-----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, IM9659jF9kd1L/KlFG0EBUw9m679KaB0177TiUAd6b/nEg5kilF28SItoBtt6VO6 mNp9SUOPhVmQquL6Q2IFcw== 0000313616-98-000006.txt : 19980415 0000313616-98-000006.hdr.sgml : 19980415 ACCESSION NUMBER: 0000313616-98-000006 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980414 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980414 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DANAHER CORP /DE/ CENTRAL INDEX KEY: 0000313616 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 591995548 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-08089 FILM NUMBER: 98592783 BUSINESS ADDRESS: STREET 1: 1250 24TH ST NW STREET 2: SUITE 800 CITY: WASHINGTON STATE: DC ZIP: 20037 BUSINESS PHONE: 2028280850 MAIL ADDRESS: STREET 1: 1250 24TH STREET NW STREET 2: SUITE 800 CITY: WASHINGTON STATE: DC ZIP: 20037 FORMER COMPANY: FORMER CONFORMED NAME: DMG INC DATE OF NAME CHANGE: 19850221 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) March 9, 1998 DANAHER CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 1-8089 59-1995548 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 1250 24th Street, N.W. Washington, D.C. 20037 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 202-828-0850 (Former name or former address, if changed since last report.) Item 2. Acquisition of Assets On March 9, 1998, Danaher Corporation acquired controlling interest (100% ownership will be completed in 1998) of Pacific Scientific Company. The total cost of acquisition will be approximately $420 million, inclusive of acquisition costs. The acquisition will be accounted for as a purchase. Pacific Scientific is a California corporation with its principal executive offices located at 620 Newport Center Drive, Newport Beach, CA 92660. The following description of the Company's business has been taken from Pacific Scientific's 1996 10-K. Pacific Scientific has two major business segments: (i) Electrical Equipment and (ii) Safety Equipment. Pacific Scientific is in the business of designing, manufacturing and selling electrical equipment and safety equipment. Nearly half of the Company's sales consists of electric motors, drives and controls. These electric motors and controls are sold primarily to original equipment manufacturers who incorporate them into a wide variety of products. Pacific Scientific motors are used in factory automation, medical, printing, plastic extrusion and molding, paper converting, vending, textile, aerospace, fitness and many other types of equipment. Safety equipment includes mainly fire detection and suppression equipment, crew restraints, flight control and pyrotechnic devices. Safety equipment is sold mainly in the aviation and aerospace industry. The Company also provides worldwide sales, service and repair of its products for airlines and other users of its safety equipment. The Company has sales offices, representatives and distributors in most industrial areas of the world. Approximately 28% of the Company's sales are made to customers outside the U.S. The Company is headquartered in California and has factories in Arizona, California, Georgia, Massachusetts, Maryland, Oregon, South Carolina, England, Germany and Mexico. Item 7. Exhibits (a) Attachment 1 contains financial statements of Pacific Scientific as specified under Rule 3.05(b) 1. Years ended December 31, 1997, 1996 and 1995 (b) Attachment 2 contains pro-forma financial statements and explanatory notes as per Article 11. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DANAHER CORPORATION By: /s/ C. Scott Brannan C. Scott Brannan Vice President and Controller Pro Forma Income Statement Year Ended December 31, 1997 (amounts in thousands) Danaher PSX Adj. Combined Net Revenues 2,050,968 310,460 2,361,428 Cost of Sales 1,382,475 210,468 (800)F 1,592,143 SG&A 401,608 77,884 7,800 G 487,292 Other -- 4,892 (4,892)B -- Total operating expenses 1,784,083 293,244 2,108 2,079,435 Operating profit 266,885 17,216 (2,108) 281,993 Interest (income) expense, net 13,104 1,578 25,000 H 39,682 EBIT 253,781 15,638 (27,108) 242,311 Income taxes 98,975 6,359 (10,833)I 94,501 Net earnings 154,806 9,279 (16,275) 147,810 Pro Forma Balance Sheet As of December 31, 1997 (amounts in thousands) DHR PSX Adj. Combined Assets Current Assets: Cash and cash equivalents 33,317 1,903 (25,000)D 10,220 A/R, net 322,600 50,774 373,374 Total inventories 209,416 46,529 2,000 A 257,945 Prepaids & other 53,006 16,602 69,720 Total current assets 618,339 115,808 (23,000) 711,259 PP&E 335,223 50,466 385,689 Other assets 72,739 6,772 79,511 Excess of cost over net assets 853,416 31,343 313,238 C 1,197,997 Total Assets 1,879,717 204,389 290,238 2,374,456 Current Liabilities: N/P-current 35,527 35,527 A/P 135,190 16,560 151,750 Accrues expenses 353,518 17,368 370,886 Total current liabilities 524,235 33,928 -- 558,163 Other liabilities 275,881 2,797 278,790 L/T debt 162,720 62,902 395,000 D 620,622 Stockholder's equity: -- Common stock 643 12,461 (12,461)E 643 APIC 336,109 7,146 (7,146)E 336,109 Retained earnings 655,692 84,681 (84,681)E 655,692 Cum. foreign trans. adj. (6,122) 474 (474)E (6,122) Treasury stock (69,441) -- (69,441) Total stockholder's equity 916,881 104,762 (104,762) 916,881 Total liability & s/h equity 1,879,717 204,389 290,238 2,374,456 EXPLANATORY NOTES TO PRO-FORMA FINANCIAL STATEMENTS (A) Represents an increase in inventory amounts to fair value. (B) Represents the elimination of a nonrecurring transaction associated with a business divestiture. (C) Represents the excess of cost over net assets of Pacific Scientific Company. (D) Represents reduction of cash and borrowings necessary to complete the transaction. (E) Represents elimination of historical equity balances for Pacific Scientific. (F) Represents the effects to the inventory adjustments discussed in item (A) above and the change in depreciation associated with establishing new values and useful lives for the acquired fixed assets. (G) Represents amortization of the excess of cost over net assets of Pacific Scientific. (H) Represents interest associated with the additional borrowings discussed in item (D) above. (I) Represents an adjustment to reflect an appropriate effective tax rate. EX-99 2 FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 26, 1997, DECEMBER 27, 1996, AND DECEMBER 29, 1995 AND INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Pacific Scientific Company: We have audited the accompanying consolidated balance sheets of Pacific Scientific Company and subsidiaries (the Company) as of December 26, 1997, December 27, 1996 and December 29, 1995, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the fiscal years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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, such consolidated financial statements present fairly, in all material respects, the financial position of Pacific Scientific Company and subsidiaries as of December 26, 1997, December 27, 1996 and December 29, 1995, and the results of their operations and their cash flows for each of the fiscal years then ended in conformity with generally accepted accounting principles. Deloitte & Touche LLP Costa Mesa, California February 27, 1998 (March 9, 1998, as to Notes 14 and 15) PACIFIC SCIENTIFIC COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS For the Fiscal Years Ended December 26, 1997, December 27, 1996, and December 29, 1995
1997 1996 1995 -------- -------- -------- (IN THOUSANDS) NET SALES................................................ $310,460 $292,363 $284,663 -------- -------- -------- COSTS AND EXPENSES Cost of Sales............................................ 210,468 198,348 185,169 Selling and administration............................... 65,600 59,790 58,694 Research and development................................. 12,284 14,281 14,811 Loss on Sale of Automation Intelligence.................. 4,892 0 0 -------- -------- -------- Total costs and expenses............................ 293,244 272,419 258,674 -------- -------- -------- Operating Income....................................... 17,216 19,944 25,989 -------- -------- -------- OTHER EXPENSE Interest expense -- net.................................. 5,468 5,052 4,281 Other income............................................. (3,890) (2,207) (1,046) -------- -------- -------- Net other expense................................... 1,578 2,845 3,235 -------- -------- -------- Income from continuing operations before income taxes.... 15,638 17,099 22,754 Income taxes............................................. (6,359) (6,766) (8,651) -------- -------- -------- INCOME FROM CONTINUING OPERATIONS........................ 9,279 10,333 14,103 -------- -------- -------- DISCONTINUED OPERATIONS: Loss from operations of Solium subsidiary (net of income tax benefits of $923 for 1997, $6,636 for 1996, and $1,311 for 1995)....................................... (1,523) (10,164) (1,353) Loss on disposal of Solium subsidiary (net of income tax benefit of $7,363)..................................... (12,040) 0 0 -------- -------- -------- Loss from discontinued operations........................ (13,563) (10,164) (1,353) -------- -------- -------- NET INCOME (LOSS)........................................ $ (4,284) $ 169 $ 12,750 ======== ======== ======== EARNINGS (LOSS) PER SHARE Continuing operations: Basic earnings per share............................ $0.76 $0.85 $1.18 Diluted earnings per share.......................... $0.76 $0.83 $1.13 Discontinued operations: Basic loss per share................................ $(1.11) $(0.84) $(0.12) Diluted loss per share.............................. $(1.11) $(0.82) $(0.11) Total: Basic earnings (loss) per share..................... $(0.35) $0.01 $1.06 Diluted earnings (loss) per share................... $(0.35) $0.01 $1.02
