6,814,783 Quarter 2 weighted average 6,823,650 Quarter 3 weighted average 6,837,112 Quarter 4 weighted average 6,833,785 ---------- Divided by 27,309,330 4 Quarters = 6,827,333 ---------- --------- ---------- --------- 1994 Quarter 1 weighted average 6,551,192 Quarter 2 weighted average 6,558,527 Quarter 3 weighted average 6,563,411 Quarter 4 weighted average 6,593,372 ---------- Divided by 26,266,502 4 Quarters = 6,566,626 ---------- --------- ---------- --------- 1993 Quarter 1 weighted average 5,623,334 Quarter 2 weighted average 6,146,910 Quarter 3 weighted average 6,532,649 Quarter 4 weighted average 6,543,452 ---------- Divided by 24,846,345 4 Quarters = 6,211,586 ---------- --------- ---------- ---------
2 EX-13 5 EXHIBIT 13 Harmon Industries, Inc. and Subsidiaries Selected Consolidated Financial Data (Unaudited) (Dollars in thousands, except per share data)
Years ended December 31 1995 1994 1993 1992 Operations Net sales $ 136,780 $ 119,703 $ 99,295 $ 81,899 Cost of sales 96,094 81,023 65,716 54,271 Research and development expenditures 5,218 4,561 3,442 3,541 Gross profit 35,468 34,119 30,137 24,087 Selling, general and administrative expenses 23,200 21,176 18,558 15,646 Other operating expenses (income) 481 44 114 137 Operating income 11,787 12,899 11,465 8,304 Other expenses 607 214 388 1,228 Pre-tax earnings (continuing operations) 11,180 12,685 11,077 7,076 Income taxes 4,294 5,046 4,193 2,498 Earnings from continuing operations 6,886 7,639 6,884 4,578 Gain (loss) from discontinued operations ---- ---- ---- 165 Use of net operating loss carryforward ---- ---- ---- 273 Net earnings (loss) $ 6,886 $ 7,639 $ 6,884 $ 5,016 Effective tax rate - continuing operations 38.4% 39.8% 37.9% 35.3% Return on sales - continuing operations 5.0% 6.4% 6.9% 5.6% Return on equity - continuing operations 14.0% 17.7% 20.8% 30.1% Return on equity - total 14.0% 17.7% 20.8% 33.0% Weighted average shares 6,827 6,567 6,212 5,275 Per Share Data Earnings from continuing operations $ 1.01 $ 1.16 $ 1.11 $ .87 Net earnings (loss) 1.01 1.16 1.11 .95 Cash dividends .15 .15 ---- ---- Book value 7.23 6.40 5.23 2.82 Price/earnings ratio range 13.2-20.3 14.2-20.9 10.5-20.9 3.6-13.4 Other Data At Year-End Working capital $ 35,014 $ 21,670 $ 20,790 $ 10,740 Total assets 86,845 68,395 53,000 38,488 Long-term debt 12,090 733 439 4,898 Stockholders' equity 49,232 43,063 33,086 15,197 Current ratio 2.60:1 2.03:1 2.28:1 1.72:1 Quick assets ratio 1.16:1 1.03:1 1.32:1 .87:1 Liabilities to equity ratio .76:1 .59:1 .60:1 1.53:1 Capital additions 5,532 3,242 3,189 2,154 Depreciation and amortization 3,906 2,621 2,121 1,936 Outstanding shares (000s) 6,806 6,728 6,328 5,383
1
5 yr. 10 yr. Compound Compound 1991 1990 1989 1988 1987 1986 1985 Growth Growth $ 70,934 $ 72,707 $ 70,154 $ 64,558 $ 57,068 $ 47,223 $ 52,993 +13.47% +9.95% 45,536 47,478 46,377 42,044 37,995 30,333 34,426 4,000 3,414 3,200 3,669 3,318 2,360 2,095 21,398 21,815 20,577 18,845 15,755 14,530 16,472 +10.21% +7.97% 13,550 14,427 13,186 11,965 10,671 9,362 8,497 1,122 762 (263) (27) 43 145 125 6,726 6,626 7,654 6,907 5,041 5,023 7,850 +12.21% +4.15% 2,118 1,504 1,244 1,301 1,519 885 1,720 4,608 5,122 6,410 5,606 3,522 4,138 6,130 +16.90% +6.19% 1,688 2,022 2,506 2,100 1,613 2,039 2,909 2,920 3,100 3,904 3,506 1,909 2,099 3,221 +17.31% +7.89% (2,492) (12,306) (2,744) (1,020) (217) -- -- 395 -- -- -- -- -- -- $ 823 $ (9,206) $ 1,160 $ 2,486 $ 1,692 $ 2,099 $ 3,221 N/M* +7.89% 36.6% 39.5% 39.1% 37.5% 45.8% 49.3% 47.5% 4.1% 4.3% 5.6% 5.4% 3.3% 4.4% 6.1% 39.6% 53.9% 26.5% 25.9% 16.5% 20.0% 22.9% 11.2% (160.2%) 7.9% 18.3% 14.6% 20.0% 22.9% 5,066 4,723 4,633 4,479 4,472 4,854 4,430 $ .58 $ .66 $ .84 $ .78 $ .43 $ .43 $ .73 +8.88% +3.30% .16 (1.95) .25 .56 .38 .43 .73 N/M* +3.30% -- .0625 .125 .125 .125 .125 .125 1.48 1.20 3.19 3.03 2.59 2.34 2.94 +43.24% +9.41% 21.9-45.3 N/A 23.0-35.0 9.5-14.8 13.2-22.4 15.4-27.3 8.2-16.1 $ 9,660 $ 7,955 $ 14,444 $ 7,037 $ 11,870 $ 11,599 $ 9,962 +34.50% +13.39% 36,575 41,408 48,082 42,948 37,984 34,045 30,111 +15.97% +11.17% 11,915 17,220 17,688 12,139 14,621 13,793 6,604 7,377 5,747 14,756 13,557 11,604 10,470 14,038 +53.66% +13.37% 1.71:1 1.49:1 2.08:1 1.45:1 2.17:1 2.36:1 2.17:1 .76:1 .66:1 .84:1 .60:1 1.09:1 .96:1 .90:1 3.96:1 6.21:1 2.26:1 2.17:1 2.27:1 2.25:1 1.14:1 1,098 4,521 4,589 9,886 3,552 2,212 2,919 2,022 3,511 3,185 2,834 2,531 2,074 1,775 4,998 4,790 4,628 4,478 4,472 4,472 4,769
*Not Measurable 2 HARMON INDUSTRIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Harmon's total business has been on an upward trend for the past several years. The Company has increased its market share with its principal customers, the Class I and Short-Line Railroads, and it has successfully entered into the new construction portion of the rail transit market, principally because of its technology and service. Additionally, the purchasing, materials management and pre-assembly services supplied by its asset management services subsidiary are filling an increasing need in the industry as railroads continue to downsize. Profile of Current Operations The Company's sales are summarized by product category in the table on page 17. The table also breaks out gross sales and percentages of total sales for each of the past three years. Sales of signal and control products by the Company's asset management services subsidiary (CAMCO) are included in those descriptive categories. The value-added portion supplied with those products by CAMCO remains in the asset management services category. A new category, Train Inspection Systems, is included this year, because its sales reached a sufficient level to separate them from the "Other" category of previous years. Train Control Systems include products related to the control of train movement. These include signal control track circuits (Electro Code); interlocking control equipment such as Electro Logic, the Harmon Logic Controller (HLC) and the Vital Harmon Logic Controller (VHLC); carborne equipment (Ultra Cab); and computer-based control systems (TTM). Signal Systems include all products related to rail/highway crossing warning systems. The products include motion detectors and predictors (the Company's PMD and HXP, among others); flashing lights and cantilevers; and the design, wiring and installation of packages comprised of these products. Asset Management Services provides a single-source, rapid delivery service for railroad components. It involves warehousing commonly-used parts and equipment that are manufactured by the Company and by other vendors. This service has been expanded in recent years to include asset and materials management as well as assembly of various components, which are delivered as a complete unit, ready for installation. Train Inspection Systems include products that monitor the condition of trains when they pass a train inspection site. The hot box detector is the principal product, which is installed beside the track to detect overheating bearings in passing rail cars, a serious condition that could lead to derailments. Other products include a sensor to identify high or wide loads and a device that detects foreign objects being dragged under a rail car. Printed Wiring Boards include production of customer designed printed wiring boards for shipment to other electronics manufacturers. Other sales include communication equipment and products that do not fit readily into the other five categories. 3
Sales by Product or Years ended December 31, Service Function* 1995 1994 1993 (Dollars in thousands) Amount % Amount % Amount % Train Control Systems $ 55,437 40.7% $ 45,711 38.4% $37,585 38.0% Signal Systems 42,374 31.1% 35,449 29.8% 36,034 36.5% Asset Management Services 14,194 10.4% 20,894 17.5% 10,223 10.3% Train Inspection Systems 11,360 8.4% 5,054 4.2% 4,510 4.6% Printed Wiring Boards 6,752 5.0% 6,307 5.3% 6,180 6.3% Other 5,999 4.4% 5,712 4.8% 4,252 4.3% Total $136,116 100.0% $119,127 100.0% $98,784 100.0%
*Sales volumes shown above are gross totals and do not include cash discounts or deferred contract revenue. As a result, there are minor differences between the figures in this table and those presented in the Consolidated Statements of Earnings. The differences do not affect the validity of the discussion and analysis. Results of Operations Years Ended December 31, 1995, 1994 and 1993. Net sales increased 14.3% to $136.8 million in 1995. Sales in 1994 were $119.7 million, 20.6% above the $99.3 million recorded for 1993. Net earnings for 1995 were $6.9 million ($1.01 per share), a decrease of 9.9% from the record $7.6 million ($1.16 a share) earned in 1994, which was 11.0% greater than the $6.9 million ($1.11 a share) earned in 1993. The decrease in earnings in 1995 was due primarily to a higher cost of sales principally occasioned by production issues related to the acquired hot box detector line, operating inefficiencies resulting from customer-induced delays in shipments, a $657,000 increase in research and development expenditures and higher interest costs. The increase in earnings in 1994 over those of 1993 was the result of substantially higher sales at slightly lower margins. The table on page 18 illustrates the percentage relationship to net sales for certain items reflected in the Company's Consolidated Statements of Earnings and the percentage increase or decrease in the dollar amounts of such items year-to-year. Net Sales Harmon's 14.3% increase in net sales in 1995 was due to gains in system sales (train control, train inspection and signal). Approximately half of the gain was the result of the Serrmi acquisition and a resurgence in rail-highway crossing installation sales (signal systems), which increased Harmon's market share last year. The remainder reflects gains in shipments on rail transit contracts and for carborne equipment (train control systems) and hot box detectors from the Servo acquisition (train inspection systems). Sales of asset management services were down $6.7 million in 1995 when shipments were delayed because of railroad merger activity. The 20.6% increase in net sales in 1994 resulted from a $10.7 million increase in asset management services revenues, an $8.1 million gain in train control system sales, much of which was related to rail transit contracts. The gain in train control systems in 1994 reflects the industry's growing acceptance of Harmon's control products, the HLC, VHLC and Ultra Cab. 4 Operating Summary
Percentage of Net Sales Percentage of Change Years ended December 31, 1995 1994 1993 over over over 1995 1994 1993 1994 1993 1992 Net sales 100.0% 100.0% 100.0% 14.3% 20.6% 21.2% Cost of sales 70.3% 67.7% 66.2% 18.6% 23.3% 21.1% Research and development 3.8% 3.8% 3.5% 14.4% 32.5% (2.8)% Gross profit 25.9% 28.5% 30.3% 4.0% 13.2% 25.1% Selling, general and administrative expenses 17.0% 17.7% 18.7% 9.6% 14.1% 18.6% Other operating expenses, net 0.4% 0.0% 0.1% 993.2% (61.4)% (16.8)% Operating income 8.5% 10.8% 11.5% (8.6)% 12.5% 38.1% Other expenses 0.4% 0.2% 0.4% 183.6% (44.8)% (68.4)% Earnings before income taxes 8.1% 10.6% 11.1% (11.9)% 14.5% 56.5% Income taxes 3.1% 4.2% 4.2% (14.9)% 20.3% 67.9% Net earnings 5.0% 6.4% 6.9% (9.9)% 11.0% 50.4%
Sales of the Company's signal systems are influenced by the financial condition of the railroad industry, the railroads' budgets for planned equipment expenditures and by the level of activity in authorizing grade crossing warning system improvements subject to 80% federal support, up to a 1996 authorized limit of $160 million. Authorization expires in 1997, and future extensions are uncertain. Rail transit project funding is expected to approximate 1995 levels. The market for the remainder of the Company's products is largely dependent on the financial condition of the railroad industry, the trend of the general economy, and individual railroads' budgets for capital expenditures and repairs and maintenance. Gross Profit Gross profit margins for 1995 decreased to 25.9% of sales from 28.5% in 1994. The decline was caused primarily by inefficiencies in manufacturing the acquired hot box detector product line, difficulties encountered by the Company when its shipment stream was interrupted by railroad merger activity, increased R&D expenditures and from low margins obtained on "pass through" sales that were part of rail transit contracts. Gross profit margins for 1994 decreased to 28.5% from 30.4% for 1993. The decline reflects that asset management services sales, which are traditionally lower in margin, comprised a greater percentage of total sales than they did in 1993. In addition, R&D expenditures were higher in 1994 than in 1993. Selling, General & Administrative Expenses Selling, general and administrative expenses (SG&A) for 1995 increased approximately $2.0 million to $23.2 million (17.0% of net sales) from $21.2 million (17.7% of net sales) in 1994 and $18.6 million (18.7%) in 1993. The downward trend as a percentage of net sales reflects gains in cost controls and the fixed nature of certain costs. The absolute increase in dollars each year basically reflects the result of inflation, 5 commissions incident to higher sales volume, and additions to SG&A expenses incident to two acquisitions made in December 1994 and February 1995. These expenses were offset somewhat in 1995 by lower profit-based bonuses. Amortization Expenses The increase in amortization expenses in 1995 is attributable to the acquisitions of the hot box detector line of Servo Corporation of America at the end of 1994 and the assets of Serrmi Services, Inc. in the first quarter of 1995. Other Operating Expenses Changes in other operating expenses were insignificant in 1995, 1994 and 1993. Interest Expense Interest expense was $741,000 in 1995, $264,000 in 1994 and $427,000 in 1993. The increase for 1995 was the result of increased borrowings related to the acquisitions and to provide working capital. Interest costs were lower in 1994 as borrowings were less than in 1993. Income Taxes The Company's effective income tax rate for 1995 was 38.4% compared with 39.8% for 1994 and 37.9% for 1993. Tax rates were lower in 1995 because Harmon did more business in states with lower tax rates than it did in 1994. Tax rates were higher in 1994 than in 1993 principally because of changes in the federal tax law, prevailing high state income taxes in California, where Harmon did more business in 1994, and increased Missouri tax rates, where Harmon is headquartered. See Note 4 of Notes to the Consolidated Financial Statements. Inflation Inflation has been moderate during the past three years, averaging 3% to 4% for materials and wages. Competitive pressure has required the Company to maintain or reduce sales prices to sustain market share. Management believes that competitive pricing pressures will remain for the foreseeable future. Its program to combat this is to continue to increase productivity, adopt emerging lower-cost technological advances into its products, expand its available products through internal development and acquire products or companies in the railroad supply industry that will expand Harmon's product or service offerings. Liquidity, Cash Flow and Capital Resources The Company had a very strong balance sheet at 1995 year-end. Total assets were $86.8 million, up $18.5 million. Stockholders' equity rose to $49.2 million ($7.23 per share) from $43.1 million ($6.40 per share). Working capital was $35 million, which produced a current ratio of 2.6:1 compared to 2.0:1 a year earlier. Cash was down $926,000 and interest-bearing debt was up $10.5 million in 1995. Cash was used to fund the acquisition of Serrmi ($1.2 million), capital expenditures of $5.5 million, increased receivables of $3.9 million (largely because of $4.3 million increase in sales in the 1995 fourth quarter), and to support increased year-end inventories and increases in contracts in progress. At year-end 1995, the Company had an $18 million line of working capital credit and had borrowed $11.5 million. Capital expenditures for 1996 are expected to be approximately $8 million, roughly $2.5 million higher than the capital expenditures for 1995. 1996 Outlook 6 There is much to be optimistic about for 1996. The Company's core business is solid. It begins the new year with a record backlog of $49.1 million, up $4.5 million from the year earlier backlog of $44.6 million. The shipment delays that accompanied the railroad merger activity in 1995 are largely over, and business is returning to normal. Further, the production and inventory difficulties that surrounded the integration of the acquired hot box detector product line are largely behind the Company, although the hot box detector line's profit margins will be below their targeted levels for the next several months as some high cost inventory remains to be sold off. In addition, customer acceptance of our newer products has been excellent. Despite the favorable climate for increased business for Harmon, there are some uncertainties to consider as well. Among them are whether the economy will perform as well in 1996, whether government funding for rail transit and grade crossing warning systems will continue as before - given the mood in the Congress to reduce federal subsidies, whether our R&D departments will continue their output of innovative and very successful products, and what the outcome will be for the environmental matter discussed in Note 10 to the Consolidated Financial Statements. Further, the railroad industry remains acquisition minded. Mergers typically create short-term problems, particularly with shipment continuity and immediate new business. Long-term, however, mergers often prove beneficial as the surviving entity often consolidates traffic patterns to strengthen its operation, which for Harmon translates into additional orders for signal and control systems. Finally, we are operating at near-capacity in several areas of our business. Accordingly, we will spend substantial sums of money over the next several years to expand capacity in order to bid on larger contracts and to produce larger and more complex systems. We are addressing these issues by expanding our manufacturing space at several locations and increasing the size of our research and development center to accommodate many additional engineers. We also intend to increase our total capacity by outsourcing certain functions that would be more expensive to do in-house with our present volume of business. Management also recognizes that capacity can be increased by joining forces with others, particularly on very large installations, such as multimillion dollar contracts that will be bid on this year by suppliers to the rail transit industry. We will also make some major changes internally in 1996 to improve our cost effectiveness and the overall management of our processes. We view these expenditures as the price of admission to reach the next level of annual sales. Other There are no pending accounting pronouncements which will have a significant effect on the Company's financial statements. 7 Fourth Quarter Results Sales for the 1995 fourth quarter were $36.5 million, 13.5% higher than 1994 fourth quarter sales of $32.2 million. Cost of sales as a percentage of sales was 70.8% in 1995 compared with 67.2% in 1994, which reflected a higher margin product mix in 1994 than in 1995. Net earnings for the 1995 fourth quarter were $1.8 million ($0.27 per share) compared with $1.7 million ($0.25 per share) in the year earlier period. While this year's final quarter reflected increased sales and earnings from the same quarter a year ago, we expected to perform better than we did. We anticipated higher volume and geared up accordingly for rush shipments that were subsequently delayed for a month and more. In an effort to compensate for these delays as much as possible, we rescheduled other projects. We put all our factories on heavy production schedules and outsourced some engineering capacity that we would normally have done in-house at lower cost. In addition, we were forced to expedite material to get our rescheduled projects out in a timely manner. Thus a combination of lower volume, primarily due to delayed shipping schedules among our customers, and higher costs incurred due to an effort to compensate as much as possible, negatively affected our earnings.
