-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ubk0gW9N1xwypgq1WJIs7ePgw/7RZJeJ8AhhhsVNxkqYeii5KVAXkWCziLeyLwyM I2B8ykd/Yq6VQ7Y6fQs3DQ== 0000950152-97-005723.txt : 19970812 0000950152-97-005723.hdr.sgml : 19970812 ACCESSION NUMBER: 0000950152-97-005723 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19970808 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STONERIDGE INC CENTRAL INDEX KEY: 0001043337 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 341598949 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-33285 FILM NUMBER: 97654843 BUSINESS ADDRESS: STREET 1: 9700 EAST MARKET ST CITY: WARREN STATE: OH ZIP: 44484 BUSINESS PHONE: 3308562443 MAIL ADDRESS: STREET 1: 9700 EAST MARKET ST CITY: WARREN STATE: OH ZIP: 44484 S-1 1 STONERIDGE, INC. FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 8, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ STONERIDGE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) OHIO 3714 34-1598949 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION) CLASSIFICATION CODE NUMBER) NUMBER)
9400 EAST MARKET STREET WARREN, OHIO 44484 (330) 856-2443 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) CLOYD J. ABRUZZO STONERIDGE, INC. 9400 EAST MARKET STREET WARREN, OHIO 44484 (330) 856-2443 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------ Copies of all correspondence to: AVERY S. COHEN, ESQ. HOWARD S. LANZNAR, ESQ. BAKER & HOSTETLER LLP LAWRENCE D. LEVIN, ESQ. 3200 NATIONAL CITY CENTER KATTEN MUCHIN & ZAVIS 1900 EAST NINTH STREET 525 W. MONROE STREET, SUITE 1600 CLEVELAND, OHIO 44114 CHICAGO, ILLINOIS 60661-3693 (216) 621-0200 (312) 902-5200
------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------ CALCULATION OF REGISTRATION FEE
================================================================================================================= TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------- Common Shares, without par value.......................... $124,000,000 $ 37,576 =================================================================================================================
(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933 solely for the purposes of calculating the registration fee. ------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 EXPLANATORY NOTE This Registration Statement covers the registration of and contains a form of prospectus relating to each of (i) an offering in the United States and Canada (the "U.S. Offering") of Common Shares of Stoneridge, Inc. (which number includes shares subject to the U.S. Underwriters' overallotment option), and (ii) a concurrent international offering outside the United States and Canada (the "International Offering" and together with the U.S. Offering, the "Offering") of Common Shares of Stoneridge, Inc. (which number includes Common Shares subject to the International Underwriters' overallotment option). The prospectuses will be identical in all respects except that each will contain different front and back cover pages and the sections under the captions "Underwriting" will differ in certain respects. This Registration Statement also covers the registration of and contains a form of prospectus (the "Company Prospectus") relating to the offering of Common Shares directly by the Company to certain directors, executive officers and other management employees of the Company. The Company Prospectus is identical in all respects to the other prospectuses except for (i) the front cover page of the Company Prospectus and (ii) the fact that the information in "Underwriters" is not applicable to purchases pursuant to the Company Prospectus. The alternative pages for the prospectuses are included herein. If required pursuant to Rule 424(b) of the General Rules and Regulations under the Securities Act of 1933, the prospectuses in the forms in which they are used after the Registration Statement becomes effective will be filed with the Securities and Exchange Commission. 3 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PROSPECTUS (Subject to Completion) Issued August 8, 1997 Shares STONERIDGE, INC. COMMON SHARES ------------------ All of the Common Shares offered hereby are being offered by the Company. Of the Common Shares being offered, shares are being offered initially in the United States and Canada by the U.S. Underwriters and shares are being offered initially outside the United States and Canada by the International Underwriters. Prior to the Offering there has been no public market for the Common Shares of the Company. It is currently anticipated that the initial public offering price per Common Share will be between $ and $ . All such shares are being offered at the initial public offering price per Common Share less underwriting discounts and commissions. See "Underwriters" for a discussion of the factors to be considered in determining the initial public offering price. In addition to the Common Shares being offered hereby, up to Common Shares are being offered directly by the Company concurrently herewith to certain directors, executive officers and other management employees of the Company. See "S Corporation Distribution and Management Reinvestment." ------------------------ APPLICATION WILL BE MADE TO LIST THE COMMON SHARES ON THE NEW YORK STOCK EXCHANGE UNDER THE PROPOSED SYMBOL "SRI." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) ------------------ ------------------ ------------------ Per Share.......................... $ $ $ Total(3)........................... $ $ $
