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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
--------------------------------
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................... to ................
--------------------------------
Commission file number 1-4879
DIEBOLD, INCORPORATED
(Exact name of Registrant as specified in its charter)
Ohio 34-0183970
- --------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
5995 Mayfair Road, P.O. Box 3077,
North Canton, Ohio 44720-8077
- --------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 490-4000
- -------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
Common Shares $1.25 Par Value New York Stock Exchange
- -------------------------------- --------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: None
- -------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 2, 1998. The aggregate market value was computed by
using the closing price on the New York Stock Exchange on March 2, 1998 of
$50.813 per share.
Common Shares, Par Value $1.25 Per Share $3,474,306,517
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 2, 1998
Common Shares $1.25 Par Value 69,067,165 Shares
- ---------------------------------- -------------------------------------
2
DOCUMENTS INCORPORATED BY REFERENCE
(1) PROXY STATEMENT FOR 1998 ANNUAL MEETING
---------------------------------------
OF SHAREHOLDERS TO BE HELD APRIL 15, 1998
-----------------------------------------
PART OF 10-K
INTO WHICH
CAPTION OR HEADING PAGE NO. INCORPORATED ITEM NO.
------------------ -------- ------------ --------
Information about Nominees for
Election as Directors 4-8 III 10
Executive Compensation 9-17 III 11
Annual Meeting of Shareholders;
Security Ownership of Directors
and Management 2-7 III 12
Compensation Committee Interlocks
and Insider Participation 8 III 13
2
3
PART I.
ITEM 1. BUSINESS.
- -----------------
(a) General Development
- -----------------------
The Registrant was incorporated under the laws of the State of Ohio in
August, 1876, succeeding a proprietorship established in 1859 and is engaged
primarily in the sale, manufacture, installation and service of automated
self-service transaction systems, electronic and physical security products,
software and integrated systems.
During 1997, no significant changes occurred in the manner of conducting
the Registrant's business.
(b) Financial Information about Industry Segments
- -------------------------------------------------
The Registrant operates predominantly in one industry segment: financial
systems and equipment. This segment accounts for more than 90% of the
consolidated net sales, operating profit and identifiable assets.
(c) Description of Business
- ---------------------------
The Registrant develops, manufactures, sells and services automated
teller machines (ATMs), electronic and physical security systems, various
products used to equip bank facilities, software and integrated systems for
global financial and commercial markets. Sales of systems and equipment are made
directly to customers by the Registrant's sales personnel and by manufacturer's
representatives and distributors. The sales/support organization works closely
with customers and their consultants to analyze and fulfill the customers'
needs. Products are sold under contract for future delivery at agreed upon
prices. In 1997, 1996, and 1995 the Registrant's sales and services of financial
systems and equipment accounted for more than 90% of consolidated net sales.
The principal raw materials used by the Registrant are steel, copper,
brass, lumber and plastics which are purchased from various major suppliers.
Electronic parts and components are also procured from various suppliers. These
materials and components are generally available in quantity at this time.
The Registrant had one customer, International Business Machines (IBM),
who was its partner in the InterBold joint venture, that accounted for
$173,751,000 of the total net sales of $1,226,936,000 in 1997, $146,103,000 of
the total net sales of $1,030,191,000 in 1996, and $106,392,000 of the total net
sales of $863,409,000 in 1995. On January 27, 1998, the Registrant completed
its purchase of IBM's 30 percent minority interest in InterBold for $16.1
million, the value of IBM's tax capital account in InterBold.
Backlog as of December 31, 1997 was $276,986,000 which was a 19% increase
from December 31, 1996 backlog of $233,586,000. While this increase in backlog
can be considered positive, order backlog is not the sole indicator of future
revenue streams. There are numerous other factors which influence the amount and
timing of revenue in future periods.
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4
ITEM 1. BUSINESS. - (continued)
- -----------------
All phases of the Registrant's business are highly competitive; some
products being in competition directly with similar products and others
competing with alternative products having similar uses or producing similar
results. Registrant believes, based upon outside independent industry surveys,
that it is the leading manufacturer of automated teller machines in the United
States and is also a market leader internationally. In the area of automated
transaction systems, the Registrant competes primarily with NCR Corporation,
Triton, Siemens-Nixdorf, Dassault, Bull, Olivetti and Fujitsu. In serving the
security products market for the financial services industry, the Registrant
competes primarily with Mosler and Lefebure in the security equipment and
systems field. Of these, some compete in only one or two product lines, while
others sell a broader spectrum of products competing with the Registrant.
However, the unavailability of comparative sales information and the large
variety of individual products makes it impossible to give reasonable estimates
of the Registrant's competitive ranking in or share of the market in its
security product fields of activity. Many smaller manufacturers of safes,
surveillance cameras, alarm systems and remote drive-up equipment are found in
the market.
The Registrant charged to expense approximately $45.1 million in 1997,
$41.8 million in 1996, and $35.5 million in 1995 for research and development
costs.
Compliance by the Registrant with federal, state and local environmental
protection laws during 1997 had no material effect upon capital expenditures,
earnings or the competitive position of the Registrant and its subsidiaries.
The total number of employee associates employed by the Registrant at
December 31, 1997 was 6,714 compared with 5,980 at the end of the preceding
year.
(d) Financial Information about International and U.S.
- ------------------------------------------------------
Operations and Export Sales
---------------------------
Sales to customers outside the United States as a percent of total
consolidated net sales approximated 26.1 percent in 1997, 22.3 percent in 1996,
and 19.8 percent in 1995.
ITEM 2. PROPERTIES.
- -------------------
The Registrant's corporate offices are located in North Canton, Ohio. It
owns facilities (approximately 1.5 million square feet) in Canton, Green and
Newark, Ohio; Lynchburg, Staunton and Danville, Virginia; Lexington, North
Carolina; Sumter, South Carolina; Melbourne, Australia; Mexico City, Mexico; and
leases facilities (approximately .5 million square feet) in Akron, Canton, Canal
Fulton, Massillon, Newark and Seville, Ohio; Rancho Dominguez, California;
Caracas Venezuela; London England; Sydney, Australia; and Shanghai, China. These
facilities house manufacturing, production, associated engineering, warehousing,
testing, administration and development and distribution for all product lines.
To keep its facilities both suitable and adequate for operations, the Registrant
has announced the expansion of its Green, Ohio facility.
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
At December 31, 1997, the Registrant was a party to several lawsuits
that were incurred in the normal course of business, none of which individually
or in the aggregate is considered material in relation to the Registrant's
financial position or results of operations.
4
5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT.
- ----------------------------------------------
Refer to pages 6 through 9.
5
6
EXECUTIVE OFFICERS OF THE REGISTRANT
Other Positions
Year Elected Held Last
Name Age Title Present Office Five Years
- -------------------- ---- ---------------------- -------------- -------------------------
1993-96
-------
Robert W. Mahoney 61 Chairman of the Board 1996 Chairman of the Board,
and Chief Executive President and Chief
Officer and Director Executive Officer and
Director - Diebold
1989-93
-------
Chairman of the Board
and Chief Executive
Officer and Director
- Diebold
1993-96
-------
Gregg A. Searle 49 President and Chief 1996 Executive Vice
Operating Officer President - Diebold
and Director 1991-93
-------
Vice President -
Diebold
General Manager -
InterBold
1990-93
-------
Gerald F. Morris 54 Executive Vice President 1993 Senior Vice President
and Chief Financial Officer and Chief Financial
Officer - Diebold
1994-96
-------
Alben W. Warf 59 Senior Vice President, 1996 Group Vice President,
Electronic Systems Self-Service Systems -
Development and Diebold
Manufacturing 1993
----
Vice President - Diebold
and General Manager -
InterBold
1990-93
-------
Vice President
Development and
Manufacturing -
Diebold and InterBold
6
7
EXECUTIVE OFFICERS OF THE REGISTRANT - (continued)
Other Positions
Year Elected Held Last
Name Age Title Present Office Five Years
- ---------------------- --- ------------------------- ----------------- ---------------------------
1993-96
-------
David Bucci 46 Group Vice President, 1997 Vice President, North
North American American Sales and Service
Sales and Service Eastern Division - Diebold
1992-93
-------
Vice President, Major
Accounts - Diebold
Michael J. Hillock 46 Group Vice President, 1997 1993-97
International Sales -------
and Service Vice President and
General Manager,
Sales and Service,
Europe, Middle East
and Africa
Charles J. Bechtel 52 Vice President, 1997 1990-97
Information Systems -------
Vice President, Marketing and
Sales Operations
Warren W. Dettinger 44 Vice President, 1989 --
General Counsel and
Assistant Secretary
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8
EXECUTIVE OFFICERS OF THE REGISTRANT - (continued)
Other Positions
Year Elected Held Last
Name Age Title Present Office Five Years
- ------------------------- --- -------------------------- -------------- --------------------
1996-97
-------
Reinoud G. J. Drenth 34 Vice President and 1997 Vice President
Managing Director, Europe Worldwide Marketing
Middle East, and Africa - Diebold
1987-96
-------
NCR Corporation
1995 -
----
Marketing
Vice President,
Financial Services
Industry
1994 -
----
Executive Assistant,
Worldwide Industry
Marketing
1993 -
----
Marketing Director,
Northern Europe
1991-93 -
-------
District Manager,
Financial and Retail
Systems Division
Donald E. Eagon, Jr. 55 Vice President, 1990 --
Corporate Communications
Charee Francis-Vogelsang 51 Vice President and 1983 --
Secretary
Bartholomew J. Frazzitta 55 Vice President and 1990 --
General Manager,
Security Products
8
9
EXECUTIVE OFFICERS OF THE REGISTRANT - (continued)
Other Positions
Year Elected Held Last
Name Age Title Present Office Five Years
- --------------------- --- ---------------------------- -------------- ---------------------------
1988-93
-------
Larry D. Ingram 51 Vice President, 1993 Divisional Vice President,
Procurement and Services Materials Management
- Diebold
Charles B. Scheurer 56 Vice President, 1991 --
Human Resources
Robert L. Stockamp 54 Vice President and 1990 --
Corporate Controller
1984-97
-------
Ernesto R. Unanue 56 Vice President and 1997 Vice President of Sales,
Managing Director, Carribbean and South
Latin America American Division
Robert J. Warren 51 Vice President and 1990 --
Treasurer
There is no family relationship, either by blood, marriage or adoption, between
any of the executive officers of the Registrant.