Quarterly Consolidated Statements of Earnings (Unaudited) 1995 1994 (Dollars in thousands, except per share data) Quarters ended March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 Net sales $29,415 $32,854 $38,026 $36,485 $25,902 $32,166 $29,448 32,187 Cost of sales 21,330 21,971 26,954 25,839 17,503 21,882 19,997 21,641 R&D expenditures 1,022 1,236 1,503 1,457 990 966 805 1,800 Gross profit 7,063 9,647 9,569 9,189 7,409 9,318 8,646 8,746 Selling, general and administrative expenses 5,612 5,990 5,464 6,134 4,837 5,377 4,973 5,989 Amortization 133 133 144 137 33 33 11 1 Miscellaneous (income) expense-net (25) (7) (13) (21) (4) (20) 21 (31) Operating income 1,343 3,531 3,974 2,939 2,543 3,928 3,641 2,787 Interest expense 147 190 197 207 43 80 85 56 Investment income 17 60 4 53 14 5 1 30 Pre-tax earnings 1,213 3,401 3,781 2,785 2,514 3,853 3,557 2,761 Income taxes 507 1,343 1,501 943 1,018 1,523 1,406 1,099 Net earnings $ 706 $ 2,058 $ 2,280 $ 1,842 $ 1,496 $ 2,330 $ 2,151 $ 1,662 Earnings per common share $ 0.10 $ 0.30 $ 0.33 $ 0.27 $ 0.23 $ 0.36 $ 0.33 $ 0.25 Weighted average shares (000s) 6,815 6,824 6,837 6,834 6,551 6,559 6,563 6,594
Quarterly per share amounts may not add to annual amounts due to the timing of net earnings and changes in common stock equivalents during each year. 8 Harmon Industries, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands)
At December 31, 1995 1994 Assets Current assets: Cash and cash equivalents $ -- $ 250 Trade receivables, less allowance for doubtful accounts of $362 in 1995 and $360 in 1994 25,317 21,457 Costs and estimated earnings in excess of billings on uncompleted contracts (note 2) 4,053 1,321 Inventories: Work in process 4,583 5,763 Raw materials and supplies 21,262 11,955 25,845 17,718 Income tax receivable 434 667 Deferred tax asset (note 4) 584 586 Prepaid expenses and other current assets 608 731 Total current assets 56,841 42,730 Property, plant and equipment, at cost (note 3): Land 356 164 Buildings 5,802 4,596 Machinery and equipment 12,820 11,680 Office furniture and equipment 14,589 11,711 Transportation equipment 1,036 928 Leasehold improvements 2,288 1,600 36,891 30,679 Less accumulated depreciation and amortization 22,714 19,610 Net property, plant and equipment 14,177 11,069 Deferred tax asset (note 4) 621 500 Cost in excess of fair value of net assets acquired, net of accumulated amortization of $1,896 in 1995 and $1,349 in 1994 (note 11) 7,674 7,967 Deferred compensation asset (note 6) 5,575 5,146 Other assets 1,957 983 $86,845 $68,395
See accompanying notes to consolidated financial statements. 9
At December 31, 1995 1994 Liabilities and Stockholders' Equity Current liabilities: Bank overdraft $ 676 $ -- Current debt installments (note 3) 337 1,174 Accounts payable 11,022 8,646 Accrued payroll, bonus and employee benefit plan contributions 6,688 7,327 Billings in excess of costs and estimated earnings on uncompleted contracts (note 2) 1,279 1,420 Other accrued liabilities 1,825 2,493 Total current liabilities 21,827 21,060 Deferred compensation liability (note 6) 3,696 3,539 Long-term debt (note 3) 12,090 733 Total liabilities 37,613 25,332 Stockholders' equity (notes 3 and 7): Common stock of $.25 par value; authorized 20,000,000 shares, issued 6,805,626 shares in 1995 and 6,728,252 shares in 1994 1,702 1,682 Additional paid-in capital 23,003 22,719 Retained earnings 24,527 18,662 Total stockholders' equity 49,232 43,063 Commitments and contingencies (notes 6 and 10) $86,845 $68,395
10 Harmon Industries, Inc. and Subsidiaries Consolidated Statements of Earnings (Dollars in thousands, except per share data)
Years ended December 31, 1995 1994 1993 Net sales $136,780 $119,703 $99,295 Cost of sales 96,094 81,023 65,716 Research and development expenditures 5,218 4,561 3,442 Gross profit 35,468 34,119 30,137 Selling, general and administrative expenses 23,200 21,176 18,558 Amortization of cost in excess of fair value of net assets acquired 547 78 134 Miscellaneous income - net (66) (34) (20) Operating income 11,787 12,899 11,465 Interest expense (741) (264) (427) Investment income 134 50 39 Earnings before income taxes 11,180 12,685 11,077 Income tax expense (benefit) (note 4): Current 4,413 5,098 4,561 Deferred (119) (52) (368) 4,294 5,046 4,193 Net earnings $ 6,886 $ 7,639 $ 6,884 Earnings per common share $ 1.01 $ 1.16 $ 1.11 Weighted average shares outstanding (000s) 6,827 6,567 6,212
See accompanying notes to consolidated financial statements. 11 Harmon Industries, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Dollars in thousands)
Additional Total Common Paid-in Retained Treasury Stockholders' Stock Capital Earnings Stock Equity Balance at December 31, 1992 $1,524 $15,591 $ 5,107 $(7,025) $15,197 Net earnings -- -- 6,884 -- 6,884 Common stock issued (note 7): Stock offering 38 3,411 -- 7,025 10,474 Stock options and other 20 511 -- -- 531 Balance at December 31, 1993 1,582 19,513 11,991 -- 33,086 Net earnings -- -- 7,639 -- 7,639 Cash dividends paid ($0.15 per share) -- -- (968) -- (968) Common stock issued (notes 7 and 11): Servo acquisition 65 2,860 -- -- 2,925 Stock options and other 35 346 -- -- 381 Balance at December 31, 1994 1,682 22,719 18,662 -- 43,063 Net earnings -- -- 6,886 -- 6,886 Cash dividends paid ($0.15 per share) -- -- (1,021) -- (1,021) Common stock issued (note 7): Stock options and other 20 284 -- -- 304 Balance at December 31, 1995 $1,702 $23,003 $24,527 $ -- $49,232
See accompanying notes to consolidated financial statements. 12 Harmon Industries, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands)
Years ended December 31, 1995 1994 1993 Cash flows from operating activities: Net earnings $ 6,886 $ 7,639 $ 6,884 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 3,906 2,621 2,121 Gain on sale of property, plant and equipment (34) (6) (7) Deferred tax expense (benefit) (119) 211 (453) Changes in assets and liabilities, net of acquisition of businesses: Trade receivables (3,860) (3,046) (5,880) Inventories (7,830) (1,558) (2,572) Estimated costs, earnings and billings on contracts (2,873) (920) (850) Prepaid expenses 131 (109) (70) Accounts payable 2,376 2,588 1,579 Accrued payroll and benefits (651) 1,506 2,107 Other liabilities (478) (1,423) (43) Other deferred liabilities 157 304 310 Discontinued operations -- -- 23 Total adjustments (9,275) 168 (3,735) Net cash provided by (used in) operating activities (2,389) 7,807 3,149 Cash flows from investing activities: Capital expenditures (5,532) (3,242) (3,189) Acquisition of businesses (1,182) (6,661) -- Proceeds from sale of property, plant and equipment 84 30 26 Deferred compensation contributions (429) (524) (1,240) Other investing activities (974) (37) 53 Net investing activities of discontinued operations -- -- (339) Net cash used in investing activities (8,033) (10,434) (4,689) Cash flows from financing activities: Proceeds from issuance of common stock 292 300 10,817 Cash dividends (1,021) (968) -- Net borrowings under line of credit agreements 10,661 800 -- Principal payments of long-term debt (436) (320) (6,655) Bank overdraft 676 -- -- Net cash provided by (used in) financing activities 10,172 (188) 4,162 Net increase (decrease) in cash and cash equivalents (250) (2,815) 2,622 Cash and cash equivalents at beginning of year 250 3,065 443 Cash and cash equivalents at end of year $ -- $ 250 $ 3,065 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 661 $ 265 $ 492 Income taxes $ 4,167 $ 5,939 $ 3,865
See accompanying notes to consolidated financial statements. 13 Harmon Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1-Summary of Significant Accounting Principles Principles of Consolidation and Basis of Presentation. The consolidated financial statements of the Company include the accounts of Harmon Industries, Inc., and its wholly-owned subsidiaries, Harmon Electronics, Inc., Electro Pneumatic Corporation (EPC), Consolidated Asset Management Company, Inc. (CAMCO) and Harmon Railway Systems International. Significant intercompany accounts and transactions have been eliminated in consolidation. Management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities and disclosure of contingent liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Nature of Business. The Company is a major supplier of signal and train control products to railroads throughout North America and the world. It manufactures an extensive line of railroad signal and communication equipment, traffic control systems, rail/highway grade crossing hardware and related components. The Company also provides a single-source, rapid delivery service for urgently needed railroad components by warehousing commonly-used parts and equipment, which are manufactured both by Harmon and other vendors. Inventory Valuation. Inventories are valued primarily at the lower of cost (first-in, first-out) or market (net realizable value). The components of cost are labor, materials and an allocation of manufacturing overhead. Property, Plant and Equipment. Buildings, machinery and equipment, office furniture and equipment, transportation equipment and leasehold improvements are being depreciated or amortized using the straight-line method over the estimated useful lives of the assets, which range from two to thirty-three years. Maintenance and repairs are charged to operations as incurred. Renewals and betterments are capitalized as additions to the appropriate asset accounts. Upon sale or retirement of assets, the cost and related accumulated depreciation applicable to such assets are removed from the accounts, and any resulting gain or loss is reflected in operations. Income Taxes. Effective January 1, 1993 the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The cumulative effect of that change in the method of accounting for income taxes in 1993 was immaterial. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 14 Long-term Contracts. Profits on long-term contracts are recorded on the basis of the Company's estimates of the percentage of completion of individual contracts. That portion of the total contract price is accrued which is allocable, on the basis of the Company's engineering estimates of the percentage of completion, to contract expenditures incurred. Profits are not recorded during the start-up phase of the contract, which has been determined by the Company to approximate the initial 15% of design and construction. All losses are recognized in the period during which they become evident. Cost in Excess of Fair Value of Net Assets Acquired. Cost in excess of the fair value of net assets acquired is amortized on a straight-line basis generally over fifteen years. The Company assesses the recoverability of such cost by determining whether the amortization of the cost in excess of the fair value of net assets acquired over its remaining life can be recovered through undiscounted future operating cash flows. Patents. The cost of patents acquired is being amortized on a straight-line basis over the estimated remaining economic lives of the respective patents, which is less than the statutory life of each patent. Statement of Cash Flows. For purposes of the statement of cash flows, the Company considers all investments purchased with a maturity of three months or less to be cash equivalents. Research and Development. Costs incurred in the creation and start-up of new products or in changing existing products are charged to expense as incurred. Earnings per Common Share. Earnings per common share are based on the weighted average number of common shares outstanding, including common shares held by the Company's Employee Stock Ownership Plan and Trust. Effect is given to common stock equivalents (stock options), if dilutive. 15 Note 2-Contracts in Progress Contract costs on uncompleted contracts are as follows:
Costs and Billings in estimated excess of earnings costs and in excess estimated (Dollars in thousands) of billings earnings Total December 31, 1995: Costs and estimated earnings $25,234 $28,541 $53,775 Billings 21,181 29,820 51,001 $4,053 $(1,279) $2,774 December 31, 1994: Costs and estimated earnings $11,820 $34,666 $46,486 Billings 10,499 36,086 46,585 $1,321 $(1,420) $(99)
Balances billed, but not paid by customers under retainage provisions in contracts amounted to $1,146,000 and $342,000 at December 31, 1995 and 1994. Unbilled amounts representing claims subject to uncertainty concerning their ultimate realization amounted to $1,000,000 at December 31, 1995. All receivables on contracts in progress are considered to be collectible within twelve months.
Note 3-Indebtedness (Dollars in thousands) 1995 1994 Revolving credit agreements $11,461 $800 Capitalized lease obligations 966 967 Industrial revenue bonds -- 140 Total indebtedness 12,427 1,907 Less current installments 337 1,174 Long-term debt $12,090 $733
Revolving credit agreements. The Company has an unsecured $15,000,000 revolving credit. At December 31, 1995, outstanding borrowings totaled $8,461,000 and $6,539,000 was available. Outstanding borrowings come due on June 28, 1997 and bear interest at a base rate established by the bank plus a variable component depending on the Company's funded debt to capitalization percentage ($7,461,000 at 8.5% and $1,000,000 at 7.5% at December 31, 1995). The Company has a reducing revolving credit agreement with original total credit availability of $6,000,000 reducing by $300,000 each quarter after June 30, 1993 ($3,000,000 at December 31, 1995). The Company has outstanding borrowings of $3,000,000 at December 31, 1995. Outstanding borrowings are due on June 28, 1998 and bear interest at a base rate established by the bank plus a variable component depending on the Company's funded debt to capitalization percentage (7.75% at December 31, 1995). Borrowings under this agreement are collateralized by liens against substantially all of the Company's equipment and machinery. The Company pays commitment fees of 3/8 of 1% annually on the unused portion of the revolving credit agreements. 16 Capitalized lease obligations. The Company entered into various computer hardware and software capital lease agreements totaling $295,000 and $783,000 in 1995 and 1994, respectively. Monthly installments are due through October 1998. The average implied interest rate in the lease agreements is 7.0%. Industrial revenue bonds. The industrial revenue bonds were issued to provide funds to construct and equip manufacturing and research and development facilities. The bonds were repaid in 1995. Covenants. The various indebtedness agreements contain, among other things, covenants relating to: maintenance of certain levels of consolidated net worth and limitations of total liabilities; maintenance of certain ratios of debt to equity and current assets to current liabilities; and certain limitations on the payment of cash dividends. At December 31, 1995, the Company is in compliance with all covenants under its indebtedness agreements. Maturities. At December 31, 1995, long-term debt maturities for 1996 and thereafter are:
Years ended December 31 (Dollars in thousands) 1996 $ 337 1997 8,821 1998 3,269 $12,427
Note 4-Income Taxes Income tax expense consisted of the following:
(Dollars in thousands) 1995 1994 1993 Current: Federal $3,664 $4,193 $4,029 State 749 905 532 Total current 4,413 5,098 4,561 Deferred: Federal (99) (14) (332) State (20) (38) (36) Total deferred (119) (52) (368) Total income tax expense $4,294 $5,046 $4,193
17 Income tax expense for the years ended December 31, 1995, 1994, and 1993, respectively, differed from the amounts computed by applying the U.S. federal income tax rate of 35 percent for 1995 and 1994 and 34 percent for 1993 to pretax income as a result of the following: (Dollars in thousands) 1995 1994 1993 Computed "expected" tax expense $3,913 $4,440 $3,766 Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal income tax benefit 473 564 327 Other, net (92) 42 100 $4,294 $5,046 $4,193
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are presented below: (Dollars in thousands) 1995 1994 Deferred tax assets: Deferred compensation $1,442 $1,327 Compensated absences 356 256 Inventories 329 186 Allowance for doubtful accounts 141 135 Various other reserves 127 378 Total gross deferred tax assets 2,395 2,282 Less valuation allowance 369 369 2,026 1,913 Deferred tax liabilities: Plant and equipment (821) (827) Net deferred tax assets $1,205 $1,086
The valuation allowance for deferred tax assets as of January 1, 1994 was approximately $351,000. The net changes in the total valuation allowance for the years ended December 31, 1995 and 1994 were $0 and $18,000, respectively. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. During 1995, the Internal Revenue Service completed examinations of the Company's federal income tax returns for the years ended December 31, 1992, 1993 and 1994. The results of the examinations did not have a material effect on the Company's financial statements. 18 Note 5-Business Segment Information The Company and its subsidiaries operate in one reportable segment of railroad electronics and related products. Two customers accounted for net sales of approximately $19,091,000 and $15,532,000 for the year ended December 31, 1995, net sales of approximately $25,735,000 and $11,015,000 for the year ended December 31, 1994 and net sales of approximately $14,168,000 and $10,136,000 for the year ended December 31, 1993. At December 31, 1995, the Company had significant receivable balances from five customers totaling approximately $11,078,000. The Company has no other unusual credit risks or concentrations. Note 6-Commitments The Company has entered into various lease arrangements covering the use of manufacturing facilities, administrative offices and equipment, all of which are operating leases. Rental expense related to these leases amounted to $1,581,000, $1,398,000 and $1,268,000 for the years ended December 31, 1995, 1994 and 1993, respectively. A summary of non-cancellable long-term operating lease commitments follows: (Dollars in thousands)
Real Total Years ended December 31, Equipment property commitments 1996 $82 $1,042 $1,124 1997 67 564 631 1998 21 547 568 1999 5 411 416 2000 - 72 72
It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amounts shown for 1996. Employee Benefits. In 1985, the Company formed an Employee Stock Ownership Plan and Trust (ESOP), which includes all employees. At December 31, 1995 and 1994 the ESOP held 490,428 shares of Company common stock which had been allocated to plan participants. Company contributions to the ESOP are normally based on a percentage of pretax earnings. Dividends on common shares held by the ESOP are reflected as a reduction in retained earnings. ESOP contributions charged to operating expense were $2,785,000, $3,045,000 and $2,540,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company and its subsidiaries have various bonus plans based primarily on Company performance. Accrued and unpaid bonuses at December 31, 1995 and 1994 were $757,000 and $1,467,000, respectively. The Company has a nonqualified, unfunded deferred compensation plan for certain key executives providing for payments upon retirement, death or disability. 19 Under the plan, certain employees receive retirement payments equal to a portion of the three highest continuous years' average compensation. These payments are to be made for the remainder of the employees' life with a minimum payment of ten years' benefits to either the employee or his or her beneficiary. The plan also provides for reduced benefits upon early retirement, disability or termination of employment. The deferred compensation expense was $491,000, $522,000 and $426,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company has recorded the assets and liabilities for the deferred compensation at gross amounts in the Consolidated Balance Sheets because such assets and liabilities belong to the Company rather than to any plan or trust. The Company does not provide other post-retirement benefits. Note 7-Stockholders' Equity A summary of stock options granted, exercised and expired follows:
Shares Price Per Share Balance at January 1, 1993 352,850 $4.40 Average Price Granted 32,000 13.38-21.50 Exercised (75,600) 3.88-5.50 Expired (2,000) 4.13 Balance at December 31, 1993 307,250 5.70 Average Price Granted 42,000 20.50-22.75 Exercised (157,600) 3.88-13.38 Expired (2,000) 5.50-7.25 Balance at December 31, 1994 189,650 10.44 Average Price Granted 28,000 14.00-17.75 Exercised (83,150) 3.88-13.38 Expired (10,000) 13.38 Balance at December 31, 1995 124,500 $15.20 Average Price
The Company has exercisable outstanding stock options for 113,290 shares of common stock at prices ranging from $5.50 to $21.50 a share ($14.46 average per share) as of December 31, 1995. In May 1995, and 1994 the Company granted stock options for up to 2,000 common shares to each of the Company's eleven directors as of those dates, respectively. The options expire on May 31, 1997 and May 31, 1996, respectively. In May 1993, the Company granted stock options for up to 2,000 common shares to each of the Company's eleven directors as of that date. The options expired on May 28, 1995. The Company and selling shareholders sold 1,150,000 shares of common stock in a public offering in April and May 1993 (285,000 shares were sold by shareholders). The Company received cash proceeds of approximately $10,474,000. The Company issued 260,000 shares of unregistered common stock to Servo Corporation of America in December 1994 (See Note 11). Note 8-Affiliates The Company has investments of 38% and 20% in unconsolidated affiliates which are accounted for under the equity method. Equity in earnings (losses) of these affiliates was not significant for the years ended December 31, 1995, 1994 20 and 1993. The Company had sales to these related entities totaling $1,477,000, $272,000 and $398,000 for 1995, 1994 and 1993, respectively. The Company had receivables due from these entities of $434,000 and $60,000 as of December 31, 1995 and 1994. Note 9-Other Financial Information The Company has classified certain environmental compliance expenses as cost of sales in the accompanying statements of operations. These expenses amounted to $215,000, $164,000 and $465,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Note 10-Litigation Environmental matter On September 30, 1991, the United States Environmental Protection Agency (EPA) issued a complaint against the Company alleging violations of the Resource Conservation and Recovery Act (RCRA) and RCRA regulations in the disposal of solvents at the Company's Grain Valley, Missouri, plant. The complaint sought penalties in the amount of $2,344,000 and proposed certain compliance actions. In January 1994 the administrative hearing on the penalty assessment was heard. The decision from that hearing reduced the penalties to $586,000. Based on the Company's cooperation with the Missouri Department of Natural Resources (MDNR), which had the original jurisdiction of the matters complained by the EPA, in voluntarily disclosing the alleged violations and in promptly undertaking all remedial actions specified by the MDNR, the penalties appear to the Company's legal counsel to be excessive. However, because so few cases have been disposed of by settlement, or by administrative or judicial proceedings since the new penalty guidelines were adopted, legal counsel cannot express an opinion as to the ultimate amount, if any, of the Company's liability. The Company has recorded a total of $1,950,000 of environmental compliance expenses to date relating to this matter. The Company has recorded a liability for its best estimates of the costs to be incurred relative to the compliance actions in other accrued liabilities. Since the amount of the penalty cannot be reasonably determined at this time, no liability has been accrued in the financial statements. Other litigation. The Company has been named as a defendant in several other lawsuits in the normal course of its business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters will not have a material effect on the consolidated financial statements of the Company. 21 Note 11-Acquisition On February 24, 1995, the Company acquired certain assets of Serrmi Services, Inc. (Serrmi) for approximately $1,182,000 in cash. The acquisition has been accounted for by the purchase method of accounting and, accordingly the operating results have been included in the Company's consolidated results of operations from the date of acquisition. The excess of the cash paid over the fair value of net assets acquired has been recorded as goodwill of $139,000. The pro forma effects of the Serrmi acquisition on the consolidated financial statements are not significant. On December 20, 1994, the Company acquired the transportation division of Servo Corporation of America. Servo's transportation division manufactures hot box detector systems and various components to help railroads monitor the condition of bearings and wheels on freight and passenger vehicles. The purchase method of accounting for business combinations was used and accordingly, the operating results of this division have been included in the Company's consolidated results of operations from the date of acquisition and were insignificant in 1994. The Servo acquisition was made with the issuance of 260,000 shares of unregistered common stock valued at $11.25 per share, as determined by a fair market value analysis conducted by an independent investment and securities firm, and $6,661,000 in cash. The fair value of assets acquired, including goodwill, was $10,283,000 and liabilities assumed totaled $697,000. Goodwill of $7,967,000 is being amortized over fifteen years on a straight line basis. Assets acquired included inventory, fixed assets and other miscellaneous items. The pro forma results below (unaudited) for 1994 assume the acquisition occurred at the beginning of that year. (Dollars in thousands, except per share data) Net sales $131,024 Operating income 13,730 Net earnings 8,152 Earnings per common share 1.19
Note 12-Disclosures About Fair Value of Financial Instruments Estimates of fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could affect the estimates. Except as follows, the fair market value of the Company's financial instruments approximates the carrying value:
December 31, 1995 December 31, 1994 Carrying Fair Carrying Fair Amount Value Amount Value (Dollars in thousands) Financial Liabilities: Long-term debt: Capital lease obligations $966 $943 $967 $938 The fair value of the Company's long-term debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rate.