See accompanying Notes to the Consolidated Financial Statements. 2 PACIFIC SCIENTIFIC COMPANY CONSOLIDATED BALANCE SHEETS As of December 26, 1997, December 27, 1996, and December 29, 1995
1997 1996 1995 -------- -------- -------- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash........................................................ $ 1,903 $ 2,986 $ 6,123 Short-term investments...................................... 1,300 0 0 Trade receivables -- net.................................... 50,774 47,301 47,715 Inventories................................................. 46,529 49,382 50,242 Deferred income taxes....................................... 9,850 7,023 4,970 Net assets of discontinued Solium operations................ 0 10,734 14,412 Other current assets........................................ 5,452 6,636 6,584 -------- -------- -------- Total Current Assets................................... 115,808 124,062 130,046 Net property................................................ 50,466 49,407 39,127 Restricted cash............................................. 0 6,171 6,143 Note receivable............................................. 0 844 844 Other assets -- net......................................... 38,115 47,607 48,858 -------- -------- -------- Total Assets........................................... $204,389 $228,091 $225,018 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings....................................... $ 0 $ 0 $ 14,897 Accounts payable............................................ 16,560 18,319 19,659 Accrued employee compensation and benefits.................. 4,897 5,406 6,841 Reserve for discontinued Solium operations.................. 2,560 0 0 Other current liabilities................................... 9,911 8,823 6,627 -------- -------- -------- Total Current Liabilities.............................. 33,928 32,548 48,024 -------- -------- -------- Bank Borrowings............................................. 62,902 60,509 41,050 7 3/4% convertible subordinated debentures................. 0 16,974 17,044 Industrial development bonds................................ 0 5,625 5,625 Other long-term liabilities................................. 2,797 5,625 6,789 STOCKHOLDERS' EQUITY: Common stock, $1 par value.................................. 12,461 12,195 12,071 Additional paid-in capital.................................. 7,146 4,394 3,007 Cumulative translation adjustment........................... 474 (282) (261) Note receivable from stockholder............................ 0 0 (125) Retained earnings........................................... 84,681 90,503 91,794 -------- -------- -------- Total Stockholders' Equity............................. 104,762 106,810 106,486 -------- -------- -------- Total Liabilities and Stockholders' Equity........ $204,389 $228,091 $225,018 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 3 PACIFIC SCIENTIFIC COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Fiscal Years Ended December 26, 1997, December 27, 1996, and December 29, 1995
NOTE ADDITIONAL CUMULATIVE RECEIVABLE COMMON PAID-IN TRANSLATION FROM RETAINED STOCK CAPITAL ADJUSTMENT STOCKHOLDER EARNINGS TOTAL ------- ---------- ----------- ----------- -------- -------- (IN THOUSANDS) STOCKHOLDERS' EQUITY, DECEMBER 30, 1994.................... $11,922 $ 610 $ 0 ($125) $80,366 $ 92,773 Net Income............................. 0 0 0 0 12,750 12,750 Common Stock Dividends................. 0 0 0 0 (1,322) (1,322) Exercise of Stock Options.............. 136 1,965 0 0 0 2,101 Conversion of Debentures............... 13 229 0 0 0 242 Amortization of Restricted Stock Award................................ 0 55 0 0 0 55 Restricted Stock Benefit............... 0 148 0 0 0 148 Cumulative Translation Adjustment...... 0 0 (261) 0 0 (261) ------- ------ ---- ----- ------- -------- STOCKHOLDERS' EQUITY, DECEMBER 29, 1995.................... 12,071 3,007 (261) (125) 91,794 106,486 Net Income............................. 0 0 0 0 169 169 Common Stock Dividends................. 0 0 0 0 (1,460) (1,460) Exercise of Stock Options.............. 120 1,321 0 0 0 1,441 Conversion of Debentures............... 4 66 0 0 0 70 Cumulative Translation Adjustment...... 0 0 (21) 0 0 (21) Payment of Note Receivable............. 0 0 0 125 0 125 ------- ------ ---- ----- ------- -------- STOCKHOLDERS' EQUITY, DECEMBER 27, 1996.................... 12,195 4,394 (282) 0 90,503 106,810 Net Loss............................... 0 0 0 0 (4,284) (4,284) Common Stock Dividends................. 0 0 0 0 (1,538) (1,538) Exercise of Stock Options.............. 262 2,673 0 0 0 2,935 Conversion of Debentures............... 4 79 0 0 0 83 Cumulative Translation Adjustment...... 0 0 756 0 0 756 ------- ------ ---- ----- ------- -------- STOCKHOLDERS' EQUITY, DECEMBER 26, 1997.................... $12,461 $7,146 $474 $ 0 $84,681 $104,762 ======= ====== ==== ===== ======= ========
See accompanying Notes to Consolidated Financial Statements. 4 PACIFIC SCIENTIFIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS As of December 26, 1997, December 27, 1996, and December 29, 1995 (in thousands)
1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income........................................... $ (4,284) $ 169 $ 12,750 Depreciation and amortization............................... 11,899 11,216 10,448 Loss on sale of Automation Intelligence..................... 4,892 0 0 Loss on disposal of discontinued operations................. 12,040 0 0 Loss from discontinued operations........................... 1,523 10,164 1,353 Loss (gain) on disposal of equipment........................ 526 134 (249) Deferred income taxes....................................... (5,059) (2,143) 915 Decrease in accrued employee benefit plan liabilities....... (741) (1,074) (504) EFFECT ON CASH OF CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF THE EFFECTS OF BUSINESS ACQUISITIONS AND DISPOSITIONS Trade receivables........................................... (2,362) 414 (1,333) Inventories................................................. 3,938 860 (10,722) Other assets................................................ 2,914 823 (4,141) Accounts payable and accrued liabilities.................... (3,127) (1,340) 1,897 Accrued employee compensation and benefits.................. (641) (1,435) 728 Other liabilities........................................... (949) 2,196 (5,302) -------- -------- -------- Net cash provided by continuing operations.................. 20,569 19,984 5,840 -------- -------- -------- Net cash used by discontinued operations.................... (2,769) (6,486) (1,353) -------- -------- -------- Net cash flows from operating activities............ 17,800 13,498 4,487 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property....................................... (9,737) (21,551) (19,302) Payments for business acquisitions, net of cash acquired.... (1,938) 0 (11,949) Proceeds from sale of Automation Intelligence............... 1,950 0 0 Proceeds from sale of discontinued operations............... 2,500 0 0 Proceeds from disposition of property....................... 141 297 638 Decrease (increase) in restricted cash...................... 6,171 (28) 29 -------- -------- -------- Net cash flows from investing activities............ (913) (21,282) (30,584) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance/repayments of short-term borrowing and debt........ 0 (14,897) 8,747 Issuance/repayment of long-term borrowing and debt.......... 2,393 19,459 21,025 Redemption of Convertible Subordinated Debentures........... (16,974) (70) 0 Redemption of industrial development bonds.................. (5,625) 0 0 Cash dividends on common stock.............................. (1,538) (1,460) (1,322) Issuances of common stock................................... 3,018 1,511 2,304 Note receivable from stockholder............................ 0 125 0 -------- -------- -------- Net cash flows from financing activities............ (18,726) 4,668 30,754 -------- -------- -------- Effect of exchange rate changes............................. 756 (21) (261) -------- -------- -------- Net increase (decrease) in cash............................. (1,083) (3,137) 4,396 Cash, Beginning of Period................................... 2,986 6,123 1,727 -------- -------- -------- Cash, End of Period......................................... $ 1,903 $ 2,986 $ 6,123 ======== ======== ======== SUPPLEMENTAL INFORMATION: Interest payments........................................... $ 5,633 $ 5,555 $ 4,918 Income tax payments......................................... 3,776 5,541 6,144 Assets acquired from acquisitions........................... 5,411 0 6,682 Liabilities assumed from acquisitions....................... 3,487 0 1,220
5 PACIFIC SCIENTIFIC COMPANY FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS (CONTINUING OPERATIONS) For the Fiscal Years Ended December 26, 1997, December 27, 1996, and December 29, 1995