9
10
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
- -----------------------------------------------------
RELATED STOCKHOLDER MATTERS.
----------------------------
On January 30, 1997, the Board of Directors of the Registrant declared a
three-for-two stock split which was effected in the form of a stock dividend,
distributed on February 19, 1997, to shareholders of record on February 7, 1997.
Accordingly, all numbers of Common Shares, except authorized shares and treasury
shares, and all per share data have been restated to reflect this stock split in
addition to the three-for-two stock split declared on January 26, 1996,
distributed on February 23, 1996, to shareholders of record on February 9, 1996.
The Common Shares of the Registrant are listed on the New York Stock
Exchange with a symbol of DBD. The price ranges of Common Shares for the
Registrant are as follows:
1997 1996 1995
---------------- --------------- ----------------
High Low High Low High Low
------ ------ ------ ------ ------ ------
1st Quarter $44.88 $36.38 $27.08 $22.44 $18.28 $14.67
2nd Quarter 43.63 28.00 32.17 24.17 19.67 15.45
3rd Quarter 50.63 39.75 39.08 27.75 21.95 19.22
4th Quarter 50.94 42.13 42.33 35.58 27.61 20.00
----- ----- ------ ------ ------ ------
Full Year $50.94 $28.00 $42.33 $22.44 $27.61 $14.67
====== ====== ====== ====== ====== ======
There were approximately 80,024 shareholders at December 31, 1997,
which includes an estimated number of shareholders who have shares held for
their accounts by banks, brokers, trustees for benefit plans and the agent for
the dividend reinvestment plan.
On the basis of amounts paid and declared the annualized quarterly
dividends per share were $0.50 in 1997, $0.45 in 1996, and $0.43 in 1995.
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
(Dollars in thousands)
1997 1996 1995 1994 1993
------------- ----------- ----------- ----------- -----------
Net Sales $1,226,936 $1,030,191 $863,409 $760,171 $623,277
Net Income 122,516 97,425 76,209 63,511 48,374
Basic earnings per share 1.78 1.42 1.11 0.93 0.71
Diluted earnings per share 1.76 1.40 1.10 0.93 0.71
Total Assets 991,050 859,101 749,795 666,174 609,019
Cash dividends paid per Common Share 0.50 0.45 0.43 0.39 0.36
10
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
MANAGEMENT'S ANALYSIS OF RESULTS OF OPERATIONS
The table below presents the changes in comparative financial data from 1995 to
1997. Comments on significant year-to-year fluctuations follow the table.
1997 1996 1995
---------------------------- ------------------------- -------------------
Percent Percent Percent Percent
of Net Increase of Net Percent of Net
(Dollars in thousands) Amount Sales (Decrease) Amount Sales Increase Amount Sales
====================================================================================================================================
Net sales
Products............................. $825,125 67.3% 21.5% $679,053 65.9% 22.7% $553,622 64.1%
Services............................. 401,811 32.7 14.4 351,138 34.1 13.3 309,787 35.9
---------------------------------------------------------------------------------------------
1,226,936 100.0 19.1 1,030,191 100.0 19.3 863,409 100.0
Cost of sales
Products............................. 507,322 61.5 20.4 421,261 62.0 20.9 348,560 63.0
Services............................. 289,514 72.1 15.2 251,418 71.6 14.1 220,418 71.2
---------------------------------------------------------------------------------------------
796,836 64.9 18.5 672,679 65.3 18.2 568,978 65.9
---------------------------------------------------------------------------------------------
Gross profit.......................... 430,100 35.1 20.3 357,512 34.7 21.4 294,431 34.1
Selling and administrative expense.... 191,842 15.7 15.2 166,572 16.2 15.3 144,490 16.7
Research, development and
engineering expense................. 54,397 4.4 7.6 50,576 4.9 17.3 43,130 5.0
---------------------------------------------------------------------------------------------
246,239 20.1 13.4 217,148 21.1 15.7 187,620 21.7
---------------------------------------------------------------------------------------------
Operating profit....................... 183,861 15.0 31.0 140,364 13.6 31.4 106,811 12.4
Other income, net...................... 6,894 0.5 (34.5) 10,533 1.0 59.3 6,612 0.8
Minority interest...................... (5,096) (0.4) 16.0 (4,393) (0.4) 2,096.5 (200) 0.0
---------------------------------------------------------------------------------------------
Income before taxes.................... 185,659 15.1 26.7 146,504 14.2 29.4 113,223 13.1
Taxes on income........................ 63,143 5.1 28.7 49,079 4.7 32.6 37,014 4.3
---------------------------------------------------------------------------------------------
Net income............................. $122,516 10.0% 25.8% $ 97,425 9.5% 27.8% $ 76,209 8.8%
====================================================================================================================================
11
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NET SALES
Net sales for 1997 totaled $1,226,936, which represented growth of $196,745 or
19.1 percent from 1996 and $363,527 or 42.1 percent from 1995. This was the
Registrant's eighth consecutive year of record sales as well as the second year
in the Registrant's 138-year history that sales have exceeded the $1 billion
mark.
Product net sales of $825,125 grew $146,072 or 21.5 percent from 1996 and
$271,503 or 49.0 percent from 1995. During 1997, the Registrant continued to
experience a significant growth in global sales of ATMs. Sales also increased in
most other major product categories. Total U.S. product revenue was up 14.5
percent from 1996. Sales of products outside the United States increased 38.3
percent in 1997 from 1996, as well as in 1996 from 1995.
Service net sales of $401,811 increased $50,673 or 14.4 percent from 1996 and
were up $92,024 or 29.7 percent from 1995. The major factors contributing to the
service revenue gain in 1997 were the growth of the installed base of equipment
resulting from new product installations and continued growth of service
offerings such as first-line maintenance.
Total product backlog of unfilled orders was $276,986 at December 31, 1997,
compared with $233,586 at the end of 1996 and $168,754 at the end of 1995. While
this increase in backlog can be considered positive, backlog is not the sole
indicator of future revenue streams. There are numerous factors which influence
the amount and timing of revenue in future periods.
COST OF SALES AND EXPENSES
Cost of sales for 1997 was $796,836, compared with $672,679 in 1996 and $568,978
in 1995.
Gross profits on product sales increased $60,011 in 1997 from 1996 and $112,741
in 1997 from 1995, to a 1997 level of $317,803. Product gross margins in 1997
were 38.5 percent of product sales, compared with 38.0 percent in 1996 and 37.0
percent in 1995. The continued increase in product gross profits was a result of
increased sales volumes and cost reduction efforts.
Service gross profits of $112,297 in 1997 increased from $99,720 in 1996 and
$89,369 in 1995. Service gross margins as a percentage of service sales were
27.9 percent in 1997, compared with 28.4 percent in 1996 and 28.8 percent in
1995. While U.S. service gross margins have remained steady, international
service gross margins have declined due to an increase in service sales to IBM,
which has contractually low margins.
Supporting the Registrant's volume growth and market expansion, operating
expenses increased $29,091 or 13.4 percent from 1996 and were $58,619 or 31.2
percent above 1995. Total operating expenses of $246,239 or 20.1 percent of net
sales in 1997 represented a decrease from the 1996 and 1995 levels of 21.1 and
21.7 percent, respectively.
Operating profit of $183,861 in 1997 represented an increase of $43,497 or 31.0
percent from 1996 and $77,050 or 72.1 percent from 1995. Operating profit again
grew faster than net sales as manufacturing cost reductions and operating
expense controls continue to cause the operating profit margin to widen from
13.6 percent and 12.4 percent in 1996 and 1995, respectively, to 15.0 percent in
1997.
OTHER INCOME, NET AND MINORITY INTEREST
Other income, net decreased $3,639 or 34.5 percent from 1996 and increased $282
or 4.3 percent from 1995. Investment income decreased in 1997 as compared with
1996 due to decreases in the investment asset base. This was offset by a
continuing growth in interest income from finance receivables.
Minority interest of $5,096 increased from $4,393 in 1996 and $200 in 1995.
Minority interest consisted primarily of income or losses allocated to the
minority ownership of InterBold, Diebold Financial Equipment Company, Ltd.
(China) and Diebold OLTP Systems C.A. (Venezuela). Minority interests for all
companies are calculated as a percentage of profits of the joint ventures based
on formulas defined in the relevant agreements establishing each venture.
INCOME
Income before taxes amounted to $185,659 in 1997. This was an increase of
$39,155 or 26.7 percent from 1996 and $72,436 or 64.0 percent from 1995. Income
before taxes also improved as a percentage of net sales, representing 15.1
percent in 1997, compared with 14.2 percent in 1996 and 13.1 percent in 1995.
The effective tax rate was 34.0 percent in 1997, compared with 33.5 percent in
1996 and 32.7 percent in 1995. The primary reason for the higher tax rate in
1997 was a reduction in tax-exempt interest as a percentage of pretax income and
tax law changes that affected insurance contracts. Details of the reconciliation
between the U.S. statutory rate and the effective tax rate are included in Note
13 of the 1997 Consolidated Financial Statements.
Net income increased to $122,516 or 10.0 percent of net sales, compared with
income of $97,425 or 9.5 percent of net sales in 1996 and $76,209 or 8.8 percent
of net sales in 1995.
12
13
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION
The Registrant continued to enhance its financial position during 1997. Total
assets increased $131,949 or 15.4 percent to a 1997 year-end level of $991,050.
Asset turnover (excluding cash, cash equivalents and short- and long-term
investment securities) was 1.69 in 1997 and 1.70 in 1996.