- --------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (2) Before deducting expenses payable by the Company, estimated at $ . (3) The Company has granted the U.S. Underwriters an option exercisable within 30 days of the date hereof, to purchase up to an aggregate of additional Common Shares at the price to public, less underwriting discounts and commissions for the purpose of covering overallotments, if any. If the U.S. Underwriters exercise such option in full, the total price to public, underwriting discounts and commissions and proceeds to Company will be $ , $ , and $ , respectively. See "Underwriters." ------------------ The shares are offered, subject to prior sale, when, as and if accepted by the Underwriters named herein and subject to approval of certain legal matters by Katten Muchin & Zavis, counsel for the Underwriters. It is expected that delivery of the Common Shares will be made on or about , 1997 at the offices of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in immediately available funds. ------------------ MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE Securities Corporation , 1997 4 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON SHARES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ For investors outside the United States: No action has been or will be taken in any jurisdiction by the Company or any Underwriter that would permit a public offering of the Common Shares or possession or distribution of this Prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons into whose possession this Prospectus comes are required by the Company and the Underwriters to inform themselves about and to observe any restrictions as to the Offering of the Common Shares and the distribution of this Prospectus. ------------------------ In this Prospectus, references to (i) the "Company" includes Stoneridge, Inc. and its subsidiaries, unless the context otherwise requires and (ii) "dollar" and "$" are to United States dollars, and the term "United States" or "U.S." means the United States of America, its states, its territories, its possessions and all areas subject to its jurisdiction. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................................................................... 4 Risk Factors.......................................................................... 9 The Company........................................................................... 13 Use of Proceeds....................................................................... 14 S Corporation Distribution and Management Reinvestment................................ 14 Dividend Policy....................................................................... 15 Capitalization........................................................................ 15 Dilution.............................................................................. 16 Selected Financial Data............................................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 19 Business.............................................................................. 27 Management............................................................................ 39 Principal Shareholders................................................................ 44 Certain Transactions.................................................................. 44 Description of Capital Shares......................................................... 46 Shares Eligible for Future Sale....................................................... 48 Certain United States Federal Tax Consequences for Non-U.S. Holders of Common Shares.............................................................................. 50 Underwriters.......................................................................... 52 Experts............................................................................... 55 Legal Matters......................................................................... 55 Additional Information................................................................ 55 Index to Financial Statements......................................................... F-1
------------------------ CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, COMMON SHARES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." 3 5 PROSPECTUS SUMMARY This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Risk Factors." The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes (i) no exercise of the Underwriters' overallotment option, (ii) the purchase of Common Shares in the Company Offering (as defined herein), (iii) the recapitalization of the Company's Class A and Class B Common Shares into a single class of Common Shares to be effected prior to the Combined Offering as described under the heading "Description of Capital Shares" and (iv) completion of the Berifors acquisition as described under the heading "The Company." THE COMPANY The Company is a leading independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems principally for the automotive, medium and heavy duty truck and agricultural vehicle markets. The Company's products interface with a vehicle's