INDUSTRY SEGMENTS CORPORATE ---------------------------- AND CONSOLIDATED MOTION PROCESS SAFETY ELIMINATIONS NET INTEREST ------------ -------- ------- ------- ------------ ------------ (IN THOUSANDS) DECEMBER 26, 1997 Net sales........................ $310,460 $142,858 $97,785 $68,587 $ 1,230 $ 0 Income from continuing operations before income taxes............ 15,638 7,340* 6,481 6,678 607 (5,468) Depreciation and amortization.... 11,899 3,711 3,727 2,693 1,768 0 Capital spending................. 9,737 3,667 2,476 2,746 848 0 Identifiable assets.............. 204,389 69,414 60,595 49,020 25,360 0 DECEMBER 27, 1996 Net sales........................ 292,363 124,850 98,433 69,528 (448) 0 Income from continuing operations before income taxes............ 17,099 9,708 3,199 6,054 3,190 (5,052) Depreciation and amortization.... 11,216 3,764 3,651 2,797 1,004 0 Capital spending................. 21,551 5,877 3,559 3,118 8,997 0 Identifiable assets.............. 228,091 75,056 65,074 47,264 40,697 0 DECEMBER 29, 1995 Net sales........................ 284,663 128,655 95,045 60,823 140 0 Income from continuing operations before income taxes............ 22,754 17,778 3,240 4,760 1,257 (4,281) Depreciation and amortization.... 10,448 3,659 3,569 2,952 268 0 Capital spending................. 19,302 5,774 4,170 2,634 6,724 0 Identifiable assets.............. 225,018 73,734 69,491 48,494 33,299 0
- --------------- Notes * Includes $4,892 loss on the sale of Automation Intelligence. (1) Capital spending is shown exclusive of property purchased in conjunction with the acquisition of businesses (Note 8). (2) Identifiable assets are those used by the industry segment involved or an allocated portion of assets used jointly by two or more segments. Intangibles and other assets arising from acquisitions of businesses are allocated to the related segment. General corporate assets primarily consist of cash and certain property. 6 PACIFIC SCIENTIFIC COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED DECEMBER 26, 1997, DECEMBER 27, 1996 AND DECEMBER 29, 1995 (1) DESCRIPTION OF BUSINESS Pacific Scientific Company (the Company) was incorporated in California in 1937 as a successor to a company in business since 1919. References to the "Company" include Pacific Scientific and its subsidiaries. The Company's business is manufacturing and selling the products of its three segments: Motion Control, Process Control, and Safety. The Motion Control segment produces electric motors and generators and related motion control devices such as controllers and drivers. The products are predominately proprietary and once designed, tend to be produced in quantity and sold based on unique specifications. The Process Control segment produces: 1) electronic instruments for particle measurement, 2) electro-mechanical and electronic controls for use mainly by electric utilities, including the controls for street and highway lighting, and 3) customized generators and alternators for aircraft. The products are predominately proprietary and once designed, tend to be produced in quantity and sold based on unique specifications. The Safety segment produces: 1) fire detection and suppression equipment, 2) personnel safety restraints, 3) mechanical and electro-mechanical flight control components, 4) pyrotechnics, and 5) provides service for products already delivered to customers. These products are used mainly in commercial aircraft and vehicles, but are also used in a variety of other military aircraft, commercial and industrial applications. In most cases, the Company's products are reconfigured to meet specific customer needs. The Company generally receives long-term purchase orders but also responds to spot buyers, particularly for spare parts. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting policies of the Company conform to generally accepted accounting principles and are summarized below for the convenience of financial statement readers. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Pacific Scientific and all its subsidiaries. All material intercompany balances and transactions have been eliminated. Foreign Currency Translation The financial position and results of operations of the Company's foreign subsidiaries are principally measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from differences in exchange rates from period to period are included in the cumulative translation adjustment account in stockholders' equity. Fiscal Year The Company's fiscal year ends on the last Friday in December. References to 1997, 1996 and 1995 in these consolidated financial statements refer to the fiscal years ended December 26, 1997, December 27, 1996 and December 29, 1995, respectively. In addition, the Company decided to align the fiscal reporting of its European subsidiaries with the U.S. operations. Accordingly, European subsidiaries that previously reported 7 a November 30th year-end were converted to a December year-end during 1997. As such, the consolidated results of operations for 1997 include the results of the European subsidiaries for the thirteen months ended December 31, 1997. Such change was not material. Prior periods have not been restated. Use of Estimates The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense during the reporting periods. Actual results could differ from these estimates and assumptions. Revenue Recognition Generally, sales are recorded when products are shipped or services are rendered with the following exceptions: (1) the unit-of-delivery method is used for contracts for products substantially reconfigured to the customers' needs and where many units are delivered over an extended period of time; these types of contracts generally exist in sales to the Company's aerospace customers, (2) the percentage of completion method is used for significant contracts for relatively few deliverable units produced over a period in excess of six months and (3) revenue for maintenance contracts is deferred and recognized ratably over the period of the agreement. In the unit-of-delivery method, sales and estimated average cost of the units to be produced under a contract are recognized as deliveries are made or accepted. Changes in estimates for sales, cost and profit are recognized in the period in which they are determined, using the cumulative catch-up method of accounting. Any anticipated losses on contracts are charged to operations as soon as they are determinable. In the percentage of completion method, revenue and income are recognized at the completion of measurable tasks rather than upon delivery of individual units. Progress payments are netted against work-in-process inventory balances and were $0, $931,000 and $1,655,000 at the end of 1997, 1996 and 1995, respectively. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes". Deferred taxes on income result from temporary differences between the reporting of income for financial statements and income tax returns. Fair Value of Financial Instruments The recorded amounts of cash, trade receivables, accounts payable and short and long-term borrowings approximate their fair values. Fair values are estimated using quoted market prices based on information available as of year-end. At December 26, 1997, all of the Company's investments represent held-to-maturity securities and have been recorded at fair value, which approximates historical cost of the investments. These investments consist primarily of debt securities of municipalities of the Commonwealth of Puerto Rico, with contractual maturities beginning in 1998 or later. Trade Receivables Trade receivables are presented net of the related allowance for doubtful accounts, which, at year-end, totaled $1,416,000, $1,663,000 and $1,151,000 in 1997, 1996 and 1995, respectively. Allowances are determined principally on the basis of past collection experience. 8 Inventories Inventories are stated at the lower of average cost or market and, at year-end, consist of the following (in thousands):
1997 1996 1995 ------- ------- ------- Finished goods...................................... $ 7,640 $ 8,848 $ 4,993 Work-in-process..................................... 10,174 15,822 15,299 Raw material and purchased parts.................... 28,715 24,712 29,950 ------- ------- ------- Net Inventories........................... $46,529 $49,382 $50,242 ======= ======= =======
The reserve for excess and obsolete inventory was $6,399,000, $3,325,000 and $3,445,000 for year-end 1997, 1996 and 1995 respectively. Property and Depreciation Property is recorded at cost. Additions, major renewals and improvements, which extend the useful life of the property, are capitalized. Maintenance, repairs and minor renewals are expensed. Depreciation of property is computed generally by the straight-line method over the useful lives of the various classes of assets. Such lives range from 5 to 30 years for buildings and improvements and from 5 to 20 years for machinery and equipment. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in the results of current operations. Net property at year-end consists of the following (in thousands):
1997 1996 1995 ------- ------- ------- Land, building and improvements..................... $18,279 $17,612 $15,903 Machinery and equipment............................. 111,411 99,726 83,901 ------- ------- ------- Total..................................... 129,690 117,338 99,804 Less accumulated depreciation....................... 79,224 67,931 60,677 ------- ------- ------- Net property.............................. $50,466 $49,407 $39,127 ======= ======= =======
Other Assets Other assets at year-end consist of the following, net of accumulated amortization (in thousands):
1997 1996 1995 ------- ------- ------- Excess of cost over net assets of acquired businesses, net................................... $31,343 $38,354 $39,641 Patents, trademarks, purchased technology and other Intangibles, net.................................. 4,952 5,632 6,295 Notes receivable and other assets................... 1,820 3,621 2,922 ------- ------- ------- Total other assets -- net................. $38,115 $47,607 $48,858 ======= ======= =======