Total current assets at December 31, 1997, of $549,837 represented an increase
of $62,314 or 12.8 percent from the prior year-end. The increase in trade
receivables and inventories comprised the majority of this increase and was a
result of higher sales volumes and continued expansion of international
operations and other new business operations in 1997. Trade receivables
increased $46,313 or 18.1 percent to a level of $302,885 at December 31, 1997.
As a percentage of net sales, trade receivables were 24.7 percent in 1997, 24.9
percent in 1996, and 22.8 percent in 1995. Inventories at year-end 1997 totaled
$128,082 which represented an increase of $18,650 or 17.0 percent from 1996.
This increase in inventory was caused primarily by the growth of product sales.
Short-term investments and long-term securities and other investments declined
by $7,317 or 4.0 percent to a level of $174,335 at December 31, 1997, largely
due to maturities being used to assist the funding of capital expenditures and
Diebold Credit Corporation financing activities. The Registrant anticipates
being able to meet both short- and long-term operational funding requirements
without liquidating individual securities prior to maturity by varying the
timing of maturities within the portfolio. However, since most of these
securities are marketable, they could readily be converted into cash and cash
equivalents if needed to fund future acquisitions, joint ventures and strategic
alliances throughout the world as part of a continuing strategy to strengthen
the Registrant's global competitiveness.
Total property, plant and equipment, net of accumulated depreciation, was
$143,901 at the end of 1997, which represented a net increase of $47,967 or 50.0
percent over prior year-end. Capital expenditures were $67,722 in 1997, compared
with $33,581 in 1996. The 1997 capital expenditures resulted primarily from the
need to meet higher manufacturing capacity requirements; expansion of facilities
for research, software development, management development and support services;
and continued investment in internal applications hardware and software. The
accounting for the Registrant's investment in projects related to internal
applications hardware and software has been done in accordance with EITF Issue
97-13, "Accounting for Business Process Reengineering Costs." Accordingly, the
Registrant has expensed as incurred, when applicable, business process
reengineering costs as well as expenditures incurred for preliminary software
project activities. The Registrant has capitalized external costs related to
application development stage activities, post-implementation/operation stage
activities and fixed asset acquisitions, such as new computer equipment, office
furniture and work stations, related to these projects.
In 1996, the Registrant announced the expansion of Diebold Credit Corporation,
to manage the growing business of financing to customers. Finance receivables
increased from $46,030 in 1996 to $74,529 in 1997 due to shipment of additional
equipment under finance agreements.
Total current liabilities at December 31, 1997, were $242,080, which represented
an increase of $13,860 or 6.1 percent from the prior year-end. The primary cause
for the increase in current liabilities was due to an increase in accounts
payable of $9,334 or 9.9 percent to a level of $104,043 from $94,709 at the
prior year-end. The Registrant's current ratio was 2.3 at the end of 1997,
compared with 2.1 at the end of 1996.
At December 31, 1997, the Registrant had unused lines of credit totaling
$150,000, all unrestricted as to use. In addition, the Registrant issued $20,800
of industrial development revenue bonds in 1997. The proceeds of these bonds
were used to finance the Registrant's three new manufacturing facilities located
in Staunton and Danville, Virginia, and in Lexington, North Carolina.
The Registrant's financial position provides it with sufficient resources to
meet projected future capital expenditures, dividends and working capital
requirements. However, if the need arises, the Registrant's strong financial
position should ensure the availability of adequate additional financial
resources.
Pension liabilities were $20,615 at December 31, 1997, representing an increase
of $307 or 1.5 percent over prior year-end. The net periodic pension costs of
$4,646 charged to income in 1997 represented a decrease of $23 from the prior
year.
Minority interests of $16,941 represented the minority interest in InterBold
owned by IBM, the minority interests in Diebold Financial Equipment Company,
Ltd. (China) owned by the Aircraft Industries of China and the Industrial and
Commercial Bank of China, Shanghai Pudong Branch and the minority interests in
Diebold OLTP Systems C.A. (Venezuela), owned by five individual investors. On
January 27, 1998, the Registrant completed its purchase of IBM's 30 percent
interest in InterBold for $16.1 million, which represented the value of IBM's
tax capital account in InterBold.
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14
Shareholders' equity increased $93,011 or 16.2 percent to $668,581 at December
31, 1997. Shareholders' equity per share was $9.69 at the end of 1997, compared
with $8.36 in 1996. The Common Shares of the Registrant are listed on the New
York Stock Exchange with a symbol of DBD. There were approximately 7,594
registered shareholders of record as of December 31, 1997.
The Board of Directors declared a first-quarter 1998 cash dividend of $0.14 per
share. This amount, which represents a 12 percent increase from the prior year's
quarterly dividend rate, will be paid on March 27, 1998, to shareholders of
record on March 6, 1998. Comparative quarterly cash dividends paid in 1997 and
1996 were $0.125 and $0.1133, respectively.
MANAGEMENT'S ANALYSIS OF CASH FLOWS
During 1997, the Registrant generated $111,330 in cash from operating
activities, compared with $96,456 in 1996 and $79,991 in 1995. In addition to
net income of $122,516 adjusted for depreciation, amortization and other charges
of $28,450, increases in accounts payable and certain other assets and
liabilities of $20,730 also increased cash provided by operations. Cash was
utilized in operations for increases in inventory levels and trade receivables
as a result of additional sales volumes and growth of international operations.
Expressed as a percentage of total assets employed, the Registrant's cash yield
from operations was 11.2 percent in 1997 and 1996, compared with 10.7 percent in
1995.
Net cash generated from operating activities in 1997 was used to reinvest
$102,725 in assets of the Registrant, compared with $55,299 in 1996 and $52,012
in 1995. The Registrant returned $34,473 to shareholders in the form of cash
dividends paid during 1997, which was a 10.5 percent increase from 1996 and a
17.7 percent increase from 1995.
OTHER BUSINESS INFORMATION - YEAR 2000 DISCLOSURE
The Registrant has begun to modify its information systems to enable proper
processing of transactions relating to the year 2000 and beyond. Project
completion is planned for the first quarter of 1999. The Registrant is expensing
as incurred all costs associated with these system changes. These costs are not
expected to have a material effect on the Registrant's financial position or
results of operations.
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CONSOLIDATED BALANCE SHEETS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997 1996
===================================================================================================================================
ASSETS
Current assets
Cash and cash equivalents........................................................ $ 20,296 $ 21,885
Short-term investments (Note 3).................................................. 36,473 43,249
Trade receivables................................................................ 302,885 256,572
Inventories (Note 4)............................................................. 128,082 109,432
Finance receivables (Note 6)..................................................... 13,559 7,931
Deferred income taxes (Note 13).................................................. 32,159 34,801
Prepaid expense and other current assets......................................... 16,383 13,653
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets.......................................................... 549,837 487,523
- -----------------------------------------------------------------------------------------------------------------------------------
Securities and other investments (Note 3).......................................... 137,862 138,403
Property, plant and equipment, at cost (Note 5).................................... 259,634 203,103
Less accumulated depreciation and amortization................................... 115,733 107,169
- -----------------------------------------------------------------------------------------------------------------------------------
143,901 95,934
Deferred income taxes (Note 13)................................................... 8,654 7,426
Finance receivables (Note 6)...................................................... 60,970 38,099
Other assets...................................................................... 89,826 91,716
- -----------------------------------------------------------------------------------------------------------------------------------
$991,050 $859,101
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable................................................................. $104,043 $ 94,709
Estimated income taxes........................................................... 12,721 11,300
Accrued insurance................................................................ 18,972 17,274
Accrued installation costs....................................................... 12,909 10,066
Deferred income.................................................................. 60,891 69,094
Other current liabilities........................................................ 32,544 25,777
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities..................................................... 242,080 228,220
- -----------------------------------------------------------------------------------------------------------------------------------
Bonds payable (Note 8)............................................................. 20,800 ---
Pensions (Note 11)................................................................. 20,615 20,308
Postretirement benefits (Note 11).................................................. 22,033 21,863
Minority interest (Note 2)......................................................... 16,941 13,140
Commitments and contingencies (Note 14)............................................ --- ---
Shareholders' equity (Note 9)
Preferred Shares, no par value, authorized
1,000,000 shares, none issued.................................................. --- ---
Common Shares, par value $1.25; authorized 125,000,000 shares;
issued 69,275,714 and 68,997,276 shares, respectively;
outstanding 69,004,838 and 68,840,591 shares, respectively.................... 86,595 86,246
Additional capital............................................................... 38,247 28,110
Retained earnings................................................................ 566,710 478,667
Treasury shares, at cost (270,876 and 156,685 shares, respectively).............. (12,882) (7,170)
Other............................................................................ (10,089) (10,283)
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity..................................................... 668,581 575,570
- -----------------------------------------------------------------------------------------------------------------------------------
$991,050 $859,101
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
15
16
CONSOLIDATED STATEMENTS OF INCOME
DIEBOLD, INCORPORATED AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands except per share amounts)
1997 1996 1995
=============================================================================================================================
Net sales
Products............................................................... $825,125 $679,053 $553,622
Services............................................................... 401,811 351,138 309,787
- -----------------------------------------------------------------------------------------------------------------------------
1,226,936 1,030,191 863,409
- -----------------------------------------------------------------------------------------------------------------------------
Cost of sales
Products............................................................... 507,322 421,261 348,560
Services............................................................... 289,514 251,418 220,418
- -----------------------------------------------------------------------------------------------------------------------------
796,836 672,679 568,978
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit............................................................. 430,100 357,512 294,431
Selling and administrative expense....................................... 191,842 166,572 144,490
Research, development and engineering expense............................ 54,397 50,576 43,130
- -----------------------------------------------------------------------------------------------------------------------------
246,239 217,148 187,620
- -----------------------------------------------------------------------------------------------------------------------------
Operating profit......................................................... 183,861 140,364 106,811
Other income (expense)
Investment income...................................................... 19,109 19,307 16,111
Miscellaneous, net..................................................... (12,215) (8,774) (9,499)
Minority interest (Note 2)............................................... (5,096) (4,393) (200)
- -----------------------------------------------------------------------------------------------------------------------------
Income before taxes...................................................... 185,659 146,504 113,223
Taxes on income (Note 13)................................................ 63,143 49,079 37,014
- -----------------------------------------------------------------------------------------------------------------------------
Net income............................................................... $122,516 $ 97,425 $ 76,209
=============================================================================================================================
Weighted-average number of shares outstanding: *
Basic.................................................................. 68,939 68,796 68,649
Diluted................................................................ 69,490 69,350 69,022
Basic earnings per share*................................................ $ 1.78 $ 1.42 $ 1.11
Diluted earnings per share*.............................................. $ 1.76 $ 1.40 $ 1.10
- -----------------------------------------------------------------------------------------------------------------------------
* See Notes 9 and 10
See accompanying Notes to Consolidated Financial Statements.