mechanical and electrical systems to activate equipment and accessories, display and monitor vehicle performance, and control and distribute electrical power and signals. The Company has a leading market position in the design and manufacture of electrical and electronic modules and systems for the medium and heavy duty truck and agricultural vehicle markets. In the automotive market, the Company produces specially designed and engineered electrical and electronic component parts and modules, typically on a sole-source basis. The Company's engineers and designers work closely with customers to design, develop and manufacture components, modules and systems to address specific vehicle requirements. The Company, together with its predecessors, has long-standing relationships with its major customers, including General Motors Corporation (since 1950), Ford Motor Company (since 1919), Deere & Company (since 1965), and Navistar International Corporation (since 1973). Approximately 72% of the Company's 1996 net sales were derived from the automotive market and approximately 27% were derived from the medium and heavy duty truck and agricultural vehicle markets. The Company's net sales were $363.7 million in the year ended December 31, 1996 and $108.1 million for the three-month period ended March 31, 1997. The Company's four principal product categories are: - Power Distribution Products. The Company designs and manufactures electrical power and signal distribution components, modules and systems, including fully integrated automotive and truck wiring systems and highly engineered products, such as power distribution panels, for the automotive, medium and heavy duty truck and agricultural vehicle markets. Power distribution systems coordinate and direct the operation of the entire electrical system within a vehicle or compartment. A significant portion of the Company's current power distribution business consists of contract manufacturing of wire harnesses for a division of General Motors (see "Business -- Contract Manufacturing"). - Switch Products. The Company designs and manufactures integrated electronic and electromechanical switch products which include hidden switches and customer-activated switches. These switches transmit a signal to a control device which activates specific functions. Hidden switches are those switches which are not typically seen by vehicle passengers but are utilized to activate selected functions such as brake lights, cruise control functions and electronic safety features related to air bag and anti-lock braking systems. Customer-activated switches are used by a vehicle's operator or passengers to manually activate headlights, rear defrosters, heated seats and other accessories. The Company sells these products principally to the automotive market. - Instrumentation and Information Display Products. The Company designs and manufactures electronic instrument clusters, driver message centers, power conversion products, multiplexed modules and electrical systems and electronic switch modules. These products collect, store and display vehicle information, such as speed, pressure, maintenance data, trip information, operator 4 6 performance, temperature, distance traveled, and driver messages related to vehicle performance. These products utilize state-of-the-art hardware, software and multiplexing technology and are sold principally to the medium and heavy duty truck and agricultural vehicle markets. - Actuator Products. The Company designs and manufactures electromechanical actuator products. These products enable users to deploy power functions in a vehicle and can be designed to integrate switching and control functions. These products include power doorlock and four-wheel-drive actuators and are sold principally to the automotive market. These four product categories accounted for 52%, 29%, 11% and 8% of the Company's 1996 net sales, respectively, and 47%, 27%, 10% and 16% of first quarter 1997 net sales, respectively. The Company believes that it holds the number one or two market position in products which include (i) power and signal distribution systems for the North American agricultural vehicle market and (ii) driver instrumentation and information display systems for the worldwide medium and heavy duty truck markets. In the automotive market, where the Company focuses on component and module design and manufacturing, the Company believes it is the largest manufacturer of pedal assembly, chassis and door mounted hidden switches in North America and Europe. In addition to the Company's leading market positions, it is typically the sole supplier of products designed, developed and manufactured by the Company for specific vehicle platforms. Demand for the Company's products has grown as electrical and electronic content in vehicles has increased. The Company has benefited as OEMs added more electrical features and sophisticated electronics, such as driver information displays, safety systems and comfort features. Increased use of these features on vehicles causes greater utilization of the products designed and manufactured by the Company. According to a report by The Economist Intelligence Unit, average electrical and electronic content per vehicle is expected to increase from $863 in 1995 to $1,230 in 2000, a compound annual growth rate of 