The excess of cost over net assets of acquired businesses is amortized, using the straight-line method, over periods not exceeding 40 years. Patents, trademarks, purchased technology and other intangibles are amortized, using the straight-line method, over estimated useful lives of 5 to 17 years. The $7 million decrease in excess of cost over net assets of acquired businesses in 1997 was primarily due to the sale of the Automation Intelligence operation and the write-off of related goodwill. The Company periodically reviews intangible assets to assure recoverability, based on undiscounted expected future operating cash flows derived from related assets, and any impairment in the value of the assets 9 would be recognized in operating results, if a permanent diminution in value were to occur. Accumulated amortization of other assets at year-end totaled $16,447,000, $14,648,000 and $12,613,000 in 1997, 1996 and 1995, respectively. Earnings per Share During 1997, the Company adopted SFAS No. 128, which requires the disclosure of basic and diluted earnings per share for all current and prior periods. This replaces the current disclosure being made for primary and fully-diluted earnings per share. All per share amounts have been restated. Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during each year, totaling 12,274,000 in 1997, 12,157,000 in 1996 and 11,992,000 in 1995. Diluted earnings per share reflects the maximum dilution, based on the average price of the Company's common stock as traded on the New York Stock Exchange each year and is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued. Shares used for calculating diluted earnings per share were 12,274,000 in 1997, 12,446,000 in 1996, and 12,469,000 in 1995. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value at the time of grant. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No compensation cost is recognized by the Company as the terms of the 1995 Stock Option Plan and those options granted outside of the 1995 Stock Option Plan require all grants be made at or above fair market value on the date of the grant. See Notes 6 and 7, "Stockholders' Equity" and "Stock Option Compensation" for further information regarding the 1995 Stock Option Plan and for SFAS No. 123 disclosure requirements. Reclassifications and Restatements Certain amounts previously reported for 1996 and 1995 have been reclassified to conform to the 1997 financial statement presentation. In addition, certain amounts have been restated to reflect the reporting of Solium as a discontinued operation. (See Note 16.) Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in financial statements. The new statement defines comprehensive income as "all changes in equity during a period, with the exception of stock issuances and dividends." In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires companies to define and report financial and descriptive information on an annual and quarterly basis about their operating segments. This new statement also establishes standards for related disclosures about products and services, geographic areas and major customers. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-Retirement Benefits." SFAS No. 132 standardizes the disclosure requirements for pensions and other post-retirement benefits. 10 SFAS No. 130, No. 131 and No. 132 will be adopted in the Company's 1998 fiscal year. Management believes that the adoption of these standards will not have a material effect on the Company's consolidated financial position, results of operations or cash flows, and any effect will be limited to the form and content of its disclosures. (3) BORROWINGS Debt at year-end consists of the following (in thousands):
1997 1996 1995 ------- ------- ------- Bank borrowings: Long term........................................... $62,902 $60,509 $41,050 Short term.......................................... 0 0 14,897 7 3/4% Convertible subordinated debentures.......... 0 16,974 17,044 Industrial development bonds........................ 0 5,625 5,625 ------- ------- ------- Total debt................................ $62,902 $83,108 $78,616 ======= ======= =======
On December 15, 1997 the Company redeemed at par value the remaining amount of the $30,000,000 7 3/4% convertible subordinated debentures issued in 1983. The Company maintains a $100,000,000 unsecured line of credit of which $62,902,000 was outstanding with an additional $2,472,000 committed to back standby letters of credit. All $100,000,000 can be borrowed at rates that do not exceed 0.625% over the London Interbank Offered Rate (LIBOR) or at the bank's prime rate. The average interest rate on borrowed bank funds at the end of 1997 was 6.12%. The long-term credit line expires on September 26, 2000. On June 4, 1997, the Company redeemed the remaining $5,625,000 of its Industrial Development Revenue Bonds using funds previously restricted for such use under the terms of the bond indenture. The remaining amount in restricted cash of $546,000 was released from restriction and used by the Company to repay bank debt. The Company's Electro Kinetics Division had issued the bonds in October 1989 to finance the construction of an industrial facility in the city of Oxnard, California. The Company concluded in 1997 not to proceed with the construction. The bank agreement has loan covenants that require the Company to maintain certain financial statement ratios. The Company was in compliance with all required ratios at December 26, 1997. All bank borrowings at December 26, 1997 of $62,902,000 mature in the year 2000. (4) EMPLOYEE RETIREMENT BENEFIT PLANS The Company has noncontributory, defined benefit pension plans covering substantially all of its U.S. employees. Non-U.S. subsidiaries have separate plans. Benefits are generally determined by a formula based on years of service, final average salary and estimated social security benefits. Pension expense for the qualified plan totaled $1,742,000, $1,659,000 and $1,417,000 in 1997, 1996 and 1995, respectively. Pension expense for the qualified plans consists of the following components (in thousands):
1997 1996 1995 ------- ------- ------- Benefits earned during the year..................... $ 2,698 $ 2,447 $ 1,866 Interest on projected benefit obligation............ 4,468 4,258 4,084 Gain on plan assets (12,536) (657) (8,793) Net amortization and deferral....................... 7,112 (4,389) 4,260 ------- ------- ------- Net pension expense....................... $ 1,742 $ 1,659 $ 1,417 ======= ======= =======
The reconciliation of the funded status of the qualified plans, includes the amount included in current and non-current employee benefit plan liabilities in the accompanying consolidated balance sheets. Pension plan 11 assets consist of corporate equity and debt securities, unallocated insurance contracts, real estate and short-term investments. The amounts shown for 1997 are estimates made by the plans' actuary, while the amounts for 1996 and 1995 have been adjusted to actuals based on final calculations performed by the plans' actuary. The Company's reconciliation of funding status was as follows (in thousands):
1997 1996 1995 ------- ------- ------- Actuarial present value of accumulated plan benefits: Vested.................................................... $55,828 $52,498 $50,542 Non-vested................................................ 1,939 1,823 1,548 ------- ------- ------- Total............................................. 57,767 54,321 52,090 Effect of estimated future salary increases................. 7,325 6,889 6,289 ------- ------- ------- Projected benefit obligation................................ 65,092 61,210 58,379 Plan assets at fair market value............................ (69,750) (57,783) (54,352) ------- ------- ------- Projected benefit obligation over plan assets............... (4,658) 3,427 4,027 Unrecognized transition asset............................... 0 129 441 Unrecognized net actuarial experience gain (loss)........... 2,757 (4,367) (3,574) ------- ------- ------- Recorded pension (assets) liabilities..................... $(1,901) $ (811) $ 894 ======= ======= =======
Significant assumptions used in the determination of pension expense consist of the following:
1997 1996 1995 ------- ------- ------- Discount rate on projected benefit obligation............... 7.5% 7.5% 8.5% Long-term rate of return on plan assets..................... 9.0% 9.0% 9.0% Rate of future salary increases............................. 4.5% 4.5% 4.5%
At the end of 1995, the Company changed the discount rate from 8.5% to 7.5% which caused an increase in the 1995 projected benefit obligation of $6,500,000 and an increase in 1996 pension expense of approximately $500,000. The Company uses the projected unit credit method for determining both pension expense and the annual contribution to the plans. The Company's funding policy is to contribute an amount between the minimum and maximum contributions allowed for federal income tax purposes. The difference between cumulative pension expense and contributions has been classified in current and non-current liabilities in the accompanying consolidated balance sheets, based on expected contribution funding dates. In addition, the Company also has a non-qualified supplemental defined benefit plan applicable to certain senior executives and a director's retirement plan, both of which provide unfunded benefits. Pension expense for the nonqualified plans was $640,000, $402,000 and $346,000 in 1997, 1996 and 1995, respectively. (5) INCOME TAXES The income tax provision from continuing operations consists of the following (in thousands):
1997 1996 1995 ---- ---- ---- Current Federal income taxes...................................... $ 8,861 $ 7,264 $ 4,772 State and foreign income taxes............................ 2,557 1,645 2,964 ------- ------- ------- Total current tax provision................................. 11,418 8,909 7,736 Deferred tax provision...................................... (5,059) (2,143) 915 ------- ------- ------- Total income tax provision................................ $ 6,359 $ 6,766 $ 8,651 ======= ======= =======