16
17
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DIEBOLD, INCORPORATED AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands)
Common Shares
--------------------
Par Additional Retained Treasury
Number* Value Capital Earnings Shares Other* Total
===================================================================================================================================
Balance,
January 1, 1995............................. 30,515,146 $38,144 $68,940 $365,513 $(3,186) $(9,572) $459,839
- -----------------------------------------------------------------------------------------------------------------------------------
Net income - 1995............................ 76,209 76,209
Stock options exercised...................... 46,149 58 961 1,019
Unearned compensation........................ 9,000 11 294 344 649
Performance shares (Note 9).................. 55,050 69 1,755 1,824
Dividends declared (Note 9).................. (29,290) (29,290)
Pensions (Note 11)........................... (1,087) (1,087)
Translation adjustment....................... (2,982) (2,982)
Treasury shares.............................. (445) (663) (1,108)
Unrealized gain on
investment securities (Note 3)............. 2,607 2,607
Three-for-two stock split.................... 15,268,333 19,085 (19,085) ---
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995.......................... 45,893,678 $57,367 $52,420 $412,432 $(3,849) $(10,690) $507,680
- -----------------------------------------------------------------------------------------------------------------------------------
Net income - 1996............................ 97,425 97,425
Stock options exercised...................... 86,918 108 1,208 1,316
Unearned compensation........................ 3,000 4 104 414 522
Performance shares (Note 9).................. 67,892 85 3,060 3,145
Dividends declared (Note 9).................. (31,190) (31,190)
Pensions (Note 11)........................... 185 185
Translation adjustment....................... 240 240
Treasury shares.............................. (3,321) (3,321)
Unrealized loss on
investment securities (Note 3)............. (432) (432)
Three-for-two stock split.................... 22,945,788 28,682 (28,682) ---
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996.......................... 68,997,276 $86,246 $28,110 $478,667 $(7,170) $(10,283) $575,570
- -----------------------------------------------------------------------------------------------------------------------------------
Net income - 1997............................ 122,516 122,516
Stock options exercised...................... 180,247 226 5,821 6,047
Unearned compensation........................ 11,000 14 430 (171) 273
Performance shares (Note 9).................. 87,191 109 3,886 3,995
Dividends declared (Note 9).................. (34,473) (34,473)
Pensions (Note 11)........................... 217 217
Translation adjustment....................... (185) (185)
Treasury shares.............................. (5,712) (5,712)
Unrealized gain on
investment securities (Note 3)............. 333 333
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997.......................... 69,275,714 $86,595 $38,247 $566,710 $(12,882) $(10,089) $668,581
- -----------------------------------------------------------------------------------------------------------------------------------
*See Note 9
See accompanying Notes to Consolidated Financial Statements.
17
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands)
1997 1996 1995
===================================================================================================================================
Cash flow from operating activities:
Net income..................................................... $122,516 $97,425 $76,209
- -----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to cash
provided by operating activities:
Minority share of income..................................... 5,096 4,393 200
Depreciation and amortization................................ 18,701 20,984 14,174
Other charges and amortization............................... 9,749 11,979 15,284
Deferred income taxes........................................ 1,118 (5,252) (4,527)
Loss on disposal of assets, net.............................. 1,113 610 1,786
Loss (gain) on sale of investments, net...................... --- 10 (810)
Cash provided (used) by changes in certain
assets and liabilities:
Trade receivables.......................................... (46,313) (59,427) (44,038)
Inventories................................................ (18,650) (18,430) (5,459)
Prepaid expenses and other current assets.................. (2,730) (3,948) (2,450)
Accounts payable........................................... 9,334 27,805 5,942
Other certain assets and liabilities....................... 11,396 20,307 23,680
- -----------------------------------------------------------------------------------------------------------------------------------
Total adjustments.............................................. (11,186) (969) 3,782
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities...................... 111,330 96,456 79,991
Cash flow from investing activities:
Proceeds from maturities of investments........................ 52,109 55,023 64,008
Proceeds from sales of investments............................. --- 5,675 16,184
Payments for purchases of investments.......................... (44,486) (69,498) (66,052)
Capital expenditures........................................... (67,722) (33,581) (35,308)
Increase in net finance receivables............................ (28,499) (2,821) (8,839)
Increase in other certain assets............................... (14,068) (10,223) (22,131)
Other.......................................................... (59) 126 126
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities.......................... (102,725) (55,299) (52,012)
Cash flow from financing activities:
Dividends paid................................................. (34,473) (31,190) (29,290)
Distribution of affiliate's earnings to minority interest
holder....................................................... (1,295) (5,719) (2,527)
Proceeds from issuance of Common Shares........................ 4,774 1,248 1,177
Proceeds from long-term borrowings............................. 20,800 --- ---
Other.......................................................... --- 691 1,074
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities.......................... (10,194) (34,970) (29,566)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents................. (1,589) 6,187 (1,587)
Cash and cash equivalents at the beginning of the year........... 21,885 15,698 17,285
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year................. $20,296 $21,885 $15,698
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
18
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIEBOLD, INCORPORATED AND SUBSIDIARIES
(Dollars in thousands except per share amounts)
NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Registrant and
its wholly and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
STATEMENTS OF CASH FLOWS
For the purposes of the Consolidated Statements of Cash Flows, the Registrant
considers all highly liquid investments with a maturity of three months or less
at the time of purchase to be cash equivalents. Cash paid during 1997, 1996 and
1995 for income taxes amounted to $60,738 $47,293 and $40,487, respectively.
INTERNATIONAL OPERATIONS
The Registrant translates the assets and liabilities of its non-U.S.
subsidiaries at the exchange rates in effect at year-end and the results of
operations at the average rate throughout the year. The translation adjustments
are recorded directly as a separate component of shareholders' equity, while
transaction gains (losses) are included in net income. Sales to customers
outside the United States approximated 26.1 percent of net sales in 1997, 22.3
percent in 1996, and 19.8 percent in 1995.
FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and cash
equivalents, trade receivables and accounts payable approximated fair value as
of December 31, 1997 and 1996, because of the relatively short maturity of these
instruments.
TRADE RECEIVABLES AND SALES
Revenue, after provision for installation, is generally recognized based on the
terms of the contracts which, for product sales, is usually when material to be
installed for customer orders is shipped from the plants.
The equipment that is sold is usually shipped and installed within one year.
Installation that extends beyond one year is ordinarily attributable to causes
not under the control of the Registrant.
The concentration of credit risk in the Registrant's trade receivables with
respect to the banking and financial services industries is substantially
mitigated by the Registrant's credit evaluation process, reasonably short
collection terms and the geographical dispersion of sales transactions from a
large number of individual customers. The Registrant maintains allowances for
potential credit losses, and such losses have been minimal and within
management's expectations.
INVENTORIES
Inventories are valued at the lower of cost or market applied on a first-in,
first-out basis. Cost is determined on the basis of actual cost.
INVESTMENT SECURITIES
Investment in debt and equity securities with readily determinable fair values
are accounted for at fair value due to the fact that the Registrant's investment
portfolio is classified as available-for-sale.
DEPRECIATION AND AMORTIZATION
Depreciation of property, plant and equipment is computed using the
straight-line method for financial statement purposes. Accelerated methods of
depreciation are used for federal income tax purposes. Amortization of leasehold
improvements is based upon the shorter of original terms of the lease or life of
the improvement.
RESEARCH AND DEVELOPMENT
Total research and development costs charged to expense were $45,184, $41,797
and $35,470 in 1997, 1996 and 1995, respectively.
19
20
OTHER ASSETS
Other assets primarily consist of the costs in excess of the net assets of
acquired businesses (goodwill), pension assets and certain other assets. These
assets are stated at cost and, if applicable, are amortized ratably over a
period of three to 25 years. The Registrant periodically monitors the value of
goodwill by assessing whether the asset can be recovered over its remaining
useful life through undiscounted cash flows generated by the underlying
businesses.
DEFERRED INCOME
Deferred income is recognized for customer billings in advance of the period in
which the service will be performed and is recognized in income on a
straight-line basis over the contract period.
STOCK-BASED COMPENSATION
Prior to January 1, 1996, the Registrant accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On January 1,
1996, the Registrant adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, FAS 123 also allows entities to
continue to apply the provisions of APB Opinion 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair value based method defined
in FAS 123 had been applied. The Registrant has elected to continue to apply the
provisions of APB Opinion 25 and provide the pro forma disclosure provisions of
FAS 123.
TAXES ON INCOME
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." The Registrant
adopted this standard, as required, for its December 31, 1997 Financial
Statements. For the years presented, the Registrant presents both basic and
diluted earnings per share. Basic earnings per share are computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if common stock equivalents were exercised
and then shared in the earnings of the Registrant.
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of the Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
The Registrant has reclassified the presentation of certain prior-year
information to conform with the current presentation format.
NOTE 2: RELATED PARTY TRANSACTIONS
INTERBOLD JOINT VENTURE
The Consolidated Financial Statements include the accounts of InterBold, a joint
venture between the Registrant and IBM, of which the Registrant owns 70 percent.