22 Harmon Industries, Inc. and Subsidiaries Report of Management To the Stockholders of Harmon Industries, Inc.: The management of Harmon Industries, Inc., is responsible for the preparation, presentation, and integrity of the consolidated financial statements and other information included in this annual report. The financial statements have been prepared by the Company in accordance with generally accepted accounting principles and, as such, include amounts based on management's best estimates and judgments. The financial statements have been audited by KPMG Peat Marwick LLP, independent public accountants. Their audits were made in accordance with generally accepted auditing standards and included such reviews and tests of the Company's internal accounting controls as they considered necessary. The Company maintains a system of internal accounting controls designed to provide reasonable assurance at reasonable cost that Company assets are protected against loss or unauthorized use and that transactions and events are properly recorded. The Board of Directors, through its Audit Committee, comprised solely of directors who are not employees of the Company, meets with management and the independent public accountants to assure that each is properly discharging its respective responsibilities. The independent accountants have free access to the Audit Committee, without management present, to discuss the results of their work and their assessment of the adequacy of internal accounting controls and the quality of financial reporting. Bjorn E. Olsson Charles M. Foudree President and Chief Executive Officer Executive Vice President - Finance, Treasurer and Secretary February 2, 1996 23 Harmon Industries, Inc. and Subsidiaries Report of Independent Auditors The Board of Directors and Stockholders of Harmon Industries, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of Harmon Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harmon Industries, Inc. and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Kansas City, Missouri February 2, 1996 24 Harmon Industries, Inc. and Subsidiaries Investor Information Form 10-K Shareholders may receive a copy of the Corporation's 1995 Annual Report to the Securities and Exchange Commission on Form 10-K free of charge by writing: Mr. Charles M. Foudree, Executive Vice President-Finance, at the Corporation's headquarters. Annual Meeting Shareholders are cordially invited to attend the 1995 Annual Meeting of Shareholders, which will be held at 2:00 p.m. on Tuesday, May 14, 1996, at the Country Club of Blue Springs, Blue Springs, Missouri. Management urges all shareholders to vote their proxies and thus participate in the decisions that will be made at this meeting. Registrar & Transfer Agent UMB Bank, n.a., P.O. Box 419226, Kansas City, Missouri 64141-6226, 816/860-7000 For change of name, address, or to replace lost stock certificates, write or call the Securities Transfer Division. Securities Analyst Contact Securities analyst inquiries are welcome. Please direct them to: Mr. Charles M. Foudree, Executive Vice President-Finance, 816/229-3345 Independent Auditors KPMG Peat Marwick LLP, 1600 Commerce Bank Building, Kansas City, Missouri 64106 Outside Counsel Morrison & Hecker, 2600 Grand Avenue, Kansas City, Missouri 64108-4606, 816/691-2600 Corporate Headquarters 1300 Jefferson Court, Blue Springs, Missouri 64015, 816/229-3345, Telefax: 816/229-0556 Common Stock Price Range and Dividend Information At December 31, 1995, there were 6,805,626 shares outstanding and approximately 675 shareholders of record. Cash dividends were resumed in 1994 at the rate of 15 cents per share per year, paid semi-annually at 7.5 cents per share. The range of high and low prices for the past eight quarters ended December 31, 1995 is shown below. Per share prices have been adjusted for all stock splits and stock dividends, if any.
1995 Calendar Quarter Ended Price Range March 31 $19 1/2 - $13 1/2 June 30 18 - 13 1/2 September 30 20 1/2 - 13 3/8 December 31 18 1/4 - 14 1994 Calendar Quarter Ended Price Range March 31 $24 1/4 - $19 5/8 June 30 21 7/8 - 19 1/8 September 30 22 1/2 - 19 5/8 December 31 23 1/4 - 16 1/2
Stock Trading The Company's common stock trades on The Nasdaq Stock Market under the symbol: HRMN. Stock price quotations can be found in major daily newspapers and in The Wall Street Journal. At February 1, 1996, the following securities firms were making a dual auction market in the Company's common stock: George K. Baum & Company; Piper Jaffray Companies Inc.; and PaineWebber Inc. 25 Harmon Industries, Inc. and Subsidiaries Officers, Directors and Corporate Data Board of Directors Robert E. Harmon (56) Chairman of the Board Thomas F. Eagleton (66) Attorney-at-Law Thompson & Mitchell St. Louis, Missouri Bruce M. Flohr (57) Chairman, President & CEO RailTex, Inc. San Antonio, Texas Charles M. Foudree (51) Executive Vice President- Finance, Treasurer and Secretary Rodney L. Gray (43) Chairman & CEO Enron International, Inc. Houston, Texas Herbert M. Kohn (57) Attorney-at-Law Bryan Cave Kansas City, Missouri Stephen L. Schmitz* (42) Vice President - Controller Harmon Industries, Inc. Douglass Wm. List (40) Management Consultant Baltimore, Maryland Gerald E. Myers (54) Management Consultant Tempe, Arizona Bjorn E. Olsson (50) President and Chief Executive Officer 26 Donald V. Rentz (57) President Graham Wholesale Floral Graham, Texas Judith C. Whittaker (57) Vice President-Legal Hallmark Cards, Inc. Kansas City, Missouri ( ) Indicates age of director *Denotes Advisory Director Corporate Officers Bjorn E. Olsson President and Chief Executive Officer Robert E. Harmon Chairman of the Board Charles M. Foudree Executive Vice President- Finance, Treasurer and Secretary Gary E. Ryker Executive Vice President- Marketing, Sales and Service Ronald G. Breshears Vice President- Human Resources Richard A. Daniels Vice President-Transit Sales Robert E. Heggestad Vice President-Technology John W. Johnson Vice President-Domestic Sales William J. Scheerer Vice President--Business Development Stephen L. Schmitz Vice President-Controller 27 Subsidiaries Consolidated Asset Management Company, Inc. (CAMCO) Lee's Summit, Missouri Riverside, California (2)^ J. Randall John, President Electro Pneumatic Corporation Riverside, California Hauppauge, New York Raymond A. Rosewall, President Harmon Electronics, Inc. Grain Valley, Missouri (3)^ Atlanta, Georgia Jacksonville, Florida Louisville, Kentucky Omaha, Nebraska Warrensburg, Missouri (2)^ Lloyd T. Kaiser, President ^ Denotes number of plants and locations International Harmon Industries Lausanne, Switzerland Henkes-Harmon Industries, Pty. Ltd. Mooroolbark, Victoria, Australia Vale-Harmon Enterprises, Ltd. Saint-Laurent, Quebec, Canada 28 EX-21 6 EXHIBIT 21 EXHIBIT 21 HARMON INDUSTRIES INC. FILE #0-7916 DECEMBER 31, 1995 LISTING OF SUBSIDIARIES NAMES UNDER WHICH SUBSIDIARY NAME BUSINESS IS CONDUCTED JURISDICTION - --------------- --------------------- ------------ Harmon Electronics, Inc. Same Missouri Electro Pneumatic Corporation Same California Consolidated Asset Management Company, Inc. CAMCO Missouri Cedrite Technologies, Inc. Same Kansas Harmon Railway Systems Same Virgin Islands International Corporation 1 EX-22 7 EXHIBIT 22 SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) /X/ Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 HARMON INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): /X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------------ 2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------------ 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------------------ 4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------------ 5) Total fee paid: ------------------------------------------------------------------------ / / Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: ------------------------------------------------------------------------ 2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------------ 3) Filing Party: ------------------------------------------------------------------------ 4) Date Filed: ------------------------------------------------------------------------ [LOGO] 1300 JEFFERSON COURT BLUE SPRINGS, MISSOURI 64015 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD AT 2:00 P.M. ON MAY 14, 1996 AT THE COUNTRY CLUB OF BLUE SPRINGS 1600 N. CIRCLE DRIVE BLUE SPRINGS, MISSOURI To the Holders of Common Stock of Harmon Industries, Inc.: Notice is hereby given that the Annual Meeting of the Shareholders of Harmon Industries, Inc. will be held for the following purposes: 1. To elect eleven (11) members of the Board of Directors; 2. To approve the selection of KPMG Peat Marwick LLP, as Auditors for the forthcoming fiscal year; 3. To approve the Company's 1996 Long-Term Incentive Plan. 4. To transact such other business as may properly come before the meeting or any adjournments thereof. Only shareholders of record at the close of business on March 18, 1996, will be entitled to notice of and to vote at the meeting and any adjournments thereof. The transfer books of the Company will not be closed. Shareholders who do not expect to attend the meeting in person are asked to date, sign and return the proxy using the enclosed envelope which needs no postage if mailed in the United States. BY ORDER OF THE BOARD OF DIRECTORS Robert E. Harmon Chairman 1300 Jefferson Court Blue Springs, Missouri 64015 April 1, 1996 [LOGO] 1300 JEFFERSON COURT BLUE SPRINGS, MISSOURI 64015 PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 14, 1996 SOLICITATION OF PROXIES This Proxy Statement and the accompanying form of proxy are being mailed to shareholders of Harmon Industries, Inc. (the "Company") commencing on April 1, 1996. The enclosed proxy is solicited by and on behalf of the Board of Directors of the Company to be used at the Annual Meeting of Shareholders, which will be held at the Country Club of Blue Springs, 1600 N. Circle Drive, Blue Springs, Missouri on May 14, 1996 at 2:00 p.m. and at any adjournments thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders. Any shareholder who executes and returns the enclosed proxy has the right to revoke it, in writing, at any time before it is voted at the meeting. The Company will bear the cost of solicitation of proxies. In addition to the use of the mail, proxies may be solicited personally or by telephone or facsimile by the directors or by a few executives or employees of the Company at a nominal cost, and the Company may reimburse brokers and other persons holding stock in their names or in the names of their nominees for their expenses in sending proxy material to principals. The Board of Directors of the Company has fixed the close of business on March 18, 1996, as the record date for the determination of shareholders entitled to notice of and to vote at the meeting. As of that date, the Company had 6,805,262 shares of Common Stock outstanding and entitled to vote at the meeting. Each share of Common Stock entitles the shareholders to one vote for each share held. All voting, unless otherwise specifically indicated, requires approval by a majority of the shares of stock represented in person or by proxy at the meeting and voted on the matter in question. Abstentions and broker non-votes will be treated as present at the meeting for purposes of determining a quorum but are tabulated as if no vote was cast on the matter indicated. Directors are elected by a plurality of the votes cast. Shareholders do not have the right to accumulate votes in the election of directors. Votes withheld in the election of directors are not tabulated as a vote for or against the person or persons indicated. The selection of directors is determined in the order of those nominees receiving the highest number of votes in favor of election until the number of nominees to be elected in the election have been selected. 1 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number of shares of Common Stock of the Company owned beneficially as of March 18, 1996 by each person who, as of that date, to the best knowledge of management, was the beneficial owner of more than 5% of the outstanding shares or who is a named executive officer. Common Stock is the only class of voting securities.
PERCENT TITLE NAME AND ADDRESS OF BENEFICIAL OF OF CLASS BENEFICIAL OWNER OWNERSHIP (1) CLASS(2) - ------------------ ------------------------------------------------- --------------- ------------- Common Stock Neuberger & Berman 638,900 9% 605 Third Avenue New York, New York 10158-3658 Common Stock ROPARBAN, Designee for MidAmerican Bank & Trust, 502,744 7% as Trustee for the Company's ESOP P.O. Box 1677 Lawrence, Kansas 66044 Common Stock Oppenheimer Group, Inc. 498,900(4) 7% Oppenheimer Tower, World Financial Center New York, New York 10281 Common Stock Wellington Management Company 346,500(5) 5% 75 State Street Boston, Massachusetts 02109 Common Stock Charles M. Foudree 44,800(6) 1% Common Stock Robert E. Heggestad 31,290(7) --% Common Stock Lloyd T. Kaiser 25,415(8) --% Common Stock Bjorn E. Olsson 42,500(9) 1% Common Stock Gary E. Ryker 30,430(10) --% Common Stock Beneficial ownership of all officers and 672,242 10% directors as a group (22 in group)
(1) All amounts of shares reflect sole voting and disposition power unless otherwise indicated. The share amounts reflected in this column include outstanding shareholdings, as well as unexercised ISOP option shares and unexercised director option shares (see discussion under caption "Executive Compensation" herein). Shares allocated under the Company's ESOP are not included since participants have no disposition power and have only shared voting rights. Shares in the ESOP allocated to Messrs. Foudree, Heggestad, Kaiser, Olsson and Ryker and all officers and directors as a group were 4,614; 3,795; 1,373; 1,356; 333 and 29,186 shares, respectively. (2) Rounded to the nearest whole percentage. Percentages are calculated on 6,977,416 shares representing the total of 6,805,626 outstanding shares and 171,790 shares for unexercised director and ISOP options. (3) Neuberger & Berman has sole voting power over 392,400 shares, shared voting power over 120,000 shares and shared dispositive power over 638,900 shares. (4) Oppenheimer Group, Inc. has shared voting power and shared dispositive power over 498,900 shares. 2 (5) Wellington Management Company has shared voting power over 162,500 shares and shared dispositive power over 346,500 shares. (6) 25,500 shares are beneficially owned and held of record by M. Colleen Foudree as trustee for the M. Colleen Foudree Trust with sole voting and disposition power. 10,300 shares are held by the Charles M. Foudree Trust with sole voting and disposition power. The remainder are held by Charles M. Foudree and represent unexercised option shares. (7) 27,790 shares are held by Robert E. Heggestad with sole voting and dispositive power. The remainder represent unexercised ISOP options. (8) 15,415 shares are held by Lloyd T. Kaiser with sole voting and dispositive power. The remainder represent unexercised ISOP options. (9) 32,500 shares are held by Bjorn E. Olsson with sole voting and dispositive power. The remainder represent unexercised options. (10) 1,650 shares are owned by Gary E. Ryker, 1,000 shares are held in an IRA account and 2,200 shares are held in a trust with sole voting and dispositive power. 565 shares are held by his daughter for whom he disclaims beneficial ownership. The remainder represent unexercised ISOP options. Based on a review of reports on Forms 3, 4 and 5 and amendments to such forms filed with the Company, the Company is aware of one late filing of such forms for an insignificant transaction by a person required to file such forms in connection with Section 16(a) of the Securities Exchange Act of 1934, as amended. The Company is unaware of any transactions in which there was a failure to file by a reporting person under such Act. ELECTION OF DIRECTORS Eleven directors are to be elected at the Annual Meeting of Shareholders for one year or until their successors are elected and qualified. It is the intention of the persons named in the accompanying form of proxy to vote for the election of the nominees listed below. If, for any reason, any of the nominees is unable or declines to serve, the proxies will be voted for the other persons listed or for substitute nominees nominated by management. During fiscal 1995, the Board of Directors held nine meetings. All of the directors nominated for re-election herein attended greater than 75% of the meetings of both the Board and the respective committees for which they were eligible to serve. The Director Compensation and Nomination Committee proposes nominees for Board positions and evaluates director compensation. The Committee consists of Herbert M. Kohn (Chair), Bruce M. Flohr and Judith C. Whittaker. The Committee met two times during 1995. The Committee will consider proposed director candidates submitted by shareholders. Proposals for the 1997 election must be received in writing by the Company not later than 90 days prior to the next shareholders' meeting. The Audit Committee of the Board of Directors is composed of Judith C. Whittaker (Chair), Thomas F. Eagleton, Herbert M. Kohn and Gerald E. Myers. The Audit Committee reviews and monitors financial controls throughout the Company, supervises the internal audit function and monitors the Company's relationship with the external auditors. The committee met three times in 1995. The Compensation Committee was composed of Rodney L. Gray (Chair), Donald V. Rentz, Bruce M. Flohr and Douglass Wm. List during 1995. The Compensation Committee is a standing committee of the Board of Directors and establishes executive salary and bonus levels for the executive officers and the Presidents of the Company's subsidiaries. During 1995, the Compensation Committee met three times. 3 DIRECTOR NOMINEES
SERVED PRINCIPAL CONTINUOUSLY STOCK OCCUPATION FOR AS A DIRECTOR PERCENT OF OWNED NAME OF NOMINEE AGE LAST FIVE YEARS SINCE CLASS(2) BENEFICIALLY(1) - ------------------------ ----------- -------------------------------------- -------------- ----------- ---------------- Thomas F. Eagleton 66 Since 1987, University Professor of 05/03/88 --% 6,000 Public Affairs, Washington University in St. Louis, Missouri and member of the law firm of Thompson & Mitchell; for more than five years prior to that a United States Senator from Mis- souri. Bruce M. Flohr 57 Since 1977, Chairman of RailTex, Inc. 05/11/93 -- % 6,000 Charles M. Foudree 51 Executive Vice President-Finance of 07/27/72 1 % 44,800 (3) the Company since Sept. 1986. Treasurer of the Company since 1974. Secretary of the Company since 1982. Rodney L. Gray 43 Since June 1993, Chairman and Chief 05/11/93 -- % 7,000 Executive Officer of Enron International, Inc.; prior to that, Senior Vice-President-Finance and Treasurer of Enron Corp. from October 1992 to June 1993; prior to that Vice-President and Treasurer of Enron Corp. Robert E. Harmon 57 Chairman of the Board of the Company 10/02/61 4 % 257,739 (4) since February 1975. Chief Executive Officer of the Company from November 1969 to December 1994. President of the Company from November 1969 to July 1990. Herbert M. Kohn 57 From June 1991, a partner in the law 09/01/85 -- % 33,100 firm of Bryan Cave; from 1966 to May 1991, a partner in the firm of Linde Thomson Langworthy Kohn and Van Dyke, P.C. Douglass Wm. List 40 Since January 1988, President, List & 05/08/90 -- % 16,500 Company, Inc., a management consulting firm based in Baltimore, Maryland. Since December 1992, also President of Railway Engineering Associates, Inc., having been Vice-President and General Manager of that company since May 1988.