12 The differences between the income tax provision and income taxes computed using the U.S. Federal statutory income tax rates (35%) consist of the following (in thousands):
1997 1996 1995 ------- ------- ------- Tax at U.S. Federal rate.................................. $ 5,471 $ 5,985 $ 7,964 State income taxes, net of Federal tax benefit............ 451 224 854 Amortization of certain other assets...................... 855 330 332 Tax benefit of foreign sales corporation.................. (320) (320) (255) Effect of foreign operations.............................. 368 632 345 Tax benefit of research and development credits........... (253) (149) (261) Nondeductible employee expenses........................... 112 161 127 Tax exempt interest income................................ (20) (86) (101) Original issue discount................................... (40) (15) (7) Other..................................................... (265) 4 (347) ------- ------- ------- Total............................................. $ 6,359 $ 6,766 $ 8,651 ======= ======= =======
The Company had available net operating losses, subject to certain limitations, of approximately $1,724,000, which expire at various dates beginning in 1999. Net deferred taxes of $9,119,000 at December 26, 1997, $4,060,000 at December 27, 1996 and $1,917,000 at December 29, 1995, were related to (in thousands):
1997 1996 1995 CURRENT LONG-TERM CURRENT LONG-TERM CURRENT LONG-TERM ------- --------- ------- --------- ------- --------- ASSETS Inventories................. $3,746 $3,791 $2,604 Employee benefits........... $ 653 $ 295 $ 455 Accrued liabilities......... 2,130 2,354 1,257 Net operating losses........ 542 112 465 112 430 Warranty liabilities........ 348 428 498 Environmental liabilities... 465 656 200 Receivables................. 329 629 425 Investment credits.......... 272 572 Reserves.................... 3,930 124 Valuation allowance......... (430) (465) (50) (430) LIABILITIES Property.................... (250) (1,981) (1,839) Patents/Trademarks.......... (1,330) (1,511) (1,687) Other....................... (633) (653) (291) (994) (182) ------ ------- ------ ------- ------ ------- Net deferred tax asset (liability)............... $9,850 $ (731) $7,023 $(2,963) $4,970 $(3,053) ====== ======= ====== ======= ====== =======
The valuation allowance was decreased by $35,000 in 1997, $15,000 in 1996, and $129,000 in 1995. (6) STOCKHOLDERS' EQUITY The Company has authorized 2,000,000 shares of preferred stock and 30,000,000 shares of Common Stock, of which 12,460,956 shares of Common Stock were outstanding at December 26, 1997. The Company maintains a stock option plan that provides for the granting of options for the purchase of Common Stock to the officers and certain other key employees. During 1995, the stockholders approved a new stock option plan (1995 Plan) to replace three previous stock option plans. The 1995 Plan expires in 2005. 13 Stock options outstanding represent cumulative grants of options from the 1995 Plan and the predecessor plans and certain other grants as described below. The maximum number of shares of Common Stock that may be granted in any calendar year for all purposes under the 1995 Plan shall be one percent (1%) of the shares of Common Stock outstanding on the first day of such calendar year provided however that, in the event that fewer than the full aggregate number of shares of Common Stock available for issuance in any calendar year are issued in such year, the shares not issued shall be added to the shares available for issuance in any subsequent year or years. If any shares of Common Stock to which options have been granted cease to be subject to exercise or purchase, such underlying shares of Common Stock shall thereafter be available for grants under the 1995 Plan during any calendar year until expiration of the 1995 Plan in 2005. Stock option activity during 1997, 1996 and 1995 consists of the following:
1997 1996 1995 ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED ACTUAL AVERAGE ACTUAL AVERAGE ACTUAL AVERAGE -------- -------- -------- -------- -------- -------- Stock options outstanding, beginning of year........................... 866,223 $11.80 923,517 $10.34 992,772 $ 9.38 Options granted (per share: $11.94 to $20.88)..... 235,955 12.29 117,000 20.88 108,600 16.75 Options canceled (per share: $6.25 to $20.88)...... (186,033) 16.47 (53,786) 14.94 (43,199) 12.31 Options exercised (per share: $4.375 to $20.88)..... (327,197) 9.14 (120,508) 8.02 (134,656) 7.78 -------- -------- -------- Stock options outstanding, end of year.............................. 588,948 $12.00 866,223 $11.80 923,517 $10.34 ======== ======== ======== Stock options exercisable, end of year.............................. 315,691 505,293 463,387 ======== ======== ======== Options available for grant, end of year....................... 180,920 146,278 117,675 ======== ======== ========
The following table summarizes information concerning current outstanding and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ---------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------------------------ ----------- ----------- -------- ----------- -------- $5.00-$8.00................................. 149,150 4.27 $ 6.99 149,150 $ 6.99 $8.01-$11.00................................ 31,400 6 $ 9.06 31,400 $ 9.06 $11.01-$14.00............................... 313,486 7 $12.77 102,825 $13.56 $14.01-$17.00............................... 54,350 8 $16.41 22,175 $16.75 $17.01-$21.00............................... 40,562 8.75 $20.88 10,141 $20.88 ------- ------- Total............................. 588,948 315,691 ======= =======
In February 1997, the Board of Directors awarded to the new Chairman and CEO, options for 250,000 shares of the Company's Common Stock. The exercise price was $12.625 per share, the fair market value on the day of the grant. These options were not issued under the 1995 Employee Stock Option Plan. The options vested 20% on February 18, 1997 and an additional 20% vest in each of the following four years. In addition, from July through December 1997, the Board of Directors awarded to certain newly hired key executives options for 305,000 shares of the Company's Common Stock. These options also were not issued under the 1995 Employee Stock Option Plan. The exercise prices range from $13.94 to $15.25 per share, based upon the fair market value on the day of the respective grant. The options vest over four years with 25% vesting in 1998, 1999, 2000 and 2001. 14 Vesting of all stock options accelerates upon a change of control of the Company. Stock option activity for out-of-plan options for 1997 are as follows:
WEIGHTED ACTUAL AVERAGE ------- -------- Stock options outstanding, beginning of year........................................ 0 $ 0.00 Options granted (per share: $12.625 to $15.25).............. 555,000 13.48 ------- Stock options outstanding, end of year........ 555,000 $13.48 ======= Stock options exercisable, end of year........ 50,000 =======
The following table summarizes information concerning currently outstanding and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING PRICE EXERCISABLE PRICE ------------------------ ----------- -------- ----------- -------- $12.00-$12.99...................................... 250,000 $12.63 50,000 $12.63 $13.00-$13.99...................................... 200,000 $13.94 0 $14.00-$14.99...................................... 80,000 $14.47 0 $15.00-$15.99...................................... 25,000 $15.25 0 ------- ------ Total....................................... 555,000 50,000 ======= ======
On December 21, 1997, the Company adopted a new shareholder protection plan and declared a dividend distribution of a new right ("Right" or "Rights") for each outstanding share of Common Stock. The dividend was payable on December 29, 1997, to the stockholders of record at that date and the then existing rights were redeemed via a distribution of $0.01 per share of Common Stock. Prior to becoming exercisable, the new Rights are attached to, and trade together with the Common Stock. Each Right entitles the registered holder to purchase one one-hundredth of a share of the Company's Series B Junior Participating Preferred Stock, par value $1 per share, at a price of $75. (7) STOCK OPTION COMPENSATION As described in Note 2, the Company applies APB Opinion No. 25, and related interpretations, in accounting for its stock option activity. No compensation cost has been recognized for its 1995 Stock Option Plan and out-of-plan issues in 1997. Had the Company chosen to adopt the provisions of SFAS No. 123, and recognized compensation cost based upon the fair value of the options at grant date, the Company's income from continuing operations per share for the years ended December 26, 1997, December 27, 1996 and December 29, 1995 would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 INCOME FROM CONTINUING OPERATIONS AVAILABLE TO COMMON STOCKHOLDERS (IN THOUSANDS): ------ ------- ------- As reported............................................................ $9,279 $10,333 $14,103 Pro forma.............................................................. $8,727 $10,056 $13,986
1997 1996 1995 INCOME FROM CONTINUING OPERATIONS PER COMMON AND COMMON EQUIVALENT SHARES (DILUTED): ------ ------- ------- As reported............................................................. $ 0.76 $ 0.83 $ 1.13 Pro forma............................................................... $ 0.71 $ 0.81 $ 1.12