The joint venture provides ATMs and other financial self-service systems
worldwide. IBM's ownership interest in InterBold is reflected in "minority
interest" on the Registrant's Consolidated Balance Sheets. Net profits of
InterBold are allocated based upon a formula as specified in the partnership
agreement.
On June 27, 1997, the Registrant announced that InterBold would discontinue its
international marketing and distribution agreement with IBM.
20
21
On July 2, 1997, IBM informed the Registrant that it was exercising its option
pursuant to the InterBold contractual arrangements to sell its 30 percent
minority interest in InterBold to the Registrant. On January 27, 1998, the
Registrant completed its purchase of IBM's 30 percent minority interest in
InterBold for $16,100 which represented IBM's tax capital account on July 2,
1997. The Registrant financed the purchase with its cash reserves. This
transaction did not have a material effect on the Registrant's financial
position or results of operations. The Registrant will continue its discussions
with IBM as well as other companies to ensure efficient international
distribution for self-service products.
NOTE 3: INVESTMENT SECURITIES
At December 31, 1997 and 1996, the investment portfolio was classified as
available-for-sale. The marketable debt and equity securities are stated at fair
value, and the Registrant includes as a separate component of shareholders'
equity until realized net unrealized holding gains of $859 (net of taxes of
$464) and net unrealized holding gains of $526 (net of taxes of $283) at
December 31, 1997 and 1996, respectively. The fair value of securities and other
investments is estimated based on quoted market prices.
The Registrant's investment securities, excluding insurance contracts, at
December 31, are summarized as follows:
Amortized Fair
Cost Basis Value
- -------------------------------------------------------------------
1997:
===================================================================
Short-term investments:
Tax-exempt municipal bonds $ 36,331 $ 36,473
Securities and other investments:
Tax-exempt municipal bonds $ 85,245 $ 86,247
Equity securities.......... 28,668 28,847
- -------------------------------------------------------------------
$ 113,913 $115,094
- -------------------------------------------------------------------
Amortized Fair
Cost Basis Value
- -------------------------------------------------------------------
1996:
===================================================================
Short-term investments:
Tax-exempt municipal bonds $ 39,944 $ 40,137
Certificates of deposit......... 3,112 3,112
- -------------------------------------------------------------------
$ 43,056 $ 43,249
- -------------------------------------------------------------------
Securities and other investments:
Tax-exempt municipal bonds $ 94,473 $ 95,280
Equity securities.......... 26,787 26,596
- -------------------------------------------------------------------
$ 121,260 $121,876
- -------------------------------------------------------------------
The contractual maturities of tax-exempt municipal bonds at December 31, 1997,
are as follows:
Amortized Fair
Cost Basis Value
===============================================================
Due within one year........... $ 36,331 $ 36,473
Due after one year
through five years........... 85,245 86,247
- ---------------------------------------------------------------
$ 121,576 $122,720
- ---------------------------------------------------------------
NOTE 4: INVENTORIES
Major classes of inventories at December 31 are summarized as follows:
1997 1996
===============================================================
Finished goods and
service parts........... $ 44,776 $ 40,348
Work in process........... 82,985 68,967
Raw materials............. 321 117
- ---------------------------------------------------------------
$128,082 $ 109,432
- ---------------------------------------------------------------
21
22
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, together with annual depreciation
and amortization rates, consisted of the following:
Annual
1997 1996 Rates
=================================================================
Land and land
improvements......... $ 5,305 $ 4,805 5-20%
Buildings.............. 42,552 36,004 2-34%
Machinery, equipment
and rotatable
spares............... 150,972 134,398 5-40%
Leasehold
improvements......... 2,981 2,278 Lease
Term
Construction in
progress............. 57,824 25,618 ---
- -----------------------------------------------------------------
$ 259,634 $ 203,103
- -----------------------------------------------------------------
NOTE 6: FINANCE RECEIVABLES
The components of finance receivables for the net investment in sales-type
leases are as follows:
1997 1996
==============================================================
Total minimum
finance receivables.. $93,043 $65,403
Estimated unguaranteed
residual values...... 3,051 254
- --------------------------------------------------------------
96,094 65,657
Less: Unearned interest
income....... (20,469) (19,543)
Unearned residuals (1,096) (84)
- --------------------------------------------------------------
(21,565) (19,627)
$74,529 $46,030
- --------------------------------------------------------------
Future minimum finance receivables due from customers under sales-type leases as
of December 31, 1997, are as follows:
- --------------------------------------------------------------
1998...................... $16,391
1999...................... 16,883
2000...................... 17,187
2001...................... 17,316
2002...................... 15,549
Thereafter................ 9,717
- --------------------------------------------------------------
$93,043
- --------------------------------------------------------------
NOTE 7: SHORT-TERM FINANCING
At December 31, 1997, bank credit lines approximated $150,000 with various banks
for short-term financing. The Registrant had no outstanding borrowings under
these agreements at December 31, 1997 and 1996.
The Registrant has informal understandings with certain banks to maintain
compensating balances which are not legally restricted as to withdrawal. The
lines of credit can be withdrawn at each bank's option.
NOTE 8: BONDS PAYABLE
Bonds payable at December 31 consisted of the following:
1997 1996
===============================================================
Industrial Development
Revenue Bond due
January 1, 2017............... $ 5,800 $---
Industrial Development
Revenue Bond due
April 1, 2017.................. 7,500 ---
Industrial Development
Revenue Bond due
June 1, 2017................... 7,500 ---
- ---------------------------------------------------------------
$20,800 $---
- ---------------------------------------------------------------
In 1997, three industrial development revenue bonds were issued on behalf of the
Registrant. The proceeds from the bond issuances were used to construct new
manufacturing facilities in Danville and Staunton, Virginia, and Lexington,
North Carolina. The Registrant guaranteed the payments of principal and interest
on the bonds by obtaining letters of credit. Each industrial development revenue
bond carries a variable interest rate which is reset weekly by the remarketing
agents. The Registrant is in compliance with the covenants of its loan
agreements and believes that the covenants will not restrict its future
operations.
Interest paid on these bonds charged to expense was $176 in 1997.
NOTE 9: SHAREHOLDERS' EQUITY
On January 30, 1997, the Board of Directors declared a three-for-two stock split
effected in the form of a stock dividend, distributed on February 19, 1997, to
shareholders of record on February 7, 1997. Prior to the 1997 stock split, on
January 26, 1996, the Board of Directors declared a three-for-two stock split
effected in the form of a stock dividend, distributed on February 23, 1996, to
shareholders of record on February 9, 1996. Accordingly, all numbers of Common
Shares, except authorized shares and treasury shares, and all per share data
have been restated to reflect these stock splits.
22
23
On the basis of amounts declared and paid, the annualized quarterly dividends
per share were $0.50 in 1997, $0.45 in 1996 and $0.43 in 1995.
At December 31, 1997, the Registrant had three stock-based compensation plans.
As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the Registrant applies APB Opinion 25 and related
interpretations in accounting for its plans. Under the guidelines of APB Opinion
25, compensation cost for fixed and variable stock-based awards is measured by
the excess, if any, of the market price of the underlying stock over the
exercise price of the option at the grant date.
In the following chart, the Registrant provides net income and basic earnings
per share reduced by the pro forma amounts calculating compensation cost for the
Registrant's fixed stock option plan consistent with FAS 123. The fair value of
each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for 1997, 1996 and 1995,
respectively: risk-free interest rates of 5.7, 5.5 and 6.5 percent; dividend
yield of 2.2 percent in 1997 and 1996, and 3.0 percent in 1995; expected lives
of seven, six and four years for options granted in 1997, 1996 and 1995; and
volatility of 19, 21 and 20 percent.
1997 1996 1995
-------- --------- --------
Net income
As reported............. $122,516 $ 97,425 $ 76,209
Pro forma............... $120,556 $ 97,030 $ 76,096
Basic earnings per share
As reported............. $ 1.78 $ 1.42 $ 1.11
Pro forma............... $ 1.75 $ 1.41 $ 1.11
Pro forma net income reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under FAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting period of
five years and compensation cost for options granted prior to January 1, 1995,
is not considered.
FIXED STOCK OPTIONS
Under the 1991 Equity and Performance Incentive Plan, as Amended and Restated
(1991 Plan), Common Shares are available for grant of options at a price not
less than 85 percent of the fair market value of the Common Shares at the time
of grant. The exercise price of options granted since January 1, 1995, was equal
to the market price at the grant date, and accordingly, no compensation cost has
been recognized. In general, options are exercisable in cumulative annual
installments over five years, beginning one year from the date of grant. The
number of Common Shares that may be issued or delivered pursuant to the 1991
Plan is 6,265,313, of which 5,224,066 shares were available for issuance at
December 31, 1997. The 1991 Plan will expire on April 2, 2002.
The 1991 Plan replaced the Amended and Extended 1972 Stock Option Plan (1972
Plan), which expired by its terms on April 2, 1992. Awards already outstanding
under the 1972 Plan are unaffected by the adoption of the 1991 Plan.
In 1997, the Registrant announced the 1997 Milestone Stock Option Plan
(Milestone Plan). The purpose of the Milestone Plan is to reward the
Registrant's employee associates for their part in helping the Registrant reach
$1 billion in revenues in 1996, and to foster the interest of the employee
associates in the growth and development of the Registrant by encouraging stock
ownership. The Milestone Plan granted options on March 3, 1997, for 100 Common
Shares to all eligible salaried and hourly employee associates. The exercise
price of the options granted under the Milestone Plan was equal to the market
price at the grant date, and accordingly, no compensation cost has been
recognized. In general all options are exercisable beginning two years from the
date of grant. The number of Common Shares that may be issued or delivered
pursuant to the Milestone Plan is 600,000 of which 559,900 shares were available
for issuance at December 31, 1997. The Milestone Plan will expire on March 2,
2002.