4
SERVED PRINCIPAL CONTINUOUSLY STOCK OCCUPATION FOR AS A DIRECTOR PERCENT OF OWNED NAME OF NOMINEE AGE LAST FIVE YEARS SINCE CLASS(2) BENEFICIALLY(1) - ------------------------ ----------- -------------------------------------- -------------- ----------- ---------------- Gerald E. Myers 54 Self-employed management consultant 05/03/88 1% 36,918(5) since July 1989; prior to that Vice President of Electronics Materials & Components Group of Square D Company since 1985; prior to that Chairman of the Board, President & Chief Execu- tive Officer of General Semiconductor Industries, Inc. (a wholly-owned subsidiary of Square D) from July 1985. Bjorn E. Olsson 50 President and Chief Executive Officer 05/06/86 1% 42,500(6) of the Company since January 1995; President and Chief Operating Officer of the Company from August 1990 to December 1994; prior to that Vice President of Corporate Development of Investment AB Cardo since 1987; prior to that President of SAB NIFE AB, a subsidiary of Investment AB Cardo (formerly Wilh. Sonesson AB) since 1982. Donald V. Rentz 57 President of Graham Wholesale Floral 09/09/70 --% 4,000 since 1993; President of Renmar Company from 1991 to 1993; President of Morton Cabinet Company, Inc. from 1984 to 1991. Judith C. Whittaker 57 Since 1992, Vice-President-Legal, of 05/11/93 --% 6,000 Hallmark Cards, Incorporated; prior to that, Associate General Counsel of Hallmark Cards, Inc. since 1978; from 1988 to 1992, also Vice-President/Gen- eral Counsel of Univision Holdings, Incorporated, a subsidiary of Hallmark Cards, Incorporated.
(1) All amounts of shares reflect sole voting and disposition power unless otherwise indicated. The share amounts reflected in this column include outstanding shareholdings, as well as unexercised ISOP option shares and unexercised director option shares (see discussion under caption "Executive Compensation" herein). Shares allocated under the Company's ESOP are not included since participants have no disposition power and shared voting rights. Shares in the ESOP allocated to Messrs. Foudree and Olsson were 4,614; and 1,356 shares, respectively. 5 (2) Percentages shown are rounded to the nearest whole percentage. Percentages are calculated on 6,977,416 shares representing the total of 6,805,626 outstanding shares and 171,790 shares for unexercised director and ISOP options. (3) 25,500 shares are beneficially owned and held of record by M. Colleen Foudree as trustee for the M. Colleen Foudree Trust with sole voting and disposition power. 10,300 shares are held by the Charles M. Foudree Trust with sole voting and disposition power. The remainder are held by Charles M. Foudree and represent unexercised ISOP and director option shares. (4) Does not include 5,500 shares owned by his wife for which Robert E. Harmon disclaims beneficial ownership. (5) Includes 32,743 shares which are held in a living trust. (6) 32,500 shares are held by Bjorn E. Olsson with sole voting and dispositive power. The remainder represent unexercised options. Mr. Eagleton serves as an advisory director of Monsanto Chemical Corporation, a publicly-held company. Ms. Whittaker serves as a director of MCI Communications Corporation, a publicly-held company. Mr. Flohr serves as an officer and director of RailTex, Inc., which is a publicly-held company. Mr. List is a director of Mark VII, Inc., a publicly-held company. Mr. Gray is a director of Battlemountain Gold Company, a publicly-held company. Mr. Foudree is a director of OTR Express, Inc., a publicly-held company. None of the other director nominees serves as a director of any other company with a class of stock registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of that Act or any company registered under the Investment Company Act of 1940. CERTAIN TRANSACTIONS. Mr. Kohn is currently a partner of the Bryan Cave firm, which the Company retains as legal counsel for certain matters. 6 EXECUTIVE COMPENSATION AND OTHER INFORMATION SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table provides certain summary information concerning compensation paid or accrued by the Company and its subsidiaries (determined as of the end of the last fiscal year), to or on behalf of the Company's Chief Executive Officer and each of the four other most highly compensated executive officers of the Company or its subsidiaries (together hereafter referred to as the "named executive officers") for the fiscal years ended December 31, 1995, 1994 and 1993: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION(1) --------------------------------------- OTHER ANNUAL FISCAL SALARY BONUS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($)(2) ($)(3) ($) - ----------------------------------- ------ ------- ------- ------------ Bjorn E. Olsson 1995 264,747 -0- -- President & CEO 1994 219,285 112,914 -- 1993 191,487 89,400 -- Charles M. Foudree 1995 163,281 -0- -- Executive V.P. - Finance, 1994 157,505 77,514 -- Secretary and Treasurer 1993 145,736 69,100 -- Lloyd T. Kaiser 1995 151,821 -0- -- President, Harmon 1994 132,931 52,914 -- Electronics, Inc. 1993 109,309 63,600 -- Gary E. Ryker 1995 148,258 -0- -- V.P. - Marketing and Sales 1994 140,989 73,714 -- 1993 133,824 69,100 -- Robert E. Heggestad 1995 129,352 -0- -- V.P. - Technology 1994 122,661 61,014 -- 1993 108,503 52,500 -- LONG TERM COMPENSATION ---------------------------------- AWARDS ------------------------ PAYOUTS RESTRICTED ------- STOCK OPTIONS (# LTIP ALL OTHER AWARD(S) OF SHS.) PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION ($)(4) (5) ($) ($)(6) - ----------------------------------- ---------- ----------- ------- ------------ Bjorn E. Olsson -- 3,500 -0- 44,339 President & CEO -- 2,000 -0- 47,091 -- 3,000 -0- 36,547 Charles M. Foudree -- 3,500 -0- 70,470 Executive V.P. - Finance, -- 2,000 -0- 71,379 Secretary and Treasurer -- 2,000 -0- 60,815 Lloyd T. Kaiser -- -0- -0- 22,317 President, Harmon -- -0- -0- 22,510 Electronics, Inc. -- -0- -0- 14,150 Gary E. Ryker -- -0- -0- 23,712 V.P. - Marketing and Sales -- -0- -0- 25,342 -- -0- -0- 8,922 Robert E. Heggestad -- -0- -0- 85,652 V.P. - Technology -- -0- -0- 89,984 -- -0- -0- 75,422
(1) Includes no perquisites (i.e. auto allowance, club dues or aircraft use) because in all instances these total less than $50,000 or 10% of the total of annual salary and bonus reported for each named executive officer. (2) Salary includes amounts deferred under the Company's 401(k) at the election of the named executive officer. (3) Bonus may include cash and stock components (See discussion under the heading "Employment Contracts" below). (4) Restricted stock awards (100% vested) are described under the heading "Employment Contracts" below and are included under the "Bonus" column in this table. These amounts represent stock bonus awards for the prior year. At year end 1995, the aggregate restricted stock holdings and values based on year-end price of $15.75 per share of Messrs. Heggestad, Kaiser and Ryker were 550 shares ($8,663); 550 shares ($8,663); and 550 shares ($8,663), respectively. (5) Includes grants of options under the Company's 1990 Incentive Stock Option Plan, as well as annual awards to Messrs. Olsson and Foudree of options on 2,000 shares under the Company's non-qualified 1988 Director Option Plan for each of 1993, 1994 and 1995. (6) Includes allocation of contributions to the Company's Deferred Compensation Plan and to the Company's non-discriminatory Employee Stock Ownership Plan (ESOP). The amounts included in this column representing allocation of the contribution made in 1995 to the Company's ESOP for Messrs. Olsson, Foudree, Kaiser, Ryker and Heggestad were $12,379 for each participant. The balance shown for each in the column represented allocation of contributions for such named executive officers to the Company's Deferred Compensation Plan. (See discussion under the heading "Pension Plan" below.) 7 STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. During 1995, two of the named executive officers received a grant of stock options under the Company's 1990 Incentive Stock Option Plan. The Company has no outstanding Stock Appreciation Rights (SARs). The following table contains information concerning the grant of stock options under the Company's 1990 Incentive Stock Option Plan (number shown to left of semicolon) and under the Company's non-qualified 1988 Director Option Plan (number shown to the right of semicolon) to the named executive officers (see discussion below under "Director Compensation" below): OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE - ---------------------------------------------------------------------------------------- VALUE AT ASSUMED ANNUAL % OF TOTAL RATES OF STOCK PRICE OPTIONS APPRECIATION FOR OPTION OPTIONS GRANTED TO EXERCISE OR TERM(3) GRANTED (1) (# EMPLOYEES IN BASE PRICE EXPIRATION ------------------------ NAME OF SHARES) FISCAL YEAR ($/SH) (2) DATE(1) 5% 10% - -------------------------- -------------- -------------- -------------- ------------ ----------- ----------- Bjorn E. Olsson 1,500;2,000 25.0;9.1 14.00;17.75 4/3/00; $ 5,802; $ 12,821; 5/31/97 $ 3,639 $ 7,455 Charles M. Foudree 1,500;2,000 25.0;9.1 14.00;17.75 4/3/00; $ 5,802; $ 12,821; 5/31/97 $ 3,639 $ 7,455 Lloyd T. Kaiser -0- N/A N/A N/A N/A N/A Gary E. Ryker -0- N/A N/A N/A N/A N/A Robert E. Heggestad -0- N/A N/A N/A N/A N/A
(1) In their capacities as directors of the Company, on May 31, 1995, Messrs. Olsson and Foudree received an option for 2,000 shares of the Company's common stock under the Company's non-qualified 1988 Director Option Plan. Messrs. Olsson and Foudree received 1,500 shares pursuant to an ISOP option grant in 1995 in lieu of the stock bonus for 1994. (2) The exercise price equals the fair market value of the underlying shares on the date of grant. ISOP options are exercisable immediately upon grant unless delays are necessary to avoid the statutory limitations on grants established under the Internal Revenue Code. ISOP options are exercisable anytime during a five-year period from date of grant or the date on which the option was first exercisable. Director options are exercisable anytime during a two-year period from date of grant. (3) These amounts represent certain assumed rates of appreciation only and may have no correlation to current or future actual market conditions. 8 OPTION EXERCISES AND HOLDINGS. The following table provides, for the named executive officers, information concerning the exercise of stock options during the last fiscal year and unexercised options held as of the end of the last fiscal year for both the Company's 1990 ISOP (numbers to the left of the semicolon) and the Company's non-qualified 1988 Director Option Plan (numbers to the right of the semicolon): AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
VALUE (IN $) OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SHARES OPTIONS AT AT 12/31/95 12/31/95(2)(3) NUMBER OF SHARES ACQUIRED ON VALUE (IN $) ISOP; DIRECTOR ISOP; DIRECTOR NAME EXERCISE REALIZED(1) OPTIONS OPTIONS - ---------------------------------------- ------------------ --------------- ---------------- --------------- Bjorn E. Olsson -0-;2,000 -0-;8,750 2,500;4,000 2,625;-0- Charles M. Foudree -0-;-0- -0-;-0- 1,500;4,000 2,625;-0- Lloyd T. Kaiser 9,500;N/A 98,515;N/A 6,500;N/A 66,625;N/A Gary E. Ryker -0-;N/A -0-;N/A 22,000;N/A 165,000;N/A Robert E. Heggestad -0-;N/A -0-;N/A -0-;N/A -0-;N/A
(1) Market price at exercise less exercise price. (2) All outstanding options shown are currently exercisable. There are no SARs. (3) Market price at 12/31/95 ($15.75) less exercise price. LONG-TERM INCENTIVE PLANS. The company has no Long-Term Incentive Plans for which awards are granted or vested based upon return on equity or changes therein. PENSION PLANS. The Company has no defined benefit pension plans. The Company has a non-qualified, unfunded deferred compensation plan and trust for officers and key employees, providing for certain payments upon retirement, death or disability. Under the plan, the employees receive retirement payments equal to a portion of the average of the three highest consecutive years' compensation. Upon retirement, these payments are to be made for the remainder of the employee's life with a minimum payment of ten years' benefits to either the employee or his beneficiary. The plan provides for reduced benefits upon early retirement, disability or termination of employment. The amount of the deferred compensation expense for all covered employees for 1995 was approximately $491,000 and amounts allocated to the named executive officers are included in the "All Other Compensation" column of the Summary Compensation Table. The Company also has an Employee Stock Ownership Plan and Trust ("ESOP"). Employees, including officers of the Company who satisfy the ESOP's eligibility criteria of hours and service are eligible to participate. Allocations are based on the ratio of an eligible individual's salary (subject to current regulatory caps) to the total salaries of all eligible persons. Standards for vesting are based upon years of service with the Company in accordance with current regulatory guidelines. Under the ESOP, the Company is not required to make any contributions, other than matching 401K funds. However, the Company's current intention is to contribute approximately 15% of the participating companies' pre-tax earnings to the ESOP. The 15% contribution would include the funds required to fulfill a portion of the companies' obligation to match a portion of the employee's 401K contribution. The contribution to the ESOP for the years ended December 31, 1993, 1994 and 1995 totalled $2,540,000; $3,045,000 and $2,785,000, respectively, which amounts were paid in cash. The amount of compensation included in the "All Other Compensation" column of the Summary Compensation Table includes the amounts of respective annual contributions allocated for the named executive officers as of March 31 of the preceding year. 9 CANCELLATION AND REGRANT OF OPTIONS. During 1995, the Company did not cancel, regrant or reprice any outstanding stock options. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Mr. Rodney L. Gray (Chairman), Mr. Douglass Wm. List, Mr. Bruce M. Flohr and Mr. Donald V. Rentz served on the Compensation Committee of the Company for the past fiscal year. None of the members of the Compensation Committee are officers or employees of the Company. The Compensation Committee of the Company establishes executive salary and bonus levels for the executive officers of the Company and the Presidents of its subsidiaries. The Company does not believe that any interlocks exist between members of the Compensation Committee and any third party represented on the Board of Directors or providing significant services to the Company. EMPLOYMENT CONTRACTS. Messrs. Olsson, Foudree, Kaiser, Ryker and Heggestad had employment contracts with the Company during 1995 which provide for the payment to such officers of annual base salaries of $262,500, $158,650, $148,000, $144,758 and $122,929, respectively. The employment contracts have a rolling 12-month term. For the year ended December 31, 1995, these officers' contracts included an annual cash bonus. (See description below under "Compensation Committee Report on Bonuses".) No bonuses were paid to any of the named executive officers in 1995 under the cash bonus plan. The executive officers of the Company and certain key employees of the Company and its subsidiaries were also subject to a stock bonus plan whose contribution is based on a percentage of pre-tax consolidated profits. A portion of this bonus normally has been paid in shares of Harmon stock which are subject to a two-year trading restriction and are valued at fair market value at time of issuance. The remainder of the bonus is paid in cash to help offset the individual's income tax expense. During 1995, a bonus accrued for 1994 was paid to each of thirteen individuals, which bonus was valued at $10,514. This bonus consisted of either (i) $5,316 in cash and 550 shares of the Company's restricted stock, valued at $5,198 or (ii) 1,500 option shares under the 1990 ISOP with an exercise price of $14.00 per share. During 1996, ISOP options for 3,500 shares were granted to each of eleven executive officers effective February 27, 1996 at an exercise price of $14.25 per share in lieu of the 1995 stock bonus. (See discussion in the Compensation Committee Report under "Bonuses" below.) REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION. RESPONSIBILITIES AND COMPOSITION OF THE COMMITTEE The Compensation Committee is responsible for (i) establishing compensation programs for executive officers of the Company and its subsidiaries designed to attract, motivate and retain key executives responsible for the success of Company as a whole; (ii) administering and maintaining such programs in a manner that will benefit the long-term interests of the Company and its shareholders; and (iii) determining the compensation of the Company's executive officers and certain key employees. The Committee serves pursuant to a charter adopted by the Board of Directors. The Committee is composed entirely of directors who have never served as officers of the Company. COMPENSATION PHILOSOPHY AND OBJECTIVES The Committee believes that the Company's executive officer compensation should be determined according to a competitive framework and based on overall financial results, individual contributions and teamwork that together help build value for the Company's shareholders. Within this overall philosophy the Committee addresses a number of specific objectives, including (i) a total compensation program that takes into account compensation practices and financial performance as compared to similar companies, (ii) annual bonus programs that take into account the Company's overall performance relative to corporate objectives established in advance by the Committee which help create value for the Company's shareholders, (iii) alignment of the financial interests of executive officers to those of shareholders by providing equity based compensation through option grants and through mandatory minimum shareholding requirements. 10 The Committee believes that the top management of the Company must operate as a team and that the cause and effect relationship between the efforts of any one individual and corporate performance is difficult to discern. Hence, in general, the compensation of the executive team tends to track as a group with the performance of the Company. The Committee does, however, make exceptional decisions where exceptional circumstances exist. Furthermore, the Committee does establish individual performance objectives and measure individual performance against these objectives in an effort to ensure that all members of the top management team are fulfilling the expectations set for them. COMPENSATION COMPONENTS AND PROCESS There are three major components of the Company's executive officer compensation: (i) base salary; (ii) annual bonuses and (iii) equity incentives through ISOP option grants and minimum shareholding requirements. The Committee currently utilizes periodic option grants under the Company's 1990 Incentive Stock Option Plan ("ISOP"). Subject to approval by the shareholders, the Committee anticipates replacing the current ISOP plan and the 1988 Director Option Plan with a new 1996 Long Term Incentive Plan which will facilitate the granting of annual incentive options vesting over five-year periods. The Committee proposes to begin use of this plan during 1996, if approved, and the plan would operate to cover both the executive officer group, as well as a fairly extensive key employee group. See discussion under "Proposal to Adopt the 1996 Long-Term Incentive Plan." The process utilized by the Committee in determining executive officer compensation levels for all of these components is based on the Committee's objective judgment and takes into account both qualitative and quantitative factors. Except as specifically set forth under the "Bonus" discussion below, no predetermined weights are assigned to such factors with respect to any compensation component. Recommendations for base salaries and awards for each individual executive officer are established after evaluation of individual performance factors (equally weighted) including the following: knowledge of job responsibilities, relationship with others, working capacity, initiative, character, leadership, adaptability, teamwork, administrative ability and individual goal attainment. The evaluation by the Committee includes the degree to which each individual has met individual performance objectives. These performance objectives are believed to relate directly to the Company's performance and are therefore related to shareholder value. Among the factors considered by the Committee are the recommendation of the Chief Executive Officer with respect to compensation of the Company's other key executive officers. However, the Committee makes the final compensation decisions concerning such officers. Comparative information utilized by the Company relates to Peer Group (as set forth below under the section herein dealing with the "Performance Graph"). In addition, the Committee reviews at least two other surveys of industry trade groups with similarity to the Company's operations. The trade group survey data sources are standard general indices constructed and provided by outside vendors. The surveys consist of many more data points than the limited number of companies in the peer performance stock group. In making compensation decisions, the Committee also from time to time receives assessments and advice regarding the compensation practices of the Company and others from independent compensation consultants. During 1995, the Compensation Committee analyzed the base salary and the total compensation (base salary plus annual incentives) of the Company's executives as compared to median survey data and to comparative companies in the rail supply industry, the electronic equipment manufacturing industry and the greater Kansas City area. In order to meet the objectives set out above, the Committee has designed the executive compensation program to be consistent with the Company's overall pay philosophy. Base salaries, the fixed regular periodic component of pay, are conservatively established at levels comparable to base salaries for similar positions at companies with similar levels of sales and overall financial performance. Annual cash bonus and equity awards, which are directly linked to the short-term financial performance of the Company as a whole, are designed to provide better than competitive pay only for better than competitive financial performance. 