7.3%. The Company seeks to grow primarily by leveraging its strong market positions and technical and manufacturing capabilities to provide highly engineered electrical and electronic components, modules and systems to selected segments of the markets it serves. To achieve this goal the Company intends to: (i) focus on higher value-added systems and modules, (ii) expand new product development to increase vehicle and platform penetration, (iii) expand penetration of international markets, and (iv) pursue strategic acquisitions and alliances. The Company was founded in 1965 and until 1987 conducted its business primarily as a contract manufacturer of wire harnesses. In 1987, the Company embarked on a strategy to design and manufacture highly engineered electrical and electronic products and diversify its portfolio of products through acquisitions. The Company's significant acquisitions include: (i) Joseph Pollak Corporation ("Pollak"), a manufacturer of electronic and electromechanical switch products in 1988; (ii) the Transportation Electronic Division ("TED") of General Instruments, a manufacturer of power conversion modules and sophisticated instrumentation components, modules and systems in 1992; and (iii) the actuator business of Kelsey-Hayes Company ("Kelsey-Hayes") in 1995. In 1996, seeking to leverage its capabilities and diversify its OEM customer base, the Company acquired approximately 45% of Berifors A.B. ("Berifors"), a Sweden-based manufacturer of electronic display panels and instrumentation for the European truck and commercial vehicle markets. Effective upon the completion of the Offering, the Company expects to acquire the remaining 55% of the outstanding stock of Berifors. As a result of this acquisition, the Company will be a leading worldwide supplier of instrumentation displays for heavy duty trucks to Mercedes Benz, Volvo and Scania. The Company expects to exit its contract manufacturing business by approximately 1999, at which time the Company will generate substantially all of its net sales and profits from the design and manufacture of highly engineered electrical and electronic products. See "Risk Factors -- Reliance on Major Customers; Discontinuance of Certain Contract Manufacturing Business" and "The Company." The Company's principal executive offices are located at 9400 East Market Street, Warren, Ohio 44484, and its telephone number is (330) 856-2443. 5 7 THE OFFERING Common Shares offered......................... shares U.S. offering............................... shares International offering...................... shares Company offering............................ shares(1) Common Shares to be outstanding after the Offering.......................... shares Use of proceeds............................... Between approximately $81.0 million and $85.0 million to pay the S Corporation Distribution and $ million to repay certain indebtedness. See "Use of Proceeds." Proposed New York Stock Exchange symbol....... SRI
(1) The Company is offering Common Shares to certain directors, executive officers and other management employees of the Company at the initial public offering price set forth on the cover page of this Prospectus (the "Company Offering"). Such shares will be sold directly by the Company with no underwriting discounts or commissions payable thereon. As used herein, the term "Combined Offering" includes both the Company Offering and the underwritten initial public offering. See "S Corporation Distributions and Management Reinvestment." S CORPORATION DISTRIBUTION AND MANAGEMENT REINVESTMENT The Company has been treated as an S corporation for federal income tax purposes. Similar elections were made in states providing for conforming laws. As a result, the Company currently pays no federal income tax and virtually no state income tax, and the earnings of the Company are subject to taxation directly at the shareholder level. Effective with the Offering, the Company's S corporation status will be terminated, and the Company will become subject to corporate income taxation as a C corporation. The Company intends to pay to existing shareholders a distribution of substantially all of its previously undistributed S corporation taxable income as of the date of termination of its status as an S corporation (the "S Corporation Distribution"). The previously undistributed S corporation taxable income was taxed at the shareholder level in the year the income was earned. It is not possible at this time to determine the exact amount of the S Corporation Distribution. The Company currently estimates that undistributed S corporation taxable income as of the termination of the Company's S corporation status will be between approximately $81.0 million and $85.0 million. The Company anticipates distributing substantially all of the S Corporation Distribution in connection with the Offering. The remaining balance of the S Corporation Distribution is anticipated to be paid after completion of the Company's 1997 income tax returns. Of the $81.0 million to $85.0 million S Corporation Distribution, certain directors, executive officers and other management employees of the Company (the "Management Investors"), who are pre-Offering shareholders, will receive approximately $8.0 million of the S Corporation Distribution. Concurrent with the Offering, not less than $5.0 million of such distribution will be used by Management Investors to purchase Common Shares directly from the Company in the Company Offering (the "Management Reinvestment"). 