15 The fair value of the options granted under the 1995 Plan was used to calculate the pro forma income from continuing operations per common and common equivalent share above, on the date of grant, using a binomial option-pricing model with the following weighted average assumptions:
1997 1996 1995 ------ ------ ------ Dividend yield............................................. 0.8% 0.6% 0.7% Expected volatility........................................ 28.2% 36.5% 36.3% Risk-free interest rate.................................... 5.0% 6.0% 6.0% Expected life.............................................. 6 Years 6 Years 6 Years Weighted average fair value of grants...................... $15.39 $18.76 $11.42
(8) BUSINESS ACQUISITIONS Effective December 3, 1997, the Company acquired the assets of AEG Servo Systems Limited (ASSL), a subsidiary of privately held Cegelec S.A., located in Ennis, Ireland. ASSL is a supplier of brushless servo motors. The acquisition expands the Company's European motor manufacturing capabilities and provides the Company with an advanced electromagnetic design center in Europe. Under the terms of the agreement, accounted for as a purchase, the purchase price was approximately $2,100,000 in an all-cash transaction, which approximated the book value of the company. Had the Company acquired ASSL as of the beginning of the current or prior year, results of operations would not differ materially from those reported. Effective December 29, 1995, the Company acquired Met One, Inc., a privately held company, in an exchange of approximately 983,000 shares of the Company's common stock, which had an approximate market value of $27.1 million. Met One is a supplier of instruments that detect, count and measure contaminant particles mainly in air. The merger allowed the Company to offer its customers a more comprehensive product line. The merger was accounted for as a pooling of interests, and accordingly, all prior periods have been restated as if Pacific Scientific and Met One had always been one company. In the fourth quarter of 1995, the Company recorded a one-time charge of $350,000 to reflect the costs to combine operations of the two companies. Combined and separate results of the Company and Met One during the periods preceding the merger were as follows (in thousands):
1995 -------- PACIFIC SCIENTIFIC Net Sales................................................. $267,157 Net income from continuing operations..................... 12,706 MET ONE Net Sales................................................. $ 17,506 Net Income................................................ 1,397 COMBINED Net Sales................................................. $284,663 Income from continuing operations......................... 14,103
The combined financial results presented above include adjustments to conform accounting policies of the two companies; such adjustments were not considered material. Intercompany transactions between the two companies for the periods presented were not material. On the first day of fiscal year 1995, the Company purchased all the outstanding shares of Eduard Bautz GmbH ("Bautz"), located in Weiterstadt, Germany. Bautz is a German manufacturer of high-performance motors and controls. The acquisition was made to expand the prospects for all of the Company's electric motors and related products throughout Europe. The purchase price was approximately $13,500,000 and resulted in the recognition of excess cost over net assets of acquired businesses of $7,300,000. 16 (9) LITIGATION The Company is a co-defendant with certain of its past and present officers in actions filed in the United States District Court for the Central District of California. A purchaser of the Company's common stock filed one action and a purchaser of the Company's convertible debentures filed the second action. The Federal Court has combined the complaints and ordered that a class of stockholders and a class of debenture holders be certified. The complaint alleges that the Company and certain of its officers made false and misleading statements regarding the Company and its Solium subsidiary. The complaint further alleges that the market prices of the common stock and the debentures were "artificially inflated" in the period of October 3, 1994 through July 2, 1996, thereby causing damages to the class members. The Company is also a co-defendant with certain of its past and present officers in an action filed in the Superior Court of Orange County, California by prior stockholders of Met One, Inc. The complaint is similar to the above class action complaint, alleging that the Company made false and misleading statements regarding the Company, its Solium subsidiary, and its High Yield Technology subsidiary. Damages and rescission of the sale are sought based on several causes of actions. On December 15, 1997, an action was filed against the Company and its directors in the Superior Court of California, County of Orange, by William Steiner, purporting to bring suit as a shareholder on behalf of a proposed class of all public shareholders of the Company. The complaint alleges, among other things, that defendants are obligated to "arrange for the sale of [the Company] to the highest bidder and that, by virtue of certain conduct alleged to have taken place with respect to the Kollmorgen Tender Offer and Kollmorgen Merger, and otherwise, the defendants have breached their fiduciary duties and have failed to exercise independent business judgment." The defendants have never actually been formally served with the Steiner complaint and, as such, have not responded to such complaint. On February 19 and 25, 1998, the Company received two complaints, filed in the Superior Court of California, County of Orange, and alleging that the Company and its directors withheld certain information concerning potential takeover of the Company when it called its 7 3/4% Convertible Subordinated Debentures due June 15, 2003, for an early redemption. The complaints seek class certification and further allege damages on behalf of the purchasers of the Company's convertible debentures. The Company believes the claims made in these complaints are without merit and the Company intends to vigorously pursue its defense. The Company, at this time, is not able to determine the eventual disposition of these matters. In addition, from time to time, as a normal incident of the nature of the Company's business, various claims, charges and litigation are asserted or commenced against the Company. These claims arise from related contractual matters, personal injury, patents, environmental matters and product liability. While there can be no assurance that the Company will prevail in any of the foregoing matters, the Company believes that these matters will not have a material adverse effect on its consolidated financial position, consolidated results of operations, or consolidated cash flows. However, in all matters of litigation, an unfavorable outcome could have an adverse effect on the Company's consolidated results of operations in the quarter in which that matter is resolved. (10)OPERATING LEASES The Company leases certain facilities and equipment under non-cancelable operating leases which require the following minimum future rental payments: 1998, $6,158,000; 1999, $5,496,000; 2000, $4,587,000; 2001, $4,018,000; 2002, $2,993,000; later years, $5,155,000. Rental expense was $6,597,000, $6,225,000 and $6,706,000 in 1997,1996 and 1995, respectively. (11)PROTECTION OF THE ENVIRONMENT The Company is currently named a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") at five (5) sites. As a PRP, the 17 Company has voluntarily agreed to fund, in participation with others, the required investigation and remediation at each site. The Company has been currently allocated responsibility at these sites for between 0.02% and 0.26% of the waste disposed of at these sites. Although current law seeks to impose joint and several liability on all responsible parties at any Superfund site, the Company anticipates that any potential liability or required contribution to the remediation of these sites will be limited by its small percent contribution to each site. No accrual has been made under the joint and several liability concept because the Company believes that the probability that it will have to pay material costs above its share is remote due to the fact that the other PRPs generally have substantial assets available to satisfy their obligation and are participating in the overall cleanup obligation. The Company is also involved in a remedial response and voluntary environmental clean-up expenditure at one former facility and monitoring activity at two other sites; no site is currently subject to any Superfund law proceeding. In addition, the Company is litigating its responsibility for environmental remediation of a site never directly operated by the Company. This site was sold by Sigma Instruments, Inc. prior to the acquisition of Sigma by Pacific Scientific Company in 1987. The Company believes that it has a number of defenses to this claim and its current potential exposure is not material. In many cases, future environmental related expenditures cannot be quantified with a reasonable degree of accuracy. Accordingly, the cost of clean-up for which the Company remains primarily liable may be in excess of the current environmental related accrual of $1,108,000 as of December 26, 1997. It is the Company's policy to accrue environmental clean-up cost if it is probable that a liability has been incurred and an amount is reasonably estimable. As assessment and clean-up proceeds, these liabilities are reviewed and adjusted if necessary. The Company continues to