11 BASE SALARY. On August 10, 1995, the Committee conducted a review of the performance and compensation of the Company's executive officer group, including Bjorn E. Olsson and the other named executive officers. This review included key accomplishments of each officer, an evaluation of achievement of individual goals and objectives, and an assessment of their contributions to the Company's performance. Based on this review and its assessment of competitive compensation practices, the Committee recommended an increase in base salaries of 5% for the executive officers and key employees (including the other named executive officers). The new base salary levels for all executives were established by the Committee and presented to the Board of Directors at its August 1995 meeting and were effective September 1, 1995. BONUSES. On December 7, 1994, the Committee approved a modification of the prior executive cash bonus plan of the Company effective for fiscal 1995. The Committee referred to the Mercer Executive Compensation Review of 1994 and recommendations contained in that report. This new format was created to include not only the traditional ROCE measurement standard, but also earnings growth as a critical indicator of financial health of the Company. The prior plan had been based solely on ROCE performance. The objective of this incentive bonus plan is to provide an additional incentive to each officer of the Company to advance the interests of the Company and its stockholders and create a more direct tie between annual performance and increased shareholder values. The Committee believes that the cash bonus plan encourages the creation of shareholder wealth by creating incentives both to maximize operating profit for the Company and minimize capital employed. Additionally, the cash bonus plan rewards efficiencies in production and innovation in quality-based productivity techniques. The new executive cash bonus plan is based on 70% weighting for ROCE and 30% weighting for earnings growth. The formula for ROCE (Return on Capital Employed) is the sum of pretax earnings plus interest expense divided by the sum of average total assets minus non-interest bearing liabilities. The new proposal establishes target base bonus levels as a percentage of current base salary. Percentages are 30%, with the exception of Mr. Olsson, whose target base bonus is established at 40% of his base salary. For 1995, the base bonus levels established for Messrs. Olsson, Foudree, Kaiser, Ryker and Heggestad were $112,500; $52,883; $49,350; $48,252; and $35,122, respectively. The actual bonus is calculated based on actual performance numbers for ROCE as compared to budget and earnings growth based on primary earnings per share as compared to an Earnings Growth Rate Target established by the Board of Directors at 20% for fiscal 1995. The ROCE portion of the formula accounts for 70% of the base bonus and is adjusted as follows based on the ratio of actual versus budget ROCE: under 75% of budgeted ROCE--no bonus award; from 75% to 99% of budgeted ROCE--pro-rated award; at 100% of budgeted ROCE--100% of potential ROCE bonus and for each 1% above budgeted ROCE a $7,000 incremental increase for each officer. The earnings growth factor is calculated on a comparison between primary earnings per share for the fiscal year as compared to an annual Earnings Growth Rate Target established by the Board of Directors. The growth rate target for fiscal 1995 was 20%. The growth target for fiscal 1996 is 10%. For 1995, budgeted ROCE was 33.4% and actual ROCE was 21.7%. Targeted earnings growth was 20% and actual primary earnings growth was -12.9%. Hence, no amounts were payable under the cash bonus plan for 1995 to any participants, including the named executive officers. All of the executive officers of the Company, including the named executive officers, have historically participated in a stock bonus plan. The bonus was based on a percentage of pre-tax consolidated profits set by the plan at 1%. The percentage has not been significantly changed since the plan was established in 1987. The plan included a fixed percentage but no range of minimum or maximum levels were set in the plan. A portion of the stock bonus was normally paid in shares of Harmon stock which were subject to a two-year trading restriction and were valued at fair market value at time of issuance. The remainder of the bonus was normally paid in cash to help offset the individual's income tax expense associated with the bonus. The stock bonus for 1994 (paid in 1995) was $10,514.00 for 12 each of thirteen officers. The stock bonus was paid as either (i) $5,316 in cash and $5,198 represented by 550 restricted shares of common stock of the Company, or (ii) ISOP options for 1,500 shares. The decision of payment of the stock bonus in the form of an option was believed to be consistent with the goal of increasing the common stock ownership of the Company's executive officers. To the extent that an officer received ISOP options, there was no current cost to fund the grant and there was no tax deduction for the Company at the time of the grant of the option. During 1995, the Committee decided to recommend replacement of the stock bonus plan incorporating the value of this plan into a new long-term incentive plan tied to stock ownership requirements. See discussion under the "Proposal to Adopt the 1996 Long-Term Incentive Plan" below. See discussion below under "Incentive Stock Option Plan" for ISOP grants in 1996 in lieu of the stock bonus for 1995. INCENTIVE STOCK OPTION PLAN. The Committee considers outstanding option holdings in determining whether to grant additional options under the Company's 1990 Incentive Stock Option Plan to any individual. No named executive officer received a grant of options pursuant to the ISOP during 1995 except for 1,500 shares to each of Messrs. Olsson and Foudree in lieu of their annual stock bonus for 1994. See above "Bonuses." The exercise price for shares granted under the ISOP are determined by the closing price for the Company's stock on the date of grant. Options are exercisable immediately upon grant unless delays are necessary to avoid the statutory limitations on grants established under the Internal Revenue Code. The options are exercisable anytime during a five-year period from date of grant or the date on which the option was first exercisable. On February 27, 1996, ISOP options of 3,500 shares were granted to each of 11 executive officers of the Company (including the named executive officers) in lieu of the stock bonus for 1995. The exercise price was $14.25 per share. The February 1996 ISOP grants were made under the 1990 ISOP Plan in a manner consistent with the new 1996 Plan which shareholders are being asked to approve at this meeting. MINIMUM STOCKHOLDING REQUIREMENT. During 1995, the Compensation Committee, with the Board of Director's approval, established a minimum stockholding requirements for Company stock (exclusive of ISOP and unexercised option shares) in amounts equal to two times base salary for the CEO, one-time base salary for the Executive Vice Presidents and the President of the Company's subsidiary, Harmon Electronics, Inc. and one-half of base salary for all other members of the Executive Officer Group, including Presidents of the other subsidiaries. For any person subject to the minimum stockholding requirements who holds less than the minimum stockholding requirement, the delinquency will result in up to one-third of that person's annual cash bonus being utilized to purchase shares of the Company's stock in the name of such individual. New officers will be given five years in which to satisfy their minimum shareholding requirement before application of the bonus withholding procedure. Rodney L. Gray (Chair) Douglass Wm. List Bruce M. Flohr Donald V. Rentz PERFORMANCE GRAPH. The Company has included in this proxy statement, a graph of five-year shareholder returns on an indexed basis comparing the Company's common stock performance to other broad market indices or an index of selected peer group companies. The Board of Directors has approved a peer group of the Company and ten other manufacturing and service companies in the railroad supply industry. Revenues (on a 12-month trailing basis) for these companies range from $128.6 Million to $2,473.7 Million, as compared to $132.5 Million for the Company. Total Assets for these companies range from $82.2 Million to $1,955.2 Million, as compared to $82.2 Million for the Company. The peer group consists of the following companies: Harsco Corporation; Trinity Industries, Inc.; The Timken Companies; Morrison Knudsen Corporation; Varlen Corporation; Brenco, Incorporated; L.B. Foster Company; 13 Union Switch & Signal Corporation; ABC Rail Products,Inc.; Wabash National Corporation and the Company. In addition, the performance graph shows comparisons between the Company, the peer group and the S&P Composite 500 Stock Index. Data points for the performance graph comparisons are included in the Legend below. All indices have been weighted for market capitalization. The following performance graph also sets forth the percentage of cumulative total return for the last fiscal year and cumulative return since January 1, 1991. TOTAL RETURN TO SHAREHOLDERS Comparison of Five-Year Cumulative Total Return* Among the Company, Peer Performance Group and S&P Composite 500 Index. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
HARMON INDUSTRIES, INC. PEER GROUP S&P 500 1990 100.00 100.00 100.00 1991 141.38 123.89 130.34 1992 331.03 149.29 140.25 1993 634.48 200.68 154.32 1994 542.20 187.27 156.42 1995 441.69 185.98 214.99
* Assumes that the value of the Company's common stock, Performance Peer Group and S&P 500 Index were each $100 on December 31, 1990 and that all dividends were reinvested. DIRECTOR COMPENSATION The Board of Directors' compensation package calls for annual fees of $8,000 plus travel expenses to and from the meetings for each director. Effective May 14, 1996, only non-employee directors will receive annual directors fees. In addition, the directors who are not employees of the Company receive $500 for each Board or separate committee meeting in which the director participates by attending or through telephonic conference. In addition, each chair of the respective committees of the Board of Directors receives an annual payment of $500 for acting as chair of their committee. The package also grants each director an annual non-qualified option to purchase 2,000 shares of the Company's Common Stock at a price equal to the closing market price for the last day of May in the year in which the option is granted. This option is exercisable at any time during a two year period following the date of grant. On May 31, 1994, options for 2,000 shares were granted to each of the directors, which options expire May 31, 1996 and have an exercise price of $20.50 per share. During 14 1994, other outstanding director options for 1,000 shares each were exercised by Messrs. Eagleton, Foudree, Harmon, Kohn, List, Myers, Olsson and Rentz and Ms. Whittaker. On May 31, 1995, options for 2,000 shares were granted to each of the directors, which options expire May 31, 1997 and have an exercise price of $17.75 per share. During 1995, other outstanding director options for 1,000 shares were exercised by Ms. Whittaker and director options for 2,000 shares each were exercised by Messrs. Olsson, List, Flohr, Myers and Gray. See discussion below under "Proposal to Adopt the 1996 Long-Term Incentive Plan" for a description of a proposed replacement of the 1988 Directors Option Plan subject to shareholders approval of the new 1996 LTIP. On December 8, 1994, the Board of Directors approved a compensation package for Mr. Robert E. Harmon, in his capacity as Chairman of the Board effective January 1, 1995. The Chairman of the Board is treated as a Non-Employee Director for annual and director meeting fees. The defined duties of the Chairman include the following: representing the Company at national trade association meetings; assisting in lobbying efforts; assisting in overseas representation of the Company; assisting the CEO in acquisitions; assisting in the development of relationships with securities analysts and investors; assisting with sales and promotional calls; providing advisory services to the CEO; and conducting all Board meetings. The Chairman's annual fee, subject to review each year, was approximately $147,000 for fiscal 1995 and will be $74,000 for fiscal 1996. APPROVAL OF SELECTION OF AUDITORS Management recommends voting to approve the selection of KPMG Peat Marwick LLP, as Auditors for the Company for the 1996 fiscal year. This firm has served continuously as Auditors for the Company since 1969. A representative of KPMG Peat Marwick LLP will be present at the Annual Meeting of Shareholders and will be available to make a statement, if he or she desires to do so, and to answer appropriate questions asked by the shareholders. PROPOSAL TO ADOPT THE 1996 LONG-TERM INCENTIVE PLAN GENERAL. The Board of Directors is proposing the Harmon Industries, Inc. 1996 Long-Term Incentive Plan (the "1996 Plan") for stockholder approval. The purposes of the 1996 Plan are (i) to align the interests of the Company's shareholders and recipients of awards under the 1996 Plan by increasing the proprietary interests of such recipients in the Company's growth and success and (ii) to advance the interests of the Company by attracting and retaining officers, other employees and non-employee directors. If adopted, the 1996 Plan will supplant and replace both the Company's 1988 Non-Qualified Director Option Plan and the Company's 1990 Qualified Incentive Stock Option Plan. The 1988 Non- Qualified Director Option Plan ("1988 Director Plan") provides for annual grant of options on 2,000 shares of stock to each director and that plan has 69,000 shares remaining for exercise. The 1990 Qualified Incentive Stock Option Plan ("1990 ISOP") has 178,375 shares available for grant. If the 1996 Plan is approved, existing outstanding options under both the 1988 Director Plan and the 1990 ISOP will remain effective, but both plans will be frozen so that no new options may be granted under either plan. Under the 1996 Plan, the Company may grant to officers and other employees non-qualified stock options, incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")), stock appreciation rights ("SARs"), restricted stock, bonus stock and performance shares. On the last business day of May following each annual meeting of stockholders of the Company, commencing with the 1996 Annual Meeting of Stockholders, 1,000 shares of Common Stock will be granted automatically to the non-employee directors of the Company immediately following such annual meeting. All employees of the Company and its subsidiaries (approximately 1,075 persons) and non-employee directors (currently 9) are eligible to participate in the 1996 Plan. Reference is made to Exhibit A of this Proxy Statement for the complete text of the 1996 Plan which is summarized below. 15 STOCKHOLDER VOTE REQUIRED AND BOARD OF DIRECTORS RECOMMENDATION. Unless otherwise instructed, the proxy holders will vote the proxies received by them FOR approval of the 1996 Plan. Approval of the 1996 Plan requires the affirmative vote of the majority of the shares of common stock present or represented by Proxy at the annual meeting. Abstentions and broker non-votes will not be counted as votes cast. The Board of Directors recommends a vote FOR approval of the Harmon Industries Inc. 1996 Long-Term Incentive Plan. DESCRIPTION OF THE 1996 PLAN ADMINISTRATION. The 1995 Plan will be administered by the Compensation Committee (the "Committee") of the Board of Directors consisting of not less than three directors who are not eligible to receive discretionary awards under the 1996 Plan or any other plan of the Company. Subject to the express provisions of the 1996 Plan, and except for shares awarded to non-employee directors, the Committee will have the authority to select eligible officers and other employees who will receive awards and determine all of the terms and conditions of each award. Each award will be evidenced by a written agreement containing such provisions not inconsistent with the 1996 Plan as the Committee shall approve. The Committee will also have authority to prescribe rules and regulations for administering the 1996 Plan and to decide questions of interpretation or application of any provision of the 1996 Plan. Except with respect to grants to officers of the Company, the Committee may delegate some or all of its power and authority to administer the 1996 Plan to the Chief Executive Officer or other executive officer of the Company. AVAILABLE SHARES. Under the 1996 Plan, the number of shares of Common Stock available for grants of awards, other than incentive stock options, to officers, other employees and non-employee directors in any calendar year will be 1.15% of the outstanding Common Stock as of January 1 of such year beginning January 1, 1996, plus the number of shares which shall have become available for grants of awards, other than incentive stock options, under the 1996 Plan in prior years but which shall not have become subject to such an award in any prior year. The number of shares of Common Stock available for grants of incentive stock options under the 1996 Plan in any calendar year, beginning with calendar year 1996 is approximately 80,000 shares. Up to 80,000 shares of the Common Stock of the Company in the aggregate may be purchased for allocation under the 1996 Plan during the term of the 1996 Plan. The purchase of shares under this provision must be approved by the Committee after consultation with counsel and notice to the Board of Directors prior to the purchase. This use of such purchased shares is intended to be essentially non-dilutive. The number of shares available under the 1996 Plan is subject to adjustment in the event of a stock split, stock dividend, recapitalization, reorganization, merger or other similar event or change in capitalization. In general, shares covered by an option, SAR or other award that expires or terminates unexercised or is cancelled or forfeited would again be available for awards under the 1996 Plan. The maximum number of shares of Common Stock with respect to which options and SARs may be granted during any calendar year to any individual participant in the 1996 Plan is 50,000, subject to adjustment as described above. CHANGE IN CONTROL. In the event of certain acquisitions of 20% or more of the then outstanding shares of Common Stock, a change in the Board of Directors resulting in the incumbent directors ceasing to constitute at least two-thirds of the Board of Directors, the approval by stockholders of a reorganization, merger or consolidation (unless the Company's stockholders receive 60% or more of the stock of the resulting company) or the approval by stockholders of a liquidation, dissolution or sale of all or substantially all of the Company's assets, all awards will be cashed-out by the Company except, in the case of a merger 16 or similar transaction in which the stockholders receive publicly traded common stock, all outstanding options and SARs will become exercisable in full, all other awards will vest, and each option, SAR and other award will represent a right to acquire the appropriate number of shares of common stock received in the merger or similar transaction. EFFECTIVE DATE, TERMINATION AND AMENDMENT. If approved by stockholders, the 1996 Plan will become effective as of May 31, 1996, following the date of approval by the shareholders and will terminate 5 years thereafter, unless terminated earlier by the Board of Directors. The Board of Directors may amend the 1996 Plan at any time except that, without the approval of the stockholders of the Company, no amendment may, among other things (i) increase the number of shares of Common Stock available under the 1996 Plan, (ii) reduce the minimum purchase price of a share of Common Stock subject to an option or the base price of an SAR or (iii) extend the term of the 1996 Plan. The 1996 Plan provides that the Committee has discretionary authority each year to select participants and to elect the amount of and form of compensation within limits established by the 1996 Plan. NON-QUALIFIED STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The period for the exercise of a non-qualified stock option or SAR, the exercise price of an option and the base price of an SAR will be determined by the Committee, provided that, in either case, the price may not be less than the fair market value of the Common Stock on the date of grant. The exercise of an SAR entitles the holder thereof to receive (subject to withholding taxes) shares of Common Stock (which may be restricted stock), cash or a combination thereof with a value equal to the difference between the fair market value of the Common Stock on the exercise date and the base price of the SAR. In the event of termination of employment of a holder of a non-qualified stock option or SAR for any reason other than for retirement on or after age 55, disability, death, voluntary termination by such holder or termination by the Company for cause, each non-qualified stock option and SAR will be exercisable only to the extent that such option or SAR is exercisable on the effective date of such termination and may thereafter be exercised after the date of such termination until the earlier of the date set forth in the agreement relating to such option or SAR and the expiration of such option or SAR. In the event of termination of employment by reason of retirement on or after age 55, disability or death, each nonqualified stock option and SAR will become fully exercisable and may thereafter be exercised by such holder or such holder's executor, administrator or similar person until the earlier of the date set forth in the agreement relating to such option or SAR and the expiration of such option or SAR. In the event of voluntary termination of employment by the holder of a non-qualified stock option or SAR or the involuntary termination of employment of such holder by the Company for cause, each non-qualified stock option and SAR will terminate on the date of such termination of employment. If the holder of a non-qualified stock option or SAR dies during the period of exercisability of such option or SAR following termination of employment for any reason other than voluntary termination or termination for cause, each non-qualified stock option or SAR will be exercisable only to the extent that such option or SAR was exercisable on the date of such holder's death and may thereafter be exercised until the earlier of the dat set forth in the agreement relating to such option or SAR and the expiration of such option or SAR. INCENTIVE STOCK OPTIONS. No incentive stock option will be exercisable more than 10 years after its date of grant, and in the case of a recipient of an incentive stock option who owns more than 10 percent of the voting power of all shares of capital stock of the Company (a "ten percent holder"), the option must be exercised within five years of its date of grant. The option exercise price of an incentive stock option will not be less than the fair market value of the Common Stock on the date of grant of such option, and, in the case of a recipient of an incentive stock option who is a ten percent holder, the option exercise price will be the price required by the Code, currently 110% of fair market value. To the extent that the aggregate fair market value of Common Stock with respect to which an incentive stock option is 17 exercisable for the first time by any individual during a calendar year exceeds $100,000, such option is treated as a non-qualified stock option. In the event of termination of employment of a holder of an incentive stock option by reason of retirement on or after age 55, such option (including any related, in tandem SAR) will become fully exercisable and may thereafter be exercised until the earlier of three months after such retirement and the expiration of such incentive stock option or SAR. In the event of termination of employment of a holder of an incentive stock option by reason of permanent and total disability (as defined in section 22(e)(3) of the Code), such option (including any related tandem SAR) will become fully exercisable and may thereafter be exercised until the earlier of one year (or such shorter period set forth in the agreement relating to such option or SAR) after such termination and the expiration of such incentive stock option or SAR. In the event of termination of employment by reason of death, each incentive stock option, (including any related tandem SAR) will become fully exercisable and may thereafter be exercised by such holder's executor, administrator or similar person until the earlier of the date set forth in the agreement relating to such option or SAR and the expiration of such option or SAR. In the event of voluntary termination of employment by the holder of an incentive stock option or the involuntary termination of employment of such holder by the Company for cause, each incentive stock option (including any related tandem SAR) will terminate on the date of such termination of employment. In the event of a termination of employment for any reason other than retirement on or after age 55, permanent and total disability, death, cause or voluntary termination, each incentive stock option (including any related tandem SAR) will be exercisable only to the extent such option or SAR is exercisable on the effective date of such termination and may thereafter be exercised until the earlier of three months after such termination and.the expiration of such incentive stock option or SAR. If the holder of an incentive stock option dies during the one-year period following termination of employment and such termination was by reason of permanent and total disability, or during the three-month period following,termination of employment for any reason, other than permanent and total disability, death, cause or voluntary termination, each incentive stock option (including any related tandem