23
24
The following is a summary with respect to options outstanding at December 31,
1997, 1996 and 1995, and activity during the years ending on those dates:
1997 1996 1995
----------------------- ----------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at the beginning of year 1,529,545 $ 18 1,180,283 $ 12 996,366 $ 11
Options granted 829,500 41 500,438 29 308,476 16
Options exercised (203,260) 10 (130,377) 10 (103,836) 8
Options expired or forfeited (34,562) 40 (20,799) 17 (20,723) 14
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at the end of year 2,121,223 $ 27 1,529,545 $ 18 1,180,283 $ 12
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable at the end of year 694,448 577,198 472,712
Weighted-average fair value
of options granted during the year $ 7 $ 6 $ 4
The following table summarizes pertinent information regarding fixed stock
options outstanding and options exercisable at December 31, 1997:
---------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------ -------------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
of Contractual Average of Average
Options Life Exercise Options Exercise
Range of Exercise Prices Outstanding (In years) Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------------------------
$ 11 - 15 22,780 0.33 $ 12 22,780 $ 12
6 - 18 46,371 1.00 11 37,509 10
7 - 16 80,469 2.00 10 60,213 8
6 - 36 103,144 3.00 15 68,971 9
9 - 42 748,975 4.00 37 98,425 10
13 - 13 154,394 5.00 13 117,934 13
17 - 18 126,410 6.00 17 70,070 17
15 - 19 247,820 7.00 16 119,569 16
24 - 38 333,960 8.00 27 76,477 24
33 - 38 256,900 9.00 38 22,500 38
--------- ----------
2,121,223 6.00 $27.17 694,448 $14.49
--------- ----------
24
25
RESTRICTED SHARE GRANTS
The 1991 Plan also provides for the issuance of restricted shares without cost
to certain employee associates. Outstanding shares granted at December 31, 1997,
totaled 35,748 restricted shares. The shares are subject to forfeiture under
certain circumstances. Unearned compensation representing the fair market value
of the shares at the date of grant will be charged to income over the
three-to-five-year vesting period.
PERFORMANCE SHARE GRANTS
The 1991 Plan also provides for the issuance of Common Shares based on certain
management objectives achieved within a specified performance period of at least
one year as determined by the Board of Directors. The management objectives set
in 1997 are based on a three-year performance period ending December 31, 1999.
The management objectives for the period ended December 31, 1997, were set in
April 1995. The objectives were exceeded and a payout was made in the form of
cash in 1998.
The compensation cost that has been charged against income for its
performance-based share grant plan was $10,400, $13,534 and $7,201 in 1997, 1996
and 1995, respectively.
In February 1989, the Board of Directors declared a dividend distribution of one
right for each outstanding Common Share of the Registrant. Pursuant to the
Rights Agreement covering the Shareholder Rights Plan, each right entitles the
registered holder to purchase one one-hundredth of a share of Cumulative
Redeemable Serial Preferred Shares, without par value, at a price of $130. The
rights become exercisable 20 days after a person or group acquires 20 percent or
more of the Registrant's shares. At that time, rights certificates would be
issued and could be traded independently from the Registrant's shares. If the
Registrant is involved in certain mergers or other business combination
transactions at any time after the rights become exercisable, then the rights
will be modified so as to entitle the holder to buy a number of an acquiring
Registrant's shares having a market value of twice the exercise price of each
right. In addition, if a holder of 20 percent or more acquires the Registrant by
means of a reverse merger in which the Registrant and its shares survive, or
engages in certain other self-dealing transactions with the Registrant, each
right not owned by the acquirer will become exercisable for a number of Common
Shares of the Registrant with a market value of two times the exercise price of
the right. The rights are redeemable for $0.01 per right at any time before 20
percent or more of the Registrant's shares have been acquired, and will expire
on February 10, 1999, unless redeemed earlier by the Registrant. As a result of
the stock split effected on February 19, 1997, each Common Share is currently
accompanied by one-fifth of a right.
NOTE 10: EARNINGS PER SHARE
(In thousands except per share amounts)
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." The Registrant
adopted this standard, as required for its December 31, 1997 Financial
Statements. For the years presented, the Registrant presents both basic and
diluted earnings per share.
The following data show the amounts used in computing earnings per share and the
effect on the weighted-average number of shares of dilutive potential common
stock.
1997 1996 1995
- --------------------------------------------------------------------------
NUMERATOR:
Income available to
common shareholders
used in basic and diluted
earnings per share $122,516 $ 97,425 $ 76,209
DENOMINATOR:
Weighted-average
number of Common
Shares used in basic
earnings per share 68,939 68,796 68,649
Effect of dilutive securities:
Fixed stock options 551 486 323
Performance share grants -- 68 50
------------------------------------
Weighted-average number
of Common Shares
and dilutive potential
Common Shares used
in diluted
earnings per share 69,490 69,350 69,022
------------------------------------
BASIC EARNINGS
PER SHARE $ 1.78 $ 1.42 $ 1.11
DILUTED EARNINGS
PER SHARE $ 1.76 $ 1.40 $ 1.10
Fixed stock options on 179 Common Shares were not included in computing diluted
earnings per share in 1996, because their effects were antidilutive.
NOTE 11: PENSION PLANS AND
POSTRETIREMENT BENEFITS
The Registrant has several pension plans covering substantially all employee
associates. Plans covering salaried employee associates provide pension benefits
that are based on the employee associate's
25
26
compensation during the 10 years before retirement. The Registrant's funding
policy for those plans is to contribute annually at an actuarially determined
rate. Plans covering hourly employee associates and union members generally
provide benefits of stated amounts for each year of service. The Registrant's
funding policy for those plans is to make at least the minimum annual
contributions required by applicable regulations.
Approximately 90 percent of the plan assets at September 30, 1997 and 1996, were
invested in listed stocks and investment grade bonds.
A summary of the components of net periodic pension costs follows:
1997 1996 1995
====================================================
Benefit earned
during the year $ 7,795 $ 7,140 $ 6,360
Interest accrued on
projected benefit
obligation 14,260 13,405 12,268
Actual return on plan
assets (59,071) (21,546) (42,503)
Net amortization and
deferral 41,662 5,670 27,403
- ----------------------------------------------------
Net periodic pension
costs $ 4,646 $ 4,669 $ 3,528
- ----------------------------------------------------
Assumptions used to measure the projected benefit obligation and the expected
long-term rate of return on plan assets at September 30, 1997 and 1996, and
December 31, 1995, include a discount rate of 7.25 percent, an expected
long-term rate of return on assets of 9 percent, and a rate of increase in
compensation levels of 5 percent.
Minimum liabilities have been recorded in 1997, 1996 and 1995 for the plans
whose total accumulated benefit obligation exceeded the fair value of the plan's
assets.
The Registrant offers an employee associate 401(k) Savings Plan (Savings Plan)
to encourage eligible employee associates to save on a regular basis by payroll
deductions, and to provide them with an opportunity to become shareholders of
the Registrant. Under the Savings Plan from January 1, through March 31, 1997,
the Registrant matched 80 percent of a participating employee associate's first
4 percent of contributions and 40 percent of a participating employee
associate's second 4 percent of contributions. Under the Savings Plan from April
1 through December 31, 1997, the Registrant matched 100 percent of a
participating employee associate's first 4 percent of contributions and 40
percent of a participating employee associate's second 4 percent of
contributions.
26
27
The following table sets forth the funded status and amounts recognized in the
Consolidated Balance Sheets at December 31, for the Registrant's defined benefit
pension plans:
1997 1996
===============================================================================================================================
Plan Assets Accumulated Plan Assets Accumulated
in Excess of Benefits in in Excess of Benefits in
Accumulated Excess of Accumulated Excess of
Benefits Plan Assets Benefits Plan Assets
===============================================================================================================================
Fair value of plan assets......................... $256,426 $ 15,217 $205,962 $ 11,724
Less:
Actuarial present value of projected
benefit obligation:
Vested employee associates.................... 126,832 29,255 117,974 24,399
Nonvested employee associates................. 11,827 2,730 6,405 4,843
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation................ 138,659 31,985 124,379 29,242
Amounts related to future
salary increases............................ 41,664 2,347 36,037 2,249
- -------------------------------------------------------------------------------------------------------------------------------
Total projected benefit obligation................ 180,323 34,332 160,416 31,491
- -------------------------------------------------------------------------------------------------------------------------------
Plan assets less projected benefits............... 76,103 (19,115) 45,546 (19,767)
Unrecognized prior service costs, net........... 5,133 2,191 5,718 2,667
Unamortized net transition (asset)
obligation.................................... (11,319) 179 (12,863) 240
Unrecognized net (gain) loss.................... (51,624) 4,258 (19,016) 4,597
Adjustment required to recognize
minimum liability............................. --- (4,281) --- (5,255)
- -------------------------------------------------------------------------------------------------------------------------------
Prepaid pension costs (accrued obligations)..... $18,293 $(16,768) $19,385 $(17,518)
===============================================================================================================================
27
28
In addition to providing pension benefits, the Registrant provides healthcare
and life insurance benefits for certain retired employee associates. Eligible
employee associates may be entitled to these benefits based upon years of
service with the Registrant, age at retirement and collective bargaining
agreements. Presently, the Registrant has made no commitments to increase these
benefits for existing retirees or for employee associates who may become
eligible for these benefits in the future. Currently there are no plan assets,
and the Registrant funds the benefits as the claims are paid.
A summary of the components of net periodic postretirement (life and healthcare)
benefit costs follows:
1997 1996 1995
========================================================================
Interest cost............. $1,788 $1,806 $2,104
Service cost.............. 62 57 61
Amortization ............. -- -- 207
- ------------------------------------------------------------------------
Net periodic postretirement
benefit cost............. $1,850 $1,863 $2,372
- ------------------------------------------------------------------------
The effect of a one percentage point annual increase in the assumed healthcare
cost trend rate would increase the service and interest cost components of the
healthcare benefits from $1,620 to $1,750, an 8.0 percent increase.