evaluate possible insurance claims for both past and future remediation cost. Ongoing environmental compliance cost, including maintenance and monitoring costs, are expensed as incurred and are not material. While it is not feasible to predict the outcome of all pending suits and claims involving environmental matters, the Company is of the opinion that the ultimate disposition of these matters will not have a material adverse effect upon the consolidated financial position, consolidated results of operations, or consolidated cash flows of the Company. (12)FOREIGN EXCHANGE INSTRUMENTS The Company enters into forward exchange and option contracts to hedge foreign currency transactions on a continuing basis for periods consistent with its committed exposure. The objective of the hedging is to minimize the impact of foreign exchange rate movements on the Company's earnings and financial position. Generally, gains and losses on these contracts offset losses and gains on the assets and liabilities being hedged. The Company does not engage in currency speculation. As of December 26, 1997, the Company had approximately $1,296,000 of outstanding foreign exchange contracts in which foreign currencies could be purchased. There were no outstanding foreign exchange contracts in which foreign currencies could be sold at December 26, 1997. All outstanding foreign exchange contracts served to hedge assets and liabilities. All outstanding foreign exchange contracts expired during February 1998 without any significant gain or loss. (13)INFORMATION BY INDUSTRY SEGMENT Financial information by industry segment for fiscal years 1997, 1996 and 1995 is summarized on page 6. International sales totaled $89,900,000 in 1997, $83,226,000 in 1996 and $80,695,000 in 1995. The Company's net sales under prime contracts to defense agencies of the U.S. Government were $6,500,000 in 1997, $12,727,000 in 1996 and $7,256,000 in 1995. (14)RECENT DEVELOPMENTS On December 15, 1997, Kollmorgen Corporation ("Kollmorgen"), through a wholly owned subsidiary, commenced an unsolicited tender offer for a majority of the shares of Pacific Scientific Company's (the 18 "Company," "Pacific Scientific," or "Registrant") common stock ("Common Stock") for $20.50 in cash (the "Kollmorgen Tender Offer") and a second step merger (the "Kollmorgen Merger") of the Company into a Kollmorgen subsidiary in which the Company's shareholders would receive, for each share of Common Stock, Kollmorgen stock with a value of $20.50, subject to certain conditions that could render the value of such stock less than or greater than $20.50. On December 17 and 21, 1997, the Board met to consider the Kollmorgen Tender Offer and related matters. At those meetings, the Board considered the Company's business, financial condition, results of operations, current business strategy and future prospects, recent and historical market prices for the Common Stock, the terms of the Kollmorgen Tender Offer and the Kollmorgen Merger, strategic and other potential alternatives to the Kollmorgen Tender Offer and the Kollmorgen Merger, and other matters, including information presented by the Company's management, BancAmerica Robertson Stephens ("BARS") and the Company's legal advisors. At its December 21st meeting, the Board unanimously (i) determined to redeem the preferred share purchase rights then issued and outstanding under the Company's then-existing preferred share purchase rights plan and simultaneously adopted a new Preferred Share Purchase Rights Plan (the "Rights Plan"); (ii) declared a dividend distribution of new preferred share purchase rights (the "Rights") under the Rights Plan; (iii) declined to render the then-existing rights or the Rights applicable to the Kollmorgen Tender Offer or the Kollmorgen Merger; and (iv) declined to recommend or approve the Kollmorgen Tender Offer or the Kollmorgen Merger. During the period following commencement of the Kollmorgen Tender Offer, the Board, together with the Company's management and its legal and financial advisors, continued to evaluate the Company's strategic alternatives. A variety of third parties contacted members of the Company's management and BARS to express an interest in the possibility of pursuing a transaction with the Company were the Board to entertain such a possibility. As part of the Board's evaluation process, BARS was directed to contact, on a confidential basis, third parties who might have an interest in pursuing a transaction with the Company. Beginning on January 5, 1998, BARS, on behalf of the Company, arranged for more than 40 parties to execute customary confidentiality agreements. During the period following BARS' distribution of confidential information to third parties, BARS responded to questions and provided additional information to various parties to which it previously had provided information, in order to assist such parties in their review of the Company. The Company, through BARS, also received oral preliminary indications of interest from certain of these parties as to the price levels such parties would be willing to consider in an acquisition transaction involving the Company. Over the weekend of January 23 and during the week of January 25, 1998, the Company's management and BARS continued to have discussions and due diligence meetings with several parties. On January 28, 1998, the Company's counsel delivered to attorneys to several parties a proposed form of merger agreement. Beginning on January 30, 1998, the Company's legal advisors, with the assistance of management and the Company's financial advisors, discussed and negotiated the form of contract or merger agreement with such interested parties. Also on January 30, Kollmorgen increased the cash and stock price of its unsolicited tender offer and merger to $23.75 per share. On January 31, 1998, following continued discussions and negotiations, the Board received the interested parties' final offers, each of which contemplated all-cash tender offers followed by a cash merger. After discussion and analysis, including the opinion of BARS, the Board unanimously approved and adopted an Agreement and Plan of Merger (the "Merger Agreement") with DH Holdings Corp ("Holdings") a wholly owned subsidiary of Danaher Corporation, a Delaware corporation ("Parent") which, at $30.25 per share, represented the highest cash price any bidder was willing to offer (the "Offer"). The Board also unanimously recommended that shareholders accept the Offer and tender their shares pursuant thereto and vote in favor of approval and adoption of the Merger Agreement and the merger with Holdings (the "Merger"), to the extent required by applicable law. On February 2, 1998, Kollmorgen terminated the Kollmorgen Tender Offer. 19 In accordance with the Merger Agreement, on February 6, 1998, ACC Acquisition Corp., a California corporation (the "Purchaser") and an indirect wholly owned subsidiary of Parent, offered to purchase all outstanding shares of Common Stock, par value $1.00 per share, including the associated Rights (together with the Common Stock, the "Shares"), at $30.25 per Share, net to the seller in cash, on the terms and subject to the conditions set forth in the Offer to Purchase (the "Tender Offer"). On February 26, 1998, the Company distributed to its shareholders a proxy statement in preparation for a special meeting (the "Special Meeting") of shareholders to consider the Offer if the pending Tender Offer failed to acquire at least 90% of the outstanding Common Stock by March 27, 1998. As of March 9, 1998, the date on which the Tender Offer closed, Company shareholders tendered approximately 93.8% of the outstanding shares of Company Common Stock and the Purchaser accepted such shares for payment. The Merger contemplated by the Merger Agreement will, in accordance with the provisions of the California General Corporation Law (the "CGCL"), be consummated without a shareholder vote, and the Special Meeting will not be held. The Merger is expected to be completed on or about March 31, 1998. There were no expenses incurred with rejecting the Kollmorgen Tender Offer and with negotiating the Merger Agreement with Danaher Corporation in fiscal 1997. Costs have been incurred since the first of 1998, and these have been reported as a prepaid expense. When the Merger is complete, expenses paid to third parties totaling approximately $11.0 million will be recognized in the quarter in which the Merger is finalized or terminated. (15)SEVERANCE ARRANGEMENTS -- CHANGE OF CONTROL On December 21, 1997, the Company adopted the 1997 Pacific Scientific Company Change of Control Severance Plan (the "Severance Plan") to establish its severance policies and commitments in the change in control context. The Severance Plan was adopted to guarantee severance benefits to key employees in the event of their termination following a change of control of the Company. The Severance Plan explicitly precludes any provision from taking effect to the extent that it would prevent a business transaction from qualifying for pooling of interests accounting. Similarly, the Severance Plan generally prohibits payments that the Company believes will be subject to golden parachute tax penalties or that would be nondeductible under the deduction limit on nonperformance-based compensation under Section 162(m) of the Code. Although the Company believes that the benefits provided to Messrs. Hill, Schlotterbeck and Hickman will not constitute excess parachute payments, the Company has agreed to indemnify such individuals from any taxes, penalties and costs in the event it is ultimately determined that such benefits constitute excess parachute payments. Subject to the foregoing, the Severance Plan authorizes