SAR) will be exercisable only to the extent such option or SAR is exercisable on the date of the holder's death and may thereafter be exercised until the earlier of the date set forth in the agreement relating to such option or SAR and the expiration of such option or SAR. BONUS STOCK AND RESTRICTED STOCK AWARDS. The 1996 Plan provides for the grant of (i) bonus stock awards, which are vested upon grant, and (ii) stock awards which may be subject to a restriction period ("restricted stock"). An award of restricted stock may be conditioned upon or subject to, attainment of preestablished performance measures, If a restricted stock award is tied to performance measures, the fair market value of the Common Stock subject to such an award granted to a "covered employee" within the meaning of Section 162(m) of the Code will not exceed $2,000,000 at the time the performance measures are satisfied, if such a limitation is necessary to ensure the deductibility of the award. Shares of restricted stock will be non-transferable and subject to forfeiture it,the holder does not remain continuously in the employment of the Company during the restriction period or, if the restricted stock is subject to performance measures, if such performance measures are not attained during the restriction period; provided, however, that in the event of termination of employment, any cancellation or forfeiture of the portion of a restricted stock award which is then subject to a restriction period will be subject to the terms set forth in the agreement relating to such award. Unless otherwise determined by the Committee, the holder of a restricted stock award will have rights as a stockholder of the Company, including the right to vote and receive dividends with respect to shares of restricted stock. PERFORMANCE SHARE AWARDS. The 1996 Plan also provides for the grant of performance shares. Each performance share is a right, contingent upon the attainment of performance measures within a specified performance period, to receive one share of Common Stock, which may be restricted stock, or the fair market value of such performance share in cash. Prior to the settlement of a performance share award in shares of Common Stock, the holder of such award will have no rights as a stockholder of the Company with 18 respect to the shares of Common Stock subject to the award. Performance shares will be nontransferable and subject to forfeiture if the specified performance measures are not attained during the applicable performance period; provided, however, that in the event of termination of employment, any cancellation or forfeiture of the portion of a performance share award which is then subject to a performance period will be subject to the terms set forth in the agreement relating to such award. If an employee who has been granted a Performance Share Award is a "covered employee" within the meaning of Section 162(m) of the Code at the time of settlement of such award, (the maximum amount payable under such award shall be $2,000,000.) PERFORMANCE MEASURES. Under the 1996 Plan, the vesting or payment of performance share awards and the vesting of certain awards of restricted stock may be subject to the satisfaction of certain performance measures. All officers and other employees are eligible to be selected by the Committee to receive such awards. The performance measures applicable to a particular award will be determined by the Committee. No such awards are currently outstanding and, no performance measures have been designated by the Committee. Under the 1996 Plan, such performance measures may include criteria selected by the Committee including, but not limited to, one or more of the following: Common Stock value, earnings per share, return on capital employed, return to stockholders (including, dividends), return on equity, earnings of the Company, revenues, market share, cash flow, cost reduction measures or any combination of the foregoing. If the performance measure or measures applicable to a performance share award is satisfied, the holder of the award would receive the number of shares of Common Stock equal to the performance shares subject to the award. VESTING. Under the 1996 Plan, the Committee may establish vesting criteria for the grant of options. The Committee currently anticipates that the initial grants under the Plan will consist of non-qualified options with vesting over a five-yer period from the date of grant so that 20% of the grant amount will vest each year. The Committee currently anticipates that grants to officers will be in the amount of 3,500 per year so that 700 shares of each grant will vest over the following five years from the date of grant. For participants within the Key Employee Group, the Committee currently anticipates grants of 500 shares with 100 shares vesting for each of five years following the date of grant. Options granted to Non-Employee Directors pursuant to the 1996 Plan will immediately vest and have a term of seven years for exercise. NON-EMPLOYEE DIRECTOR SHARES. Under the 1996 Plan, the last business day of May commencing May 31, 1996 (or if later on the date on which a person is first elected or begins to serve as a non-employee director, other than by reason of termination of employment), and, thereafter, on the date of each annual meeting of stockholders of the Company, each person who is a non-employee director after such meeting of stockholders shall be granted 1,000 shares of Common Stock (which amount shall be pro-rated if such non-employee director is first elected or begins to serve as a non-employee director on a date other than the date of an annual meeting of stockholders). The annual amount of shares awarded shall be subject to adjustment in the event of a stock split, stock dividend, recapitalization, reorganization, merger or other similar event or change in capitalization, FEDERAL INCOME TAX CONSEQUENCES. The following is a brief summary of the U.S. federal income tax consequences of awards made under the 1996 Plan. 1. STOCK OPTIONS. A participant will not recognize any income upon the grant of a stock option. A participant will recognize compensation taxable as ordinary income (and subject to income tax withholding) upon exercise of a non-qualified stock option equal to the excess of the fair, market value of the shares purchased over their exercise price, and the Company will be entitled to a corresponding deduction. A participant will not recognize income (except for purposes of the alternative minimum tax) upon exercise of an Incentive Stock Option. If the shares acquired by exercise of an 19 Incentive Stock Option are held for the longer of two years from the date the option was granted and one year from the date it was exercised, any gain or loss arising from a subsequent disposition of such shares will be taxed as long-term capital gain or loss, and the Company will not be entitled to any deduction. If, however, such shares are disposed of within the above-described period, then in the year of such disposition the participant will recognize compensation taxable as ordinary income equal to the excess of the lesser of (i) the amount realized upon such disposition and (ii) the fair market value of such shares on the date of exercise over the exercise price, and the Company will be entitled to a corresponding deduction. 2. SARS. A participant will not recognize any taxable income upon the grant of an SAR. A participant will recognize compensation taxable as ordinary income (and subject to income tax withholding) upon exercise of a SAR equal to the fair market value of any shares delivered and the amount of cash paid by the Company upon such. exercise, and the Company will be entitled to a corresponding deduction. 3. RESTRICTED STOCK. A participant will not recognize taxable income at the time of the grant of shares of restricted stock, and the Company will not be entitled to a tax deduction at such time, unless the participant makes an election to be taxed at the time restricted stock is granted. If such election is not made, the participant will recognize taxable income at the time the restrictions lapse in an amount equal to the excess of the fair market value of the shares at such time over the amount, if any, paid for such shares. The amount of ordinary income recognized by a participant by making the above-described election or upon the lapse of the restrictions is deductible by the Company as compensation expense, except to the extent the limit of section 162(m) of the Code applies. In addition, a participant receiving dividends with respect to restricted stock for which the above-described election has not been made and prior to the time the restrictions lapse will recognize compensation taxable as ordinary,income (subject to income tax withholding), rather than dividend income, in an amount equal to the dividends paid and the Company will be entitled to a corresponding deduction, except to the extent the limit of section 162(m) of the Code applies. 4. BONUS STOCK. A participant will recognize compensation taxable as ordinary income,(and subject to income tax withholding) in respect of awards of shares of bonus stock at the time such shares are transferred in an amount equal to the then fair market value of such shares and the Company will be entitled to a corresponding deduction, except to the extent the limit of section 162(m) of the Code applies, 5. PERFORMANCE SHARES. A participant will not recognize taxable income upon the grant of performance shares and the Company will not be entitled to a tax deduction for such performance shares, the participant will recognize compensation taxable subject to income tax withholding) in an amount equal to the fair market value and any cash paid by the Company, and the Company will be entitled,to a corresponding deduction, except to the extent the limit of section 162(m) of the Code applies. 6. NON-EMPLOYEE DIRECTOR SHARES. Each non-employee director will recognize compensation taxable as ordinary income in respect of shares of Common Stock awarded at the time such shares are transferred in an amount equal to the then fair market value of such shares, and the Company will be entitled to a corresponding deduction. 7. SECTION 162(M) OF THE CODE. Section 162(m) of the Code generally limits to $1 million the amount that a publicly held corporation is allowed each year to deduct for the company's chief executive officer and the Company's four most highly compensated officers. However, certain types of compensation paid to such executives are not subject to the $1 million deduction limit. One such type is "qualified performance-based" compensation. Qualified performance-based compensation must satisfy all the following requirements (i) compensation must be payable solely on account of the attainment of preestablished objective performance measures, (ii) the performance measures must be determined by a committee consisting solely of two or more "outside directors," (iii) the material terms under which the compensation is to be paid, including the performance measures, must be approved by a majority of the corporation's stockholders and, (iv) the committee administering the plan must certify, that the applicable performance measures were satisfied before payment of any 20 performance-based compensation is made. The Committee will consist solely of "outside directors" as defined for purposes of section 162(m) of the Code. As a result, and based on certain proposed regulations published by the Internal Revenue Service, certain compensation under the 1996 Plan, such as that payable with respect to options and certain SARs, is not expected to be subject to the $1 million deduction limit under section 162(m) of the Code, but other compensation payable under the 1996 Plan, such as grants of Bonus Stock with Restricted Stock with restrictions not based upon attainment of performance measures, is expected to be subject to such limit. IMPLEMENTATION PROPOSAL. If approved by the shareholders, as soon as practicable, the Company intends to file a registration statement under The Securities Act of 1933, as amended, and applicable rules and regulations thereunder to register the 1996 Plan and shares of stock related thereto. Subject to approval by the shareholders, the Compensation Committee intends to implement the 1996 Plan with the following parameters: (a) Non-Employee Director Options--Option grants to each of the nine non-employee directors of 1,000 shares with a 7-year term in the form of non-qualified stock options, based on market price at the date of issuance. The grants will occur each of the five years that the 1996 Plan is in effect. (b) Officer Group (currently 12 persons, including the named executive officers)--Option grants in the form of non-qualified option grants for 3,500 shares each, vesting 20% over five years, with an exercise price based on fair market value at date of grant with exercisability over five years from date of vesting. It is contemplated that similar grants would be made for each of the five years of the existence of the 1996 Plan. (c) Key Employee Group--This group consists of key employees other than those included in the officer group, approved annually by the Compensation Committee to receive a grant of non-qualified stock options for 500 option shares vesting 20% each year for five years. The pricing and exercisability provisions would be similar to those for the officer group above. The selection for participation in any year would not assure inclusion in any subsequent year although there may well be key employees who participate all or part of the years covered by the 1996 Plan. The following table sets forth the number of shares of Common Stock which would be granted to the indicated persons or groups if the 1996 Plan is approved by stockholders. 1996 LONG-TERM INCENTIVE PLAN BENEFITS
NAME AND POSITION DOLLAR VALUE* NUMBER OF SHARES - ------------------------------------------------------------ -------------- ------------------- Bjorn E. Olsson $ 13,296 3,500 Charles M. Foudree 13,296 3,500 Lloyd T. Kaiser 13,296 3,500 Gary E. Ryker 13,296 3,500 Robert E. Heggestad 13,296 3,500 Officer Group (currently 12 persons)** 159,553 42,000 Key Employee Group (not to exceed 60 persons)*** 102,570 27,000 All Non-Employee Directors as a Group (9 persons) 34,190 9,000
*Based on the closing price ($13.75) of Common Stock on March 18, 1996, as reported in THE WALL STREET JOURNAL and calculated on appreciation of the initial grant at 5% per annum over five years. These assumptions are for illustration purposes only and actual results may vary from the assumptions shown. **Includes the individuals shown above as named executive officers. 21 ***Initially grants of 500 non-qualified option shares to each of up to 54 individuals. SHAREHOLDER PROPOSALS-1996 MEETING In the event any shareholder intends to present a proposal at the Annual Meeting of Shareholders to be held in 1997, such proposal must be received by the Company, in writing, on or before November 12, 1996, to be considered for inclusion in the Company's next Proxy Statement. Shareholder proposals for suggested nominees for director should be submitted to the Company or its Director Nomination and Compensation Committee not later than 90 days prior to the next shareholders' meeting. OTHER MATTERS Management is not aware of any other matters which may come before the meeting. However, if any other matters properly come before the meeting, it is the intention of the persons named in the accompanying form of proxy to vote the proxy in accordance with their best judgment on such matters. BY ORDER OF THE BOARD OF DIRECTORS Robert E. Harmon Chairman April 1, 1996 22 EXHIBIT A HARMON INDUSTRIES, INC. 1996 LONG-TERM INCENTIVE PLAN HARMON INDUSTRIES, INC. 1996 LONG-TERM INCENTIVE PLAN I. INTRODUCTION 1.1 PURPOSES. The purposes of the 1996 Long-Term Incentive Plan (the "Plan") of Harmon Industries, Inc. (the "Company") and its subsidiaries from time to time (individually a "Subsidiary" and collectively the "Subsidiaries") are to align the interests of the Company's stockholders and the recipients of awards under this Plan by increasing the proprietary interest of such recipients in the Company's growth and success and to advance the interests of the Company by attracting and retaining officers and other key employees and other persons who are not officers or employees of the Company for services as directors of the Company. For purposes of this Plan, references to employment by the Company shall also mean employment by a Subsidiary. 1.2 CERTAIN DEFINITIONS. "Agreement" shall mean the written agreement evidencing an award hereunder between the Company and the recipient of such award. "Board" shall mean the Board of Directors of the Company. "Bonus Stock" shall mean shares of Common Stock which are not subject to a Restriction Period or Performance Measures. "Bonus Stock Award" shall mean an award of Bonus Stock under this Plan. "Cause" shall have the meaning set forth in Section 2.3(d). "Change in Control" shall have the meaning set forth in Section 6.8(b). "Code" shall mean the Internal Revenue Code of 1986, as amended. "Committee" shall mean the Compensation Committee designated by the Board, consisting of three or more members of the Board, each of whom shall be (i) a "disinterested person" within the meaning of Rule 16b-3 under the Exchange Act and (ii) an "outside director" within the meaning of Section 162(m) of the Code, subject to any transaction rules applicable to the definition of outside director. "Common Stock" shall mean the common stock, $.25 par value, of the Company. "Company" shall mean Harmon Industries, Inc., a Missouri corporation, and any successor thereto. "Disability" shall mean the inability of the holder of an award to perform substantially such holder's duties and responsibilities for a continuous period of at least six months, as determined solely by the Committee. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean the closing sale price of a share of Common Stock as reported in the New York Stock Exchange Composite Transactions on the date as of which such value is being determined, or, if the Common Stock is not listed on the New York Stock Exchange, the closing sale price of a share of Common Stock on the principal national stock exchange on which the Common Stock is traded on the date as of which such value is being determined, or, if there shall be no reported sale for such date, on the next preceding date for which a sale was reported; provided that if Fair Market Value for any date cannot be so determined, Fair Market Value shall be determined by the Committee by whatever means or method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate. A-1 "Free-Standing SAR" shall mean an SAR which is not issued in tandem with, or by reference to, an option, which entitles the holder thereof to receive, upon exercise, shares of Common Stock (which may be Restricted Stock), cash or a combination thereof with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of shares of Common Stock with respect to which such SARs are exercised. "Incentive Stock Option" shall mean an option to purchase shares of Common Stock that meets the requirements of Section 422 of the Code, or any successor provision, which is intended by the Committee to constitute an Incentive Stock Option. "Incumbent Board" shall have the meaning set forth in Section 6.8(b)(2). "Mature Shares" shall mean shares of Common Stock for which the holder thereof has good title, free and clear of all liens and encumbrances and which such holder either (i) has held for at least six months or (ii) has purchased on the open market. "Non-Employee Director" shall mean any director of the Company who is not an officer or employee of the Company or any Subsidiary. "Non-Qualified Stock Option" shall mean a stock option which is not an Incentive Stock Option. "Performance Measures" shall mean the criteria and objectives, established by the Committee, which shall be satisfied or met (i) as a condition to the exercisability of all or a portion of an option or SAR, or (ii) as a condition to the grant of a Restricted Stock Award, or (iii) during the applicable Restriction Period or Performance Period as a condition to the holder's receipt, in the case of a Restricted Stock Award, of the shares of Common Stock subject to such award. Such criteria and objectives may include criteria selected by the Committee including, but not limited to, one or more of the following: the attainment by a share of Common Stock of a specified Fair Market Value for a specified period of time, earnings per share, return on capital employed, return to stockholders (including dividends), return on equity, earnings of the Company, revenues, market share, cash flow or cost reduction goals, or any combination of the foregoing. If the Committee desires that compensation payable pursuant to any award subject to Performance Measures be "qualified performance-based compensation" within the meaning of Section 162(m) of the Code, the Performance Measures shall be established by the Committee no later than the end of the first quarter of the Performance Period (or such other time designated by the Internal Revenue Service). "Performance Period" shall mean a period designated by the Committee during which the Performance Measures applicable to a Performance Share Award shall be measured. "Performance Share" shall mean a right, contingent upon the attainment of specified Performance Measures within a specified Performance Period, to receive one share of Common Stock, which may be Restricted Stock, or in lieu thereof, the Fair Market Value of such Performance Share in cash. "Performance Share Award" shall mean an award of Performance Shares under the Plan. "Permanent and Total Disability" shall have the meaning set forth in Section 22(e)(3) of the Code or any successor thereto. "Restricted Stock" shall mean shares of Common Stock which are subject to a Restriction Period. "Restricted Stock Award" shall mean an award of Restricted Stock under this Plan. "Restriction Period" shall mean a period designated by the Committee during which the Common Stock subject to a Restricted Stock Award may not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed of, except as provided in this Plan or the Agreement relating to such award. A-2 "SAR" shall mean a stock appreciation right which may be a Free-Standing SAR or a Tandem SAR. "Stock Award" shall mean a Restricted Stock Award or a Bonus Stock Award. "Tandem SAR" shall mean a SAR which is granted in tandem with, or by reference to, an option (including a Non-Qualified Stock Option granted prior to the date of grant of the SAR), which entitles the holder thereof to receive, upon exercise of such SAR and surrender for cancellation of all or a portion of such option, shares of Common Stock (which may be Restricted Stock), cash or a combination thereof with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of shares of Common Stock subject to such option, or portion thereof, which is surrendered. "Tax Date" shall have the meaning set forth in Section 6.5. "Ten Percent Holder" shall have the meaning set forth in Section 2.1(a). 