Measurement of the accumulated postretirement benefit obligation at September
30, 1997 and 1996, was based on a discount rate of 7.25 percent in 1997 and
1996. The following table sets forth the components of the accumulated
postretirement benefit obligation at December 31:
1997 1996
=============================================================
Retirees ..................... $ 19,560 $ 24,545
Fully eligible active
plan participants ........ 288 209
Other active plan participants 930 841
- -------------------------------------------------------------
Accumulated postretirement
benefit obligation ....... 20,778 25,595
Unrecognized net gain (loss) . 4,551 (778)
- -------------------------------------------------------------
Accrued postretirement
benefit obligation ....... $ 25,329 $ 24,817
- -------------------------------------------------------------
The postretirement benefit obligation was determined by application of the terms
of medical and life insurance plans together with relevant actuarial assumptions
and healthcare cost trend rates projected at annual rates declining from 8.5
percent in 1997 to 4.5 percent through the year 2005 as well as the following
years. The effect of a one percentage point annual increase in these assumed
healthcare cost trend rates would increase the healthcare accumulated
postretirement benefit obligation from $18,339 to $19,850, an 8.2 percent
increase.
NOTE 12: LEASES
The Registrant's future minimum lease payments due under operating leases for
real and personal property in effect at December 31, 1997, are as follows:
Real Vehicles and
Expiring Total Estate Equipment
===================================================
1998 ........... $25,056 $ 7,941 $17,115
1999 ........... 18,246 6,103 12,143
2000 ........... 12,033 5,197 6,836
2001 ........... 6,720 4,402 2,318
2002 ........... 3,922 3,916 6
Thereafter ..... 9,085 9,085 --
- ---------------------------------------------------
$75,062 $36,644 $38,418
- ---------------------------------------------------
Rental expense for 1997, 1996 and 1995 under all lease agreements amounted to
approximately $30,900, $28,100 and $22,000, respectively.
NOTE 13: INCOME TAXES
Income tax expense attributable to income from continuing operations consists
of:
1997 1996 1995
====================================================
Federal and international
Current............ $54,348 $45,082 $33,127
Deferred........... (265) (2,696) (1,113)
- ----------------------------------------------------
54,083 42,386 32,014
State and local
Current.......... 9,368 7,203 5,339
Deferred......... (308) (510) (339)
- ----------------------------------------------------
9,060 6,693 5,000
- ----------------------------------------------------
$63,143 $49,079 $37,014
- ----------------------------------------------------
In addition to the 1997 income tax expense of $63,143, certain deferred income
tax expenses of $296 were allocated directly to shareholders' equity.
28
29
A reconciliation of the difference between the U.S. statutory tax rate and the
effective tax rate is as follows:
1997 1996 1995
===========================================================
Statutory tax rate .... 35.0% 35.0% 35.0%
State and local income
taxes, net of federal
tax benefit ......... 3.2 3.0 2.9
Exempt income ......... (2.5) (2.7) (3.2)
Insurance contracts ... (2.1) (2.3) (3.9)
Other ................. 0.4 0.5 1.9
- -----------------------------------------------------------
Effective tax rate .... 34.0% 33.5% 32.7%
- -----------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Registrant's deferred tax assets and liabilities are as follows:
1997 1996
==================================================
DEFERRED TAX ASSETS:
Postretirement benefits.... $13,882 $13,194
Accrued expenses........... 17,110 16,686
Inventory.................. 6,712 6,396
Partnership income......... 4,860 4,079
Deferred revenue........... 4,694 6,566
Net operating
loss carryforwards...... 1,685 1,362
State deferred taxes....... 6,841 6,316
Other...................... 10,619 8,639
- --------------------------------------------------
66,403 63,238
Valuation allowance....... (1,777) (1,441)
- --------------------------------------------------
Net deferred tax assets... 64,626 61,797
- --------------------------------------------------
DEFERRED TAX LIABILITIES:
Pension................... 7,728 7,021
Amortization.............. 4,093 3,973
Depreciation.............. 2,569 2,483
Other..................... 9,423 6,093
- --------------------------------------------------
Net deferred tax
liabilities............. 23,813 19,570
- --------------------------------------------------
Net deferred tax asset.... $40,813 $42,227
- --------------------------------------------------
At December 31, 1997, the Registrant's international subsidiaries had deferred
tax assets relating to net operating loss carryforwards of $1,685, $973 of which
expires in years 1999 through 2004, and $712 of which has an indefinite
carryforward period. For financial reporting purposes, a valuation allowance of
$1,685 has been recognized to offset the deferred tax assets relating to the net
operating loss carryforwards.
NOTE 14: COMMITMENTS AND
CONTINGENCIES
At December 31, 1997, the Registrant was a party to several lawsuits that were
incurred in the normal course of business, none of which individually or in the
aggregate is considered material by management in relation to the Registrant's
financial position or results of operations.
NOTE 15: SEGMENT INFORMATION
The Registrant operates predominantly in one industry segment, financial systems
and equipment. This industry segment accounts for more than 90 percent of the
consolidated revenues, operating profit and identifiable assets.
The Registrant had one customer, IBM, its minority partner in the InterBold
joint venture, that accounted for $173,751 of the total net sales of $1,226,936
in 1997, $146,103 of the total net sales of $1,030,191 in 1996, and $106,392 of
the total net sales of $863,409 in 1995.
NOTE 16: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
See "Comparison of Selected Quarterly Financial Data (Unaudited)" on page 31 of
this Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENT DISCLOSURE
In the Registrant's written or oral statements, the use of the words "believes,"
"anticipates," "expects" and similar expressions is intended to identify
forward-looking statements which have been made and may in the future be made by
or on behalf of the Registrant, including statements concerning future operating
performance, the Registrant's share of new and existing markets, and the
Registrant's short-and long-term revenue and earnings growth rates. Although
the Registrant believes that its outlook is based upon reasonable assumptions
regarding the economy, its knowledge of its business, and on key performance
indicators which impact the Registrant, there can be no assurance that the
Registrant's goals will be realized. Readers are cautioned not to place undue
reliance on
29
30
these forward-looking statements, which speak only as of the date hereof. The
Registrant's uncertainties could cause actual results to differ materially from
those anticipated in forward-looking statements. These include, but are not
limited to:
- - competitive pressures, including pricing pressures and technological
developments;
- - changes in the Registrant's relationships with customers, suppliers,
distributors and/or partners in its business ventures;
- - changes in political, economic or other factors such as currency exchange
rates, inflation rates, recessionary or expansive trends, taxes and
regulations and laws affecting the worldwide business in each of the
Registrant's operations;
- - acceptance of the Registrant's product and technology introductions in the
marketplace; and
- - unanticipated litigation, claims or assessments.
30
31
COMPARISON OF SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
(Dollars in thousands 1997 1996 1997 1996 1997 1996 1997 1996
except per
share amounts)
========================================================================================================================
Net sales ...... $264,608 $215,886 $303,202 $248,337 $317,778 $271,796 $341,348 $294,172
Gross profit ... 92,359 73,816 106,203 87,529 108,522 94,279 123,016 101,888
Net income ..... 23,733 18,039 30,690 24,427 33,056 26,673 35,037 28,286
Basic earnings
per share .... 0.34 0.26 0.45 0.36 0.48 0.39 0.51 0.41
Diluted earnings
per share * .. 0.34 0.26 0.44 0.35 0.47 0.38 0.50 0.41
========================================================================================================================
See Note 16 to Consolidated Financial Statements and 5-Year Summary 1997-1993.
* Annual earnings per share do not equal the sum of individual quarters due
to differences in the weighted-average number of shares outstanding during
the respective periods.
31
32
REPORT OF MANAGEMENT
The management of Diebold, Incorporated is responsible for the contents of the
consolidated financial statements, which are prepared in conformity with
generally accepted accounting principles. The consolidated financial statements
necessarily include amounts based on judgments and estimates. Financial
information elsewhere in the Form 10-K is consistent with that in the
consolidated financial statements.
The Registrant maintains a comprehensive accounting system which includes
controls designed to provide reasonable assurance as to the integrity and
reliability of the financial records and the protection of assets. An internal
audit staff is employed to regularly test and evaluate both internal accounting
controls and operating procedures, including compliance with the Registrant's
statement of policy regarding ethical and lawful conduct. The role of KPMG Peat
Marwick LLP, the independent auditors, is to provide an objective examination of
the consolidated financial statements and the underlying transactions in
accordance with generally accepted auditing standards. The report of KPMG Peat
Marwick LLP accompanies the consolidated financial statements.
The Audit Committee of the Board of Directors, composed of directors who are
not members of management, meets regularly with management, the independent
auditors and the internal auditors to ensure that their respective
responsibilities are properly discharged. KPMG Peat Marwick LLP and the Internal
Audit Organization have full and free independent access to the Audit Committee.