the Company's Executive Committee to extend participation selectively to the Company's corporate officers and corporate staff, to its group and division presidents, to persons who directly report to division presidents, to other comparable employees and to other key employees. The Company's Executive Committee has thus far extended severance benefits to 51 individuals. Each of the Company's executive officers has been designated as a participant in the Severance Plan. Pursuant to those benefits, in the event a "change in control" occurs and a participant is terminated by the Company (or its successor) without cause or resigns for "good reason" (as defined under the Severance Plan), within two years from the date of such event, the individual would receive a lump sum severance benefit of from 12 to 130 weeks of salary and target bonus, depending on the individual's position (130 weeks in the case of Messrs. Hill, Schlotterbeck and Hickman and from 52 to 104 weeks in the case of other executive officers), and would receive group insurance benefit continuation for an equivalent period. The severance benefits provided to Messrs. Hill, Schlotterbeck and Hickman in their respective Employment Agreements do not add to their benefits under the Severance Plan. In no event, however, would participants receive less than one month of severance for each year of service to the Company (subject to an 18-month cap). For the purpose of the Severance Plan, a "change of control" includes each of the following: (i) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of substantially all the assets of another entity, in each case, unless, following such transaction, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Common Stock and the Company's outstanding voting 20 securities immediately prior to such transaction beneficially own, directly or indirectly, more than 60%, respectively, of the then-outstanding shares of Common Stock and the combined voting power of the then outstanding voting securities, as the case may be, of the surviving entity in such transaction in substantially the same proportions as their ownership, immediately prior to such transaction of the then-outstanding shares of Common Stock and then-outstanding voting securities, as the case may be, (B) no individual, entity or group (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such transaction) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of Common Stock of the corporation resulting from such transaction or the combined voting power of the outstanding securities of such corporation except to the extent that such ownership existed prior to such transaction, and (C) at least a majority of the members of the Board resulting from such transaction were members of the Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such transaction; (ii) the acquisition by any individual, entity or group of 20% or more of either the outstanding shares of Common Stock or the combined voting power of the outstanding voting securities of the Company (in either case other than acquisitions by the Company, directly from the Company and by employee benefit plans of the Company or any entity controlled thereby; (iii) individuals who, as of December 21, 1997, constitute the Board (the "Incumbent Board") cease for any reason to constituted at least a majority of the Board (except that any individual becoming a director subsequent to such date whose election, or nomination for election by the Shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest, including a contest for the removal of directors and certain other contests); (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company; and (v) the Board adopts a resolution to the effect that, for purposes of the Severance Plan, a change in control has occurred. Such a change of control occurred on March 9, 1998, the date on which the Tender Offer effected by Purchaser was completed -- i.e., when the Company shareholders tendered approximately 93.8% of the outstanding shares of Company Common Stock and the Purchaser accepted such shares for payment. The Merger contemplated by the Merger Agreement will, in accordance with the provisions of the CGCL, be consummated without a shareholder vote, and the Special Meeting previously called by the Company will not be held. The Merger is expected to be completed on or about March 31, 1998. The Severance Plan will expire on December 31, 2002 unless terminated sooner, which the Company can do prior to a change in control, other than in anticipation of a change in control. If the proposed merger with Danaher Corporation is consummated, costs associated with the Severance Plan, estimated to be approximately $3.8 million (excluding the pre-existing employee agreements), would be recognized in the quarter implemented. (16)DISCONTINUED OPERATIONS On April 9, 1997, the Company announced that it would seek a strategic buyer for its Solium technology and equipment, phase-out the Solium subsidiary, and discontinue operations. An after-tax loss from discontinued operations of $13.6 million was reported in 1997. This amount was composed of $12.1 million of estimated loss on disposal of assets and a loss of $1.5 million from operations in the first quarter of 1997. On December 4, 1997, the Company completed the sale of the assets of its Solium subsidiary to Chicago Miniature Lamp, Inc. ("CHML"). In addition, the Company granted CHML the exclusive worldwide license for the advanced Solium technology line of electronic fluorescent ballast products. Under the license agreement, the Company will also receive royalty payments from future sales of the Solium product line. As of December 26, 1997, the $2.6 million reserve for discontinuance of Solium operations will be used in connection with certain assets, the building lease, severance and other expenses. All financial information contained herein has been restated to reflect Solium as a discontinued operation. 21 (17)BUSINESS DIVESTMENTS On December 26, 1997, the Company sold its Automation Intelligence Inc. subsidiary to Sanyo Denki, Co., Ltd. of Japan. The sale resulted in a one-time pre-tax loss of $4.9 million. (18)DIVIDENDS AND QUARTERLY INFORMATION (UNAUDITED) Selected quarterly information for fiscal years 1997, 1996 and 1995 follows (in thousands, except per share data):
Q-1 Q-2 Q-3 Q-4 YEAR ------- ------- ------- ------- -------- 1997 Net sales..................................... $72,464 $78,603 $76,677 $82,716 $310,460 Gross profit.................................. 23,178 25,765 24,373 26,676 99,992 Income from continuing operations(1).......... 2,718 3,088 3,219 254 9,279 Income per common share (basic)............... 0.22 0.25 0.26 0.02 0.76 Income per common share (diluted)............. 0.22 0.25 0.26 0.02 0.76 Loss from discontinued operations(2).......... (13,563) 0 0 0 (13,563) Loss per common share (basic)................. (1.11) 0.00 0.00 0.00 (1.11) Loss per common share (diluted)............... (1.11) 0.00 0.00 0.00 (1.11) Net income (loss)............................. (10,845) 3,088 3,219 254 (4,284) Net income (loss) per common share (basic).... (0.89) 0.25 0.26 0.02 (0.35) Net income (loss) per common share (diluted).................................. (0.89) 0.25 0.26 0.02 (0.35) Dividends per common share.................... $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.12 1996 Net sales..................................... $74,041 $72,174 $70,898 $75,250 $292,363 Gross profit.................................. 24,116 23,972 22,675 23,252 94,015 Income from continuing operations............. 3,095 2,406 2,248 2,584 10,333 Income per common share (basic)............... 0.26 0.20 0.18 0.21 0.85 Income per common share (diluted)............. 0.25 0.19 0.18 0.21 0.83 Loss from discontinued operations............. (1,204) (6,144) (1,378) (1,438) (10,164) Loss per common share (basic)................. (0.10) (0.51) (0.11) (0.12) (0.84) Loss per common share (diluted)............... (0.10) (0.49) (0.11) (0.12) (0.82) Net income (loss)............................. 1,891 (3,738) 870 1,146 169 Net income (loss) per common share (basic).... 0.16 (0.31) 0.07 0.09 0.01 Net income (loss) per common share (diluted).................................. 0.15 (0.30) 0.07 0.09 0.01 Dividends per common share.................... $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.12 1995 Net sales..................................... $68,959 $72,979 $70,417 $72,308 $284,663 Gross profit.................................. 22,105 25,048 25,074 27,267 99,494 Income from continuing operations............. 2,922 3,513 3,574 4,094 14,103 Income per common share (basic)............... 0.28 0.30 0.29 0.31 1.18 Income per common share (diluted)............. 0.27 0.29 0.28 0.29 1.13 Income (loss) from discontinued operations.... 24 (254) (490) (633) (1,353) Income (loss) per common share (basic)........ 0.00 (0.02) (0.04) (0.06) (0.12) Income (loss) per common share (diluted)...... 0.00 (0.02) (0.04) (0.05) (0.11)
22
Q-1 Q-2 Q-3 Q-4 YEAR ------- ------- ------- ------- -------- Net income.................................... 2,946 3,259 3,084 3,461 12,750 Net income per common share (basic)........... 0.28 0.28 0.25 0.25 1.06 Net income per common share (diluted)......... 0.27 0.27 0.24 0.24 1.02 Dividends per common share.................... $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.12
- --------------- Notes: (1) The fourth quarter 1997 includes a $4,892,000 pre-tax loss on the sale of Automation Intelligence. (2) The first quarter 1997 includes a $13,563,000 after-tax loss from discontinuing the Solium operation. All quarters reported for discontinued operations are related to Solium. 23 -----END PRIVACY-ENHANCED MESSAGE-----