1.3 ADMINISTRATION. This plan shall be administered by the Committee. Any one or a combination of the following awards may be made under this Plan to eligible officers and other employees of the Company and its Subsidiaries: (i) options to purchase shares of Common Stock in the form of Incentive Stock Options or Non-Qualified Stock Options, (ii) SARs in the form of Tandem SARs or Free-Standing SARS, (iii) Stock Awards in the form of Restricted Stock or Bonus Stock and (iv) Performance Shares. The Committee shall, subject to the terms of this Plan, select eligible officers and other employees for participation in this Plan and determine the form, amount and timing of each award and, if applicable, the number of shares of Common Stock, the number of SARs and the number of Performance Shares subject to an award, the exercise price or base price associated with the award, the time and conditions of exercise or settlement of the award, the ability to defer any payment of an award and all other terms and conditions of the award, including, without limitation, the form of the Agreement evidencing the award. The Committee shall, subject to the terms of this Plan, interpret this Plan and the application thereof, establish rules and regulations for the administration of this Plan and may impose, incidental to the grant of an award, conditions with respect to the award, such as limiting competitive employment or other activities. All such interpretations, rules, regulations and conditions shall be conclusive and binding on all parties. The Committee may delegate some or all of its power and authority hereunder to the Chief Executive Officer or other executive officer of the Company as the Committee deems appropriate; provided, however, that the Committee may not delegate its power and authority with regard to (i) the grant of an award under this Plan, or the terms of such award, to any person who is a "covered employee" within the meaning of Section 162(m) of the Code or who, in the Committee's judgment, is likely to be a covered employee at any time during the period an award hereunder to such employee would be outstanding or (ii) the selection for participation in this Plan of an officer or other person subject to Section 16 of the Exchange Act or decisions concerning the timing, pricing or amount of an award to such an officer or other person. No member of the Board of Directors or Committee, and neither the Chief Executive Officer nor any other executive officer to whom the Committee delegates any of its power and authority hereunder, shall be liable for any act, omission, interpretation, construction or determination made in connection with this Plan in good faith, and the members of the Board of Directors and the Committee and the Chief Executive Officer or other executive officer shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including attorneys' fees) arising therefrom to the full extent permitted by law, except as otherwise may be provided in the Company's Certificate of Incorporation or By-laws, and under any directors' and officers' liability insurance that may be in effect from time to time. A-3 A majority of the Committee shall constitute a quorum. The acts of the Committee shall be either (i) acts of a majority of the members of the Committee present at any meeting at which a quorum is present or (ii) acts approved in writing by a majority of the members of the Committee without a meeting. 1.4 ELIGIBILITY. All employees, including officers of the Company and its Subsidiaries are eligible to participate in this Plan. Participants in this Plan shall consist of such officers or other employees of the Company and its Subsidiaries as the Committee in its sole discretion may select from time to time or as may be selected pursuant to delegated authority in accordance with Section 1.3. The Committee's selection of a person to participate in this Plan at any time shall not require the Committee to select such person to participate in this Plan at any other time. Non-Employee Directors shall only be eligible to participate in this plan in accordance with Article V. 1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.7, the total number of shares of Common Stock available for grants of all awards under this Plan in any calendar year shall be one and fifteen hundredths percent (1.15%) of the outstanding Common Stock as of January 1 of such year beginning January 1, 1996, plus the number of shares of Common Stock which shall have become available for grants of awards under this Plan in any and all prior calendar years, but which shall not have become subject to the grant of such awards in any prior year. In addition, up to 80,000 shares of the Common Stock of the Corporation may be purchased at market for allocation under this Plan, such amount shall be the aggregate limit of purchase shares during the term of this Plan. The purchase of shares for this purpose must be approved by the Compensation Committee after consultation with counsel and notice to the Board of Directors prior to the purchase. This use of purchased shares is intended to be essentially non-dilutive. Subject to adjustment as provided in Section 6.7, the total number of shares of Common Stock available for grants of Incentive Stock Options in any calendar year, beginning with calendar year 1996, shall be 80,000 shares, plus the number of shares of Common Stock which shall have become available for grants of Incentive Stock Options under this Plan in any and all prior calendar years, but which shall not have become subject to the grant of Incentive Stock Options in any prior year. Except as described above, shares of Common Stock to be delivered under this Plan shall be made available from authorized and unissued shares of Common Stock, or authorized and issued shares of Common Stock reacquired and held as treasury shares or otherwise or a combination thereof. To the extent required by Section 162(m) of the Code and the rules and regulations thereunder, the maximum number of shares of Common Stock with respect to which options or SARs or a combination thereof may be granted during any calendar year to any person shall be 50,000, subject to adjustment as provided in Section 6.7. II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS 2.1 STOCK OPTIONS. The Committee may, in its discretion, grant options to purchase shares of Common Stock to such eligible persons as may be selected by the Committee, provided that Non-Employee Directors shall only be eligible for option grants as provided in Article V hereof. Each option, or portion thereof, that is not an Incentive Stock Option, shall be a Non-Qualified Stock Option. Each option shall be granted within ten years of the effective date of this Plan. To the extent that the aggregate Fair Market Value (determined as of the date of grant) of shares of Common Stock with respect to which options designated as Incentive Stock Options are exercisable for the first time by a participant during any calendar year (under this Plan or any other plan of the Company, or any parent or Subsidiary) exceeds the amount (currently $100,000) set forth in the Code, such options shall constitute Non-Qualified Stock Options. The terms of each option granted by the Committee shall be embodied in an Agreement. A-4 Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: (a) NUMBER OF SHARES AND PURCHASE PRICE. The number of shares of Common Stock subject to an option and the purchase price per share of Common Stock purchasable upon exercise of the option shall be determined by the Committee; provided, however, that the purchase price per share of Common Stock purchasable upon exercise of an option shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of such option; provided further, that if an Incentive Stock Option shall be granted to any person who, at the time such option is granted, owns capital stock possessing more than ten percent of the total combined voting power of all classes of capital stock of the Company (or of any parent or Subsidiary) (a "Ten Percent Holder"), the purchase price per share of Common Stock shall be the price (currently 110% of Fair Market Value) required by the Code in order to constitute an Incentive Stock Option. (b) OPTION PERIOD AND EXERCISABILITY. The period during which an option may be exercised shall be determined by the Committee; provided, however, that no Incentive Stock Option shall be exercised later than ten years after its date of grant; provided further, that if an Incentive Stock Option shall be granted to a Ten Percent Holder, such option shall not be exercised later than five years after its date of grant. The Committee may, in its discretion, establish Performance Measures which shall be satisfied or met as a condition to the grant of an option or to the exercisability of all or a portion of an option. The Committee shall determine whether an option shall become exercisable in cumulative or non-cumulative installments and in part or in full at any time. An exercisable option, or portion thereof, may be exercised only with respect to whole shares of Common Stock. (c) METHOD OF EXERCISE. An option may be exercised (i) by giving written notice to the Company specifying the number of whole shares of Common Stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (A) in cash, (B) in Mature Shares having a Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) by authorizing the Company to withhold whole shares of Common Stock which would otherwise be delivered upon exercise of the option having a Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (D) in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) a combination of (A), (B) and (C), in each case to the extent set forth in the Agreement relating to the option, (ii) if applicable, by surrendering to the Company any Tandem SARs which are cancelled by reason of the exercise of the option and (iii) by executing such documents as the Company may reasonably request. The Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(E) and in the case of an optionee who is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Common Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the holder. No certificate representing Common Stock shall be delivered until the full purchase price therefor has been paid. 2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant SARs to such eligible persons (other than Non-Employee Directors) as may be selected by the Committee. The Agreement relating to an SAR shall specify whether the SAR is a Tandem SAR or a Free-Standing SAR. SARs shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: A-5 (a) NUMBER OF SARS AND BASE PRICE. The number of SARs subject to an award shall be determined by the Committee. Any Tandem SAR related to an Incentive Stock Option shall be granted at the same time that such Incentive Stock Option is granted and the base price thereof shall be the purchase price per share of Common Stock of the related option. The base price of a Free-Standing SAR or an SAR granted in tandem with, or by reference to, a Non-Qualified Stock Option shall be determined by the Committee; provided, however, that such base price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of such SAR. (b) EXERCISE PERIOD AND EXERCISABILITY. The Agreement relating to an award of SARs shall specify whether such award may be settled in shares of Common Stock (including shares of Restricted Stock) or cash or a combination thereof. The period for the exercise of an SAR shall be determined by the Committee; provided, however, that no Tandem SAR shall be exercised later than the expiration, cancellation, forfeiture or other termination of the related option. The Committee may, in its discretion, establish Performance Measures which shall be satisfied or met as a condition to the exercisability of an SAR. The Committee shall determine whether an SAR may be exercised in cumulative or non-cumulative installments and in part or in full at any time. An exercisable SAR, or portion thereof, may be exercised, in the case of a Tandem SAR, only with respect to whole shares of Common Stock and, in the case of a Free-Standing SAR, only with respect to a whole number of SARs. If an SAR is exercised for shares of Restricted Stock, a certificate or certificates representing such Restricted Stock shall be issued in accordance with Section 3.2(c) and the holder of such Restricted Stock shall have such rights of a stockholder of the Company as determined pursuant to Section 3.2(d). Prior to the exercise of an SAR for shares of Common Stock, including Restricted Stock, the holder of such SAR shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to such SAR and shall have rights as a stockholder of the Company in accordance with Section 6.10. (c) METHOD OF EXERCISE. A Tandem SAR may be exercised (i) by giving written notice to the Company specifying the number of whole SARs which are being exercised, (ii) by surrendering to the Company any options which are cancelled by reason of the exercise of the Tandem SAR and (iii) by executing such documents as the Company may reasonably request. A Free-Standing SAR may be exercised (i) by giving written notice to the Company specifying the whole number of SARs which are being exercised and (ii) by executing such documents as the Company may reasonably request. 2.3 TERMINATION OF EMPLOYMENT. (a) DISABILITY. Subject to paragraph (f) below and Section 6.8 and unless otherwise specified in the Agreement relating to an option or SAR, as the case may be, if the employment with the Company of the holder of an option or SAR terminates by reason of Disability, each option and SAR held by such holder shall be fully exercisable on the effective date of such holder's termination of employment and may thereafter be exercised by such holder (or such holder's legal representative or similar person) until the earlier to occur of (i) the date set forth in the Agreement relating to such option or SAR after the effective date of such holder's termination of employment and (ii) the expiration date of the term of such option or SAR. (b) RETIREMENT. Subject to paragraph (f) below and Section 6.8 and unless otherwise specified in the Agreement relating to an option or SAR, as the case may be, if the employment with the Company of the holder of an option or SAR terminates by reason of retirement on or after age 55, each option and SAR held by such holder shall be fully exercisable and may thereafter be exercised on the effective date of such holder's termination of employment and may thereafter be exercised by such holder (or such holder's legal representative or similar person) until the earlier to occur of (i) the date set forth in the Agreement relating to such option or SAR after the effective date of such holder's termination of employment and (ii) the expiration date of the term of such option or SAR. A-6 (c) DEATH. Subject to paragraph below and unless otherwise specified in the Agreement relating to an option or SAR, as the case may be, if the employment with the Company of the holder of an option or SAR terminates by reason of death, each option and SAR held by such holder shall be fully exercisable and may thereafter be exercised by such holder's executor, administrator, legal representative, beneficiary or similar person, as the case may be, until the earlier to occur of (i) the date set forth in the Agreement relating to such option or SAR after the date of death and (ii) the expiration date of the term of such option or SAR. (d) OTHER TERMINATION. If the employment with the Company of the holder of an option or SAR is terminated by the Company for Cause or is voluntarily terminated by such holder, each option and SAR held by such holder shall terminate automatically on the effective date of such holder's termination of employment. "Cause" shall mean any act of dishonesty, commission of a felony, significant activities harmful to the reputation of the Company or any of its Subsidiaries, refusal to perform or substantial disregard of duties properly assigned or significant violation of any statutory or common law duty of loyalty to the Company or any of its Subsidiaries. Subject to paragraph (f) below and Section 6.8 and unless specified in the Agreement relating to an option or SAR, as the case may be, if the employment with the Company of the holder of an option or SAR terminates for any reason other than Disability, retirement on or after age 55, death, Cause or voluntary termination, each option and SAR held by such holder shall be exercisable only to the extent that such option or SAR is exercisable on the effective date of such holder's termination of employment and may thereafter be exercised by such holder (or such holder's legal representative or similar person) until the earlier to occur of (i) the date set forth in the Agreement relating to such option or SAR after the effective date of such holder's termination of employment and (ii) the expiration date of the term of such option or SAR. (e) DEATH FOLLOWING TERMINATION OF EMPLOYMENT. Subject to paragraph (f) below and Section 6.8 and unless otherwise specified in the Agreement relating to an option or SAR, as the case may be, if the holder of an option or SAR dies during the period of exercisability of such option or SAR following termination of employment for any reason other than death, disability or retirement after age 55, Cause or voluntary termination, each option and SAR held by such holder shall be exercisable only to the extent that such option or SAR, as the case may be, is exercisable on the date of such holder's death and may thereafter be exercised by the holder's executor, administrator, legal representative, beneficiary or similar person, as the case may be, until the earlier to occur of (i) the date set forth in the Agreement relating to such option or SAR after the date of death and (ii) the expiration date of the term of such option or SAR. (f) TERMINATION OF EMPLOYMENT -- INCENTIVE STOCK OPTIONS. Subject to Section 6.8, if the employment with the Company of a holder of an Incentive Stock Option terminates by reason of Permanent and Total Disability, each Incentive Stock Option (including any related Tandem SAR) held by such holder shall be fully exercisable on the effective date of such holder's termination of employment and may thereafter be exercised by such holder (or such holder's legal representative or similar person) until the earlier to occur of (i) the date which is one year (or such shorter period as set forth in the Agreement relating to such option or SAR) after the effective date of such holder's termination of employment and (ii) the expiration date of the term of such Incentive Stock Option. Subject to Section 6.8, if the employment with the Company of a holder of an Incentive Stock Option terminates by reason of retirement on or after age 55, each Incentive Stock Option (including any related Tandem SAR) held by such holder shall be fully exercisable on the effective date of such holder's termination of employment and may thereafter be exercised by such holder (or holder's legal representative or similar person) until the earlier to occur of (i) the date which is three months after the effective date of such holder's termination of employment and (ii) the expiration date of the term of the Incentive Stock Option. A-7 Subject to Section 6.8, if the employment with the Company of the holder of an Incentive Stock Option terminates by reason of death, each Incentive Stock Option (including any related Tandem SAR) held by such holder shall be fully exercisable and may thereafter be exercised by such holder's executor, administrator, legal representative, beneficiary or similar person, as the case may be, until the earlier to occur of (i) the date set forth in the Agreement relating to such option or SAR after the date of death and (ii) the expiration date of the term of such Incentive Stock Option. If the employment with the Company of the holder of an Incentive Stock Option is terminated by the Company for Cause or is voluntarily terminated by such holder, each Incentive Stock Option held by such holder shall terminate automatically on the effective date of such holder's termination of employment. If the employment with the Company of a holder of an Incentive Stock Option terminates for any reason other than Permanent and Total Disability, retirement on or after age 55, death, Cause or voluntary termination, each Incentive Stock Option (including any related Tandem SAR) held by such holder shall be exercisable only to the extent such option is exercisable on the effective date of such holder's termination of employment and may thereafter be exercised by such holder (or such holder's legal representative or similar person) until the earlier to occur of (i) the date which is three months after the effective date of such holder's termination of employment and (ii) the expiration date of the term of the Incentive Stock Option. If the holder of an Incentive Stock Option dies during the one-year period following termination of employment by reason of Permanent and Total Disability, or if the holder of an Incentive Stock Option dies during the three-month period following termination of employment for any reason other than Permanent and Total Disability, Cause or voluntary termination, each Incentive Stock Option (including any related Tandem SAR) held by such holder shall be exercisable only to the extent such option is exercisable on the date of the holder's death and may thereafter be exercised by the holder's executor, administrator, legal representative, beneficiary or similar person until the earlier to occur of (i) the date which is one year (or such shorter period as set forth in the Agreement relating to such option or SAR) after the date of death and (ii) the expiration date of the term of such Incentive Stock Option. III. STOCK AWARDS 3.1 STOCK AWARDS. The Committee may, in its discretion, grant Stock Awards to such eligible persons (other than Non-Employee Directors) as may be selected by the Committee. Grants of Restricted Stock Awards may be conditioned upon the attainment of Performance Measures. The Agreement relating to a Stock Award shall specify whether the Stock Award is a Restricted Stock Award or Bonus Stock Award. 