Gerald F. Morris
Executive Vice President and Chief Financial Officer
32
33
5-YEAR SUMMARY 1997-1993
DIEBOLD, INCORPORATED AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND RATIOS)
1997 1996 1995 1994 1993
=================================================================================================================================
OPERATING RESULTS
Net sales ........................................... $ 1,226,936 $ 1,030,191 $ 863,409 $ 760,171 $ 623,277
Cost of sales ....................................... 796,836 672,679 568,978 504,489 413,239
Gross profit ........................................ 430,100 357,512 294,431 255,682 210,038
Selling and administrative expense .................. 191,842 166,572 144,490 128,309 106,110
Research, development and engineering expense ....... 54,397 50,576 43,130 36,599 34,838
Operating profit .................................... 183,861 140,364 106,811 90,774 69,090
Other income, net ................................... 6,894 10,533 6,612 5,152 5,664
Minority interest ................................... (5,096) (4,393) (200) (1,948) (4,239)
Income before taxes ................................. 185,659 146,504 113,223 93,978 70,515
Taxes on income ..................................... 63,143 49,079 37,014 30,467 22,141
Net income .......................................... 122,516 97,425 76,209 63,511 48,374
Basic earnings per share (Note A) ................... 1.78 1.42 1.11 0.93 0.71
Diluted earnings per share (Note A) ................. 1.76 1.40 1.10 0.93 0.71
- ---------------------------------------------------------------------------------------------------------------------------------
DIVIDEND AND COMMON SHARE DATA
Basic weighted-average shares outstanding (Note A) .. 68,939 68,796 68,649 68,243 68,020
Diluted weighted-average shares outstanding (Note A) 69,490 69,350 69,022 68,595 68,307
Common dividends paid ............................... $ 34,473 $ 31,190 $ 29,290 $ 26,682 $ 24,191
Common dividends paid per share (Note A) ............ 0.50 0.45 0.43 0.39 0.36
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR-END FINANCIAL POSITION
Current assets ...................................... $ 549,837 $ 487,523 $ 376,212 $ 329,658 $ 311,500
Current liabilities ................................. 242,080 228,220 189,078 159,755 138,571
Net working capital ................................. 307,757 259,303 187,134 169,903 172,929
Property, plant and equipment, net .................. 143,901 95,934 84,072 64,713 60,660
Total assets ........................................ 991,050 859,101 749,795 666,174 609,019
Long-term debt, less current maturities ............. 20,800 --- --- --- ---
Shareholders' equity ................................ 668,581 575,570 507,680 459,839 427,391
Shareholders' equity per share (Note B) ............. 9.69 8.36 7.39 6.70 6.27
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS
Pretax profit on net sales (%) ...................... 15.1% 14.2% 13.1% 12.4% 11.3%
Current ratio ....................................... 2.3 to 1 2.1 to 1 2.0 to 1 2.1 to 1 2.3 to 1
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Capital expenditures ................................ $ 67,722 $ 33,581 $ 35,308 $ 22,641 $ 18,343
Depreciation and amortization ....................... 18,701 20,984 14,174 13,240 12,231
=================================================================================================================================
Note A -- After adjustment for stock splits.
Note B -- Based on shares outstanding at year-end adjusted for stock splits.
33
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- --------------------------------------------------------------------
AND FINANCIAL DISCLOSURE.
-------------------------
There have been no changes in accountants or disagreements with accountants
on accounting and financial disclosures.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
Information with respect to directors of the Registrant is included on
pages 4 through 8 of the Registrant's proxy statement for the 1998 Annual
Meeting of Shareholders ("1998 Annual Meeting") and is incorporated herein by
reference. Refer to pages 6 through 9 of this Form 10-K for information with
respect to executive officers.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------
Information with respect to executive compensation is included on pages 9
through 17 of the Registrant's proxy statement for the 1998 Annual Meeting and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
Information with respect to security ownership of certain beneficial owners
and management is included on pages 2 through 7 of the Registrant's proxy
statement for the 1998 Annual Meeting and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
The information with respect to certain relationships and related
transactions set forth under the caption "Compensation Committee Interlocks and
Insider Participation" on page 8 of the Registrant's proxy statement for the
1998 Annual Meeting is incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------
(a) Documents filed as a part of this report.
1. The following additional information for the years 1997, 1996, and
1995 is submitted herewith:
Independent Auditors' Report on Consolidated Financial Statements
and Financial Statement Schedule
SCHEDULE II. Valuation and Qualifying Accounts
All other schedules are omitted, as the required information is
inapplicable or the information is presented in the consolidated
financial statements or related notes.
34
35
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
- -------- ----------------------------------------------------------------
(continued)
- -----------
2. Exhibits
3.1 (i) Amended and Restated Articles of Incorporation of
Diebold, Incorporated -- incorporated by reference to
Exhibit 3.1 (i) of Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
3.1 (ii) Code of Regulations -- incorporated by reference to
Exhibit 4(c) to Registrant's Post-Effective Amendment No.
1 to Form S-8 Registration Statement No. 33-32960.
3.2 Certificate of Amendment by Shareholders to Amended
Articles of Incorporation of Diebold, Incorporated --
incorporated by reference to Exhibit 3.2 to Registrant's
Form 10-Q for the quarter ended March 31, 1996.
4. Rights Agreement dated as of February 10, 1989 between
Diebold, Incorporated and The Bank of New York --
incorporated by reference to Exhibit 2.1 to Registrant's
Registration Statement on Form 8-A dated February 10,
1989.
* 10.1 Form of Employment Agreement as amended and restated as
of September 13, 1990 -- incorporated by reference to
Exhibit 10.1 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1990.
* 10.2 Schedule of Certain Officers who are Parties to
Employment Agreements in the form of Exhibit 10.1.
* 10.3 (i) Supplemental Retirement Benefit Agreement with William
T. Blair -- incorporated by reference to Exhibit 10.3 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
* 10.3 (ii) Consulting Agreement with William T. Blair --
incorporated by reference to Exhibit 10.3 (ii) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
* 10.5 Supplemental Employee Retirement Plan (as amended
January 1, 1994) -- incorporated by reference to Exhibit
10.5 of Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
10.6 Amended and Restated Partnership Agreement dated as of
September 12, 1990 -- incorporated by reference to
Exhibit 10 to Registrant's Form 8-K dated September 26,
1990.
* 10.7 1985 Deferred Compensation Plan for Directors of Diebold,
Incorporated -- incorporated by reference to Exhibit 10.7
to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.
* Reflects management contract or other compensatory arrangement
required to be filed as an exhibit pursuant to Item 14(c) of this
report.
35
36
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------
(continued)
- -----------
* 10.8 1991 Equity and Performance Incentive Plan as Amended and
Restated -- incorporated by reference to Exhibit 10.8 to
Registrant's Form 10-Q for the quarter ended March 31,
1997.
* 10.9 Long-Term Executive Incentive Plan -- incorporated by
reference to Exhibit 10.9 of Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993.
* 10.10 1992 Deferred Incentive Compensation Plan (as amended and
restated as of July 1, 1993) -- incorporated by reference
to Exhibit 10.10 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1993.
* 10.11 Annual Incentive Plan -- incorporated by reference to
Exhibit 10.11 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992.
* 10.13 Forms of Deferred Compensation Agreement and Amendment
No. 1 to Deferred Compensation Agreement - incorporated
by reference to Exhibit 10.13 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
21. Subsidiaries of the Registrant.
23. Consent of Independent Auditors.
24. Power of Attorney.
27. Financial Data Schedule.
* Reflects management contract or other compensatory arrangement
required to be filed as an exhibit pursuant to Item 14(c) of this
report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1997
36
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIEBOLD, INCORPORATED
March 5, 1998 By: /s/Robert W. Mahoney
- -------------- --------------------
Date Robert W. Mahoney
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Robert W. Mahoney Chairman of the Board and March 5, 1998
- ------------------------ Chief Executive Officer -------------
Robert W. Mahoney (Principal Executive Officer)
/s/Gerald F. Morris Executive Vice President March 5, 1998
- ------------------------ and Chief Financial Officer -------------
Gerald F. Morris (Principal Accounting and
Financial Officer)
/s/Louis V. Bockius III Director March 5, 1998
- ------------------------ -------------
Louis V. Bockius III
/s/Daniel T. Carroll Director March 5, 1998
- ------------------------ -------------
Daniel T. Carroll
/s/Richard L. Crandall Director March 5, 1998
- ------------------------ -------------
Richard L. Crandall
* Director March 5, 1998
- ------------------------ -------------
Donald R. Gant
/s/L. Lindsey Halstead Director March 5, 1998
- ------------------------ -------------
L. Lindsey Halstead
* Director March 5, 1998
- ------------------------ -------------
Phillip B. Lassiter
37
38
Signature Title Date
--------- ----- ----
* Director March 5, 1998
- ------------------------ -------------
John N. Lauer
* Director March 5, 1998
- ------------------------ -------------
William F. Massy
* Director March 5, 1998
- ------------------------ -------------
Gregg A. Searle
/s/W. R. Timken, Jr. Director March 5, 1998
- ------------------------ -------------
W. R. Timken, Jr.
* The undersigned, by signing his name hereto, does sign and execute this
Annual Report on Form 10-K pursuant to the Powers of Attorney executed by
the above-named officers and directors of the Registrant and filed with the
Securities and Exchange Commissions on behalf of such officers and
directors.
Dated: March 5, 1998 *By: /s/Gerald F. Morris
--------------- -------------------
Gerald F. Morris, Attorney-in-Fact
38
39
INDEPENDENT AUDITORS' REPORT ON
-------------------------------
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
-----------------------------------------------------
The Board of Directors and Shareholders
Diebold, Incorporated
We have audited the accompanying consolidated balance sheets of Diebold,
Incorporated and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in Item 14 (a)(1) of Form 10-K of
Diebold, Incorporated for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements and financial
statement schedule are the responsibility of the Registrant's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diebold,
Incorporated and subsidiaries as of December 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Cleveland, Ohio
January 20, 1998, except for the second paragraph of Note 2, which is as of
January 27, 1998
39
40
DIEBOLD, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Balance at Balance
beginning at end
of period Additions Deductions of period
--------- --------- ---------- ----------
Year ended December 31, 1997
- ----------------------------
Allowance for doubtful accounts $5,917,055 $1,727,130 $806,167 $6,838,018
Year ended December 31, 1996
- ----------------------------
Allowance for doubtful accounts $5,541,954 $2,273,553 $1,898,452 $5,917,055
Year ended December 31, 1995
- ----------------------------
Allowance for doubtful accounts $4,053,864 $1,733,449 $245,359 $5,541,954
40
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EXHIBIT INDEX
-------------
EXHIBIT NO. DOCUMENT DESCRIPTION PAGE NO.
----------- -------------------- --------
10.2 Schedule of Certain Officers who 42
are Parties to Employment Agreements
21 Subsidiaries of the Registrant 43
23 Consent of Independent Auditors 44
24 Power of Attorney 45
27 Financial Data Schedule 46
41