3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. (a) NUMBER OF SHARES AND OTHER TERMS. The number of shares of Common Stock subject to a Restricted Stock Award or Bonus Stock Award and the Performance Measures (if any) and Restriction Period applicable to a Restricted Stock Award shall be determined by the Committee. (b) VESTING AND FORFEITURE. The Agreement relating to a Restricted Stock Award shall provide, in the manner determined by the Committee, in its discretion, and subject to the provisions of this Plan, for the vesting of the shares of Common Stock subject to such award (i) if specified Performance Measures are satisfied or met during the specified Restriction Period or (ii) if the holder of such award remains continuously in the employment of the Company during the specified Restricted Period and for the forfeiture of the shares of Common Stock subject to A-8 such award (x) if specified Performance Measures are not satisfied or met during the specified Restriction Period or (y) if the holder of such award does not remain continuously in the employment of the Company during the specified Restriction Period. Bonus Stock Awards shall not be subject to any Performance Measures or Restriction Periods. (c) SHARE CERTIFICATES. During the Restriction Period, a certificate or certificates representing a Restricted Stock Award shall be registered in the holder's name and may bear a legend, in addition to any legend which may be required pursuant to Section 6.6, indicating that the ownership of the shares of Common Stock represented by such certificate is subject to the restrictions, terms and conditions of this Plan and the Agreement relating to the Restricted Stock Award. All such certificates shall be deposited with the Company, together with stock powers or other instruments of assignment (including a power of attorney), each endorsed in blank with a guarantee of signature if deemed necessary or appropriate, which would permit transfer to the Company of all or a portion of the shares of Common Stock subject to the Restricted Stock Award in the event such award is forfeited in whole or in part. Upon termination of any applicable Restriction Period (and the satisfaction or attainment of applicable Performance Measures), or upon the grant of a Bonus Stock Award, in each case subject to the Company's right to require payment of any taxes in accordance with Section 6.5, a certificate or certificates evidencing ownership of the requisite number of shares of Common Stock shall be delivered to the holder of such award. (d) RIGHTS WITH RESPECT TO RESTRICTED STOCK AWARDS. Unless otherwise set forth in the Agreement relating to a Restricted Stock Award, and subject to the terms and conditions of a Restricted Stock Award, the holder of such award shall have all rights as a stockholder of the Company, including, but not limited to, voting rights, the right to receive dividends and the right to participate in any capital adjustment applicable to all holders of Common Stock; provided, however, that a distribution with respect to shares of Common Stock, other than a distribution in cash, shall be deposited with the Company and shall be subject to the same restrictions as the shares of Common Stock with respect to which such distribution was made. (e) AWARDS TO CERTAIN EXECUTIVE OFFICERS. Notwithstanding any other provision of this Article III, and only to the extent necessary to ensure the deductibility of the award to the Company, the Fair Market Value of the number of shares of Common Stock subject to a Restricted Stock Award granted to a "covered employee" within the meaning of Section 162(m) of the Code shall not exceed $2,000,000 (i) at the time of grant in the case of an award granted upon the attainment of Performance Measures and (ii) the earlier of (x) the date on which restrictions lapse in the case of a Restricted Stock Award with restrictions which lapse upon the attainment of Performance Measures, and (y) the date the holder makes an election under Section 83(b) of the Code. 3.3 TERMINATION OF EMPLOYMENT. Subject to Section 6.8, all of the terms relating to the satisfaction of Performance Measures and the termination of the Restriction Period relating to a Restricted Stock Award, or any cancellation or forfeiture of such Restricted Stock Award upon a termination of employment with the Company of the holder of such Restricted Stock Award, whether by reason of Disability, retirement, death or other termination, shall be set forth in the Agreement relating to such Restricted Stock Award. IV. PERFORMANCE SHARE AWARDS 4.1 PERFORMANCE SHARE AWARDS. The Committee may in its discretion grant Performance Share Awards to such eligible persons (other than Non-Employee Directors) as may be selected by the Committee. A-9 4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. (a) NUMBER OF PERFORMANCE SHARES AND PERFORMANCE MEASURES. The number of Performance Shares subject to any award and the Performance Measures and Performance Period applicable to such award shall be determined by the Committee. (b) VESTING AND FORFEITURE. The Agreement relating to a Performance Share Award shall provide, in the manner determined by the Committee, in its discretion, and subject to the provisions of this Plan, for the vesting of such award, if specified Performance Measures are satisfied or met during the specified Performance Period, and for the forfeiture of such award, if specified Performance Measures are not satisfied or met during the specified Performance Period. (c) SETTLEMENT OF VESTED PERFORMANCE SHARE AWARDS. The Agreement relating to a Performance Share Award (i) shall specify whether such award may be settled in shares of Common Stock (including shares of Restricted Stock) or cash or a combination thereof and (ii) may specify whether the holder thereof shall be entitled to receive, on a current or deferred basis, dividend equivalents, and, if determined by the Committee, interest on any deferred dividend equivalents, with respect to the number of shares of Common Stock subject to such award. If a Performance Share Award is settled in shares of Restricted Stock, a certificate or certificates representing such Restricted Stock shall be issued in accordance with Section 3.2(c) and the holder of such Restricted Stock shall have such rights of a stockholder of the Company as determined pursuant to Section 3.2(d). Prior to the settlement of a Performance Share Award in shares of Common Stock, including Restricted Stock, the holder of such award shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to such award. (d) AWARDS TO CERTAIN EXECUTIVE OFFICERS. Notwithstanding any other provision of this Article IV, and only to the extent necessary to ensure deductibility of any payment under an award made by the Company, the maximum amount payable upon the attainment of the Performance Measures applicable to an award granted to any employee who is a "covered employee" within the meaning of Section 162(m) of the Code at the time of such payment shall be $2,000,000. 4.3 TERMINATION OF EMPLOYMENT. Subject to Section 6.8, all of the terms relating to the satisfaction of Performance Measures and the termination of the Performance Period relating to a Performance Share Award, or any cancellation or forfeiture of such Performance Share Award upon a termination of employment with the Company of the holder of such Performance Share Award, whether by reason of Disability, retirement, death or other termination, shall be set forth in the Agreement relating to such Performance Share Award. V. NON-EMPLOYEE DIRECTOR OPTIONS 5.1 ELIGIBILITY. Each Non-Employee Director shall be granted shares of Common Stock annually in accordance with this Article V. 5.2 AWARDS OF NON-QUALIFIED STOCK OPTIONS. Subject to Section 6.7, on the last Business day of May following each annual meeting of shareholders (or if later on the date on which a person is first elected or begins to serve as a Non-Employee Director other than by reason of termination of employment) commencing May 31, 1996, and, thereafter, on the date of each annual meeting of stockholders of the Company, each person who is a Non-Employee Director after such meeting of stockholders shall be granted a Non-Qualified Stock Option for 1,000 shares of Common Stock (which amount shall be prorated if such Non-Employee Director is first elected or begins to serve as a Non-Employee Director on a date other than the date of an annual meeting of stockholders). The term of any option granted to Non-Employee Directors hereunder shall be seven (7) years, there shall be no Agreement evidencing such option, and the provisions of Section 2.1 shall otherwise apply to options granted hereunder. A-10 VI. GENERAL 6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to the stockholders of the Company for approval and, if approved by the affirmative vote of a majority of the shares of Common Stock present in person or represented by proxy at the 1996 annual meeting of stockholders, shall become effective on May 31, 1996. This Plan shall terminate approximately 5 years after its effective date (on May 31, 2001) unless terminated earlier by the Board. Termination of this Plan shall not affect the terms or conditions of any award granted prior to termination. Awards hereunder may be made at any time on or after the effective date, and prior to the termination, of this Plan, provided that no award may be made later than 5 years after the effective date of this Plan. In the event that this Plan is not approved by the stockholders of the Company, this Plan and any awards hereunder shall be void and of no force or effect. 6.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable, subject to any requirement of stockholder approval required by applicable law, rule or regulation including Rule 16b-3 under the Exchange Act and Section 162(m) of the Code; provided, however, that no amendment shall be made without stockholder approval if such amendment would (a) increase the maximum number of shares of Common Stock available for issuance under this Plan (subject to Section 6.7), (b) reduce the minimum purchase price in the case of an option or the base price in the case of an SAR, (c) effect any change inconsistent with Section 422 of the Code or (d) extend the term of this Plan; provided further that, subject to Section 6.7, the number of shares of Common Stock to be awarded to Non-Employee Directors pursuant to Article V, the date of the award of such shares and the category of persons eligible to be awarded such shares shall not be amended more than once every six months, other than to comply with changes in the Code or ERISA, or the rules and regulations thereunder. No amendment may impair the rights of a holder of an outstanding award without the consent of such holder. 6.3 AGREEMENT. Each award under this Plan (other than Non-Qualified Stock Options granted to Non-Employee Directors pursuant to Article V hereof) shall be evidenced by an Agreement setting forth the terms and conditions applicable to such award. No award shall be valid until an Agreement is executed by the Company and the recipient of such award and, upon execution by each party and delivery of the Agreement to the Company, such award shall be effective as of the effective date set forth in the Agreement. 6.4 NON-TRANSFERABILITY OF STOCK OPTIONS, SARS AND PERFORMANCE SHARES. No option, SAR or Performance Share shall be transferable other than (i) by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or (ii) as otherwise permitted under Rule 16b-3 under the Exchange Act as set forth in the Agreement relating to such award. Each option, SAR or Performance Share may be exercised or settled during the participant's lifetime only by the holder or the holder's guardian, legal representative or similar person. Except as permitted by the second preceding sentence, no option, SAR or Performance Share may be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any option, SAR or Performance Share, such award and all rights thereunder shall immediately become null and void. 6.5 TAX WITHHOLDING. The Company shall have the right to require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash pursuant to an award made hereunder, payment by the holder of such award of any federal, state, local or other taxes which may be required to be withheld or paid in connection with such award. An Agreement may provide that (i) the Company shall withhold whole shares of Common Stock which would otherwise be delivered to a holder, having an aggregate Fair Market Value determined as of the date the obligation to withhold or pay taxes arises in connection with an award (the "Tax Date"), or withhold an amount of cash A-11 which would otherwise be payable to a holder, in the amount necessary to satisfy any such obligation or (ii) the holder may satisfy any such obligation by any of the following means: (A) a cash payment to the Company, (B) delivery to the Company of Mature Shares having an aggregate Fair Market Value, determined as of the Tax Date, equal to the amount necessary to satisfy any such obligation, (C) authorizing the Company to withhold whole shares of Common Stock which would otherwise be delivered having an aggregate Fair Market Value, determined as of the Tax Date, or withhold an amount of cash which would otherwise be payable to a holder, equal to the amount necessary to satisfy any such obligation, (D) in the case of the exercise of an option, a cash payment by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) any combination of (A), (B) and (C), in each case to the extent set forth in the Agreement relating to the award; provided, however, that the Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(E) and that in the case of a holder who is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 and the rules and regulations thereunder. An Agreement may provide for shares of Common Stock to be delivered or withheld having an aggregate Fair Market Value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the holder's maximum marginal tax rate. Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the holder. 6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject to the requirement that if at any time the Company determines that the listing, registration or qualification of the shares of Common Stock subject to such award upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of shares thereunder, such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company may require that certificates evidencing shares of Common Stock delivered pursuant to any award made hereunder bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. 6.7 ADJUSTMENT. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the number and class of securities available under this Plan, the number and class of securities subject to each outstanding option and the purchase price per security, the number of Non-Qualified Options to be awarded to Non-Employee Directors pursuant to Article V, the terms of each outstanding SAR, the number and class of securities subject to each outstanding Stock Award, and the terms of each outstanding Performance Share shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding options and SARs without an increase in the aggregate purchase price or base price, other than an increase resulting from rounding. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any such adjustment would result in a fractional security being (i) available under this Plan, such fractional security shall be disregarded, or (ii) subject to an award under this Plan, the Company shall pay the holder of such award, in connection with the first vesting, exercise or settlement of such award, in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on the vesting, exercise or settlement date over (B) the exercise or base price, if any, of such award. A-12 6.8 CHANGE IN CONTROL. (a) (1) Notwithstanding any provision in this Plan or any Agreement, in the event of a Change in Control pursuant to Section (b)(3) or (4) below in connection with which the holders of Common Stock receive shares of common stock that are registered under Section 12 of the Exchange Act, (i) all outstanding options and SARS shall immediately become exercisable in full, (ii) the Restriction Period applicable to any outstanding Restricted Stock Award shall lapse, (iii) the Performance Period applicable to any outstanding Performance Share shall lapse, (iv) the Performance Measures applicable to any outstanding Restricted Stock Award (if any) and to any outstanding Performance Share shall be deemed to be satisfied at the maximum level and (v) there shall be substituted for each share of Common Stock available under this Plan, whether or not then subject to an outstanding award, the number and class of shares into which each outstanding share of Common Stock shall be converted pursuant to such Change in Control. In the event of any such substitution, the purchase price per share in the case of an option and the base price in the case of an SAR shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding options and SARs without a change in the aggregate purchase price or base price. (2) Notwithstanding any provision in this Plan or any Agreement, in the event of a Change in Control pursuant to Section (b)(1) or (2) below, or in the event of a Change in Control pursuant to Section (b)(3) or (4) below in connection with which the holders of Common Stock receive consideration other than shares of common stock that are registered under Section 12 of the Exchange Act, each outstanding award shall be surrendered to the Company by the holder thereof, and each such award shall immediately be cancelled by the Company, and the holder shall receive, within ten days of the occurrence of a Change in Control pursuant to Section (b)(1) or (2) below or within ten days of the approval of the stockholders of the Company contemplated by Section(b)(3) or (4) below, a cash payment from the Company in an amount equal to (i) in the case of an option, the number of shares of Common Stock then subject to such option, multiplied by the excess, if any, of the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, over the purchase price per share of Common Stock subject to the option, (ii) in the case of a Free-Standing SAR, the number of shares of Common Stock then subject to such SAR, multiplied by the excess, if any, of the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, over the base price of the SAR, (iii) in the case of a Restricted Stock Award or Performance Share Award, the number of shares of Common Stock or the number of Performance Shares, as the case may be, then subject to such award, multiplied by the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control. In the event of a Change in Control, each Tandem SAR shall be surrendered by the holder thereof and shall be cancelled simultaneously with the cancellation of the related option. The Company may, but is not required to, cooperate with any person who is subject to Section 16 of the Exchange Act to assure that any cash payment in accordance with the foregoing to such person is made in compliance with Section 16 and the rules and regulations thereunder. (b) "Change in Control" shall mean: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of benefi-cial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the A-13 Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of a conversion or exchange privilege in respect of outstanding convertible or exchangeable securities), (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving the Company, if, immediately after such reor-ganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of subsection (3) of this Section 6.8(b) shall be satisfied; provided further, that for purposes of clause (B), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 20% or more of the Outstanding Company Common Stock or 20% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company, and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Company Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control; (2) individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least two-thirds of such Board; provided that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was nominated and approved by the Director Nomination and Compensation Committee of the Board of Directors shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to have been a member of the Incumbent Board and such person shall not thereafter become a member of the Incumbent Board unless approved by two-thirds of the members of the then Incumbent Board; (3) approval by the stockholders of the Company of a reorganization, merger or consolidation unless, in any such case, immediately after such reorganization, merger or consolidation, (i) more than 60% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and more than 60% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger or consoli- dation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger or consolidation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock of such corporation or 20% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of A-14 the Board of Directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board of Directors providing for such reorganization, merger or consolidation; or (4) approval by the stockholders of the Company of (i) a plan of complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 60% of the then outstanding shares of common stock thereof and more than 60% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, an Exempt Person, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company) and any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of the then outstanding shares of common stock thereof or 20% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least a majority of the members of the Board of Directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. 6.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any right to participate in this Plan. Neither this Plan nor any award made hereunder shall confer upon any person any right to continued employment by the Company, any Subsidiary or any affiliate of the Company or affect in any manner the right of the Company, any Subsidiary or any affiliate of the Company to terminate the employment of any person at any time without liability hereunder. 6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a stockholder of the Company with respect to any shares of Common Stock or other equity security of the Company which is subject to an award hereunder unless and until such person becomes a stockholder of record with respect to such shares of Common Stock or equity security. 6.11 GOVERNING LAW. This Plan, each award hereunder and the related Agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Missouri and construed in accordance therewith without giving effect to principles of conflicts of laws. 6.12 APPROVAL OF PLAN. This Plan and all awards made hereunder shall be null and void if the adoption of this Plan is not approved by the affirmative vote of a majority of the shares of Common Stock present in person or represented by proxy at the 1996 annual meeting of stockholders. A-15 PROXY HARMON INDUSTRIES, INC. ANNUAL MEETING OF SHAREHOLDERS TUESDAY, MAY 14, 1996 The undersigned holders of shares of Common Stock of Harmon Industries, Inc. (the "Company") hereby appoint Robert E. Harmon and Charles M. Foudree, and each of them, attorneys, agents and proxies of the undersigned with full power of substitution and revocation to each of them, to vote all the shares of Common Stock which the undersigned may be entitled to vote at the Annual Meeting of Shareholders of the Company to be held at the Country Club of Blue Springs, 1600 N. Circle Drive, Blue Springs, Missouri on Tuesday May 14, 1996, and at any adjournments of such meeting, with all powers which the undersigned would possess if personally present. 1. Election of eleven (11) Directors - Nominees: Thomas F. Eagleton, Bruce M. Flohr, Charles M. Foudree, Rodney L. Gray, Robert E. Harmon, Herbert M. Kohn, Douglass Wm. List, Gerald E. Myers, Bjorn E. Olsson, Donald V. Rentz, Judith C. Whittaker. / / FOR all Nominees / / AUTHORITY WITHHELD from all Nominees / / FOR all Nominees, except vote(s) withheld for the following Nominee(s): -------------------------------------------------------------------------- -------------------------------------------------------------------------- 2. / / FOR AGAINST / / ABSTENTION Selection of KPMG Peat Marwick LLP, as auditors for the Company. 3. / / FOR / / AGAINST / / ABSTENTION Resolution to approve the Company's 1996 Long-Term Incentive Plan. 4. Upon such other business as may properly come before said meeting or any adjournment or adjournments thereof. (Please sign reverse side and return promptly) (Reverse Side) UNLESS OTHERWISE DIRECTED, THE MANAGEMENT PROXY COMMITTEE WILL VOTE FOR THE ELECTION OF ELEVEN (11) DIRECTORS AS LISTED IN THE PROXY STATEMENT, FOR THE SELECTION OF KPMG PEAT MARWICK LLP, AND FOR THE RESOLUTION TO APPROVE THE COMPANY'S 1996 LONG-TERM INCENTIVE PLAN. The undersigned hereby acknowledges receipt of the Notice of the Annual Meeting and Proxy Statement of the Company dated April 1, 1996. DATED , 1996 ------------------------- ------------------------------------- (Where stock is registered jointly in the names of two or more persons, all should sign. Signatures should correspond exactly with the name or names on the stock certificate. Executing partners, trustees, guardians, etc., should so indicate when signing.) THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS INSTRUCTION CARD HARMON INDUSTRIES, INC. ANNUAL MEETING OF SHAREHOLDERS TUESDAY, MAY 14, 1996 INSTRUCTIONS TO: THE MIDAMERICAN BANK & TRUST, TRUSTEE OF THE HARMON INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST, FOR VOTING AT THE ANNUAL MEETING OF SHAREHOLDERS OF HARMON INDUSTRIES, INC. ON MAY 14, 1996. Please vote the shares held by you for my account as specified upon the proposals listed below: 1. Election of eleven (11) Directors - Nominees: Thomas F. Eagleton, Bruce M. Flohr, Charles M. Foudree, Rodney L. Gray, Robert E. Harmon, Herbert M. Kohn, Douglass Wm. List, Gerald E. Myers, Bjorn E. Olsson, Donald V. Rentz, Judith C. Whittaker. / / FOR all Nominees / / AUTHORITY WITHHELD from all Nominees / / FOR all Nominees, except vote(s) withheld for the following Nominee(s): -------------------------------------------------------------------------- -------------------------------------------------------------------------- 2. / / FOR / / AGAINST / / ABSTENTION Selection of KPMG Peat Marwick LLP, as auditors for the Company. 3. / / FOR / / AGAINST / / ABSTENTION Resolution to approve the Company's 1996 Long-Term Incentive Plan. 4. Upon such other business as may properly come before said meeting or any adjournment or adjournments thereof. (Please sign reverse side and return promptly) (Reverse Side) UNLESS OTHERWISE DIRECTED, THE MANAGEMENT PROXY COMMITTEE WILL VOTE FOR THE ELECTION OF ELEVEN (11) DIRECTORS AS LISTED IN THE PROXY STATEMENT, FOR THE SELECTION OF KPMG PEAT MARWICK LLP, AND FOR THE RESOLUTION TO APPROVE THE COMPANY'S 1996 LONG-TERM INCENTIVE PLAN. The undersigned hereby acknowledges receipt of the Notice of the Annual Meeting and Proxy Statement of the Company dated April 1, 1996. DATED , 1996 ----------------------- ----------------------------------- Participant's Signature EX-27 8 EXHIBIT 27
5 This schedule contains summary financial information extracted from the consolidated financial statements of Harmon Industries, Inc. of December 31, 1995 and for the year then ended and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 0 0 25,679 (362) 25,845 56,841 36,891 (22,714) 86,845 21,827 12,427 0 0 1,702 47,530 86,845 136,780 136,780 101,312 101,312 0 0 741 11,180 4,294 6,886 0 0 0 6,886 1.01 1.01
-----END PRIVACY-ENHANCED MESSAGE-----