6 8 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following table sets forth summary historical and pro forma financial data for the Company and should be read in conjunction with the financial statements and notes related thereto and other financial information included elsewhere herein. The summary historical financial data for the years ended December 31, 1994, 1995 and 1996 are derived from the Company's financial statements, which were audited by Arthur Andersen LLP, the Company's independent accountants. The summary historical financial data for the years ended December 31, 1992 and 1993 are derived from the unaudited combined financial statements of the Company, which financial statements have been prepared by the Company on a basis consistent with the Company's audited financial statements. The summary historical and pro forma financial data for the three-month periods ended March 31, 1996 and 1997 are derived from unaudited financial statements. The unaudited interim period financial statements for 1996 and 1997 have been prepared by the Company on a basis consistent with the Company's audited financial statements and, in the opinion of management, include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Company's results of operations for such periods and its financial condition as of the dates presented.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, -------------------------------------------------------- ------------------ 1992(1)(2) 1993(1)(2) 1994(2) 1995(3) 1996(3)( 1996 1997 ---------- ---------- -------- -------- -------- ------- -------- UNAUDITED UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales..................... $175,586 $ 187,413 $225,531 $278,043 $363,748 $83,455 $108,064 Gross profit.................. 44,190 47,480 60,557 66,331 75,606 18,528 25,939 Operating income.............. 15,958 15,610 28,015 28,822 28,912 6,601 13,714 Interest expense, net......... 2,686 2,221 2,344 2,014 4,317 1,061 913 Income before income taxes.... 13,272 13,389 25,671 26,808 24,595 5,540 14,534 Net income.................... 9,755 8,995 26,666 26,154 24,071 5,420 14,398 PRO FORMA DATA: Income before income taxes.... $ 13,272 $ 13,389 $ 25,671 $ 26,808 $ 24,595 $ 5,540 $ 14,534 Provision for income taxes(5).................... 5,548 5,597 10,730 11,206 10,295 2,332 6,034 -------- -------- -------- -------- -------- ------- -------- Pro forma net income.......... $ 7,724 $ 7,792 $ 14,941 $ 15,602 $ 14,300 $ 3,208 $ 8,500 ======== ======== ======== ======== ======== ======= ======== Pro forma net income per share....................... Weighted average number of shares outstanding.......... OTHER DATA: Research and development expense..................... $ 4,342 $ 5,096 $ 5,997 $ 6,664 $ 9,263 $ 2,198 $ 2,997 Capital expenditures.......... 12,369 5,669 9,046 14,767 14,083 3,633 2,656 Depreciation and amortization................ 6,251 6,696 6,870 7,979 9,966 2,468 3,055 EBITDA(6)..................... 22,209 22,306 34,885 36,801 38,878 9,069 16,769
MARCH 31, 1997 ---------------------------------------- PRO FORMA ACTUAL PRO FORMA(7) AS ADJUSTED(8) -------- ------------ -------------- BALANCE SHEET DATA: Working capital.................................................. $ 39,732 $(33,847) Total assets..................................................... 182,744 187,165 Long-term debt, less current portion............................. 39,940 39,940 Shareholders' equity............................................. 93,951 14,141
- --------------- (Footnotes on following page) 7 9 (Footnotes from prior page) (1) The combined financial data presented for 1992 and 1993 includes the combined results of operations and financial position of Stoneridge, Inc., Alphabet, Inc. ("Alphabet") and Alphastac, Inc. ("Alphastac/Pollak"). All intercompany transactions and balances were eliminated from the combined financial statements of these entities. (2) Effective January 1, 1994, Alphabet and Alphastac/Pollak were merged into Stoneridge, Inc. The merger was accounted for as a pooling of interest as the merged entities were related through common ownership. Prior to the merger, the Company and Alphabet were taxed as S corporations for federal and, where qualified, state income tax purposes. Alphastac/Pollak was taxed as a C corporation for federal and state income tax purposes prior to the merger. Accordingly, the combined operating data includes Alphastac/Pollak's recorded provisions for income taxes of $3.5 million and $4.4 million in 1992 and 1993, respectively. In conjunction with the merger on January 1, 1994, the Company recognized income of $1.4 million in the provision for income taxes as a result of the elimination of Alphastac/Pollak deferred tax liabilities. (3) In 1995, the Company acquired the actuator business of Kelsey-Hayes. This acquisition was accounted for as a purchase. The results of operations and financial position reflect this acquisition as of November 1, 1995. In connection with the acquisition, the Company entered into a transitional services agreement with the seller for commercial and process engineering support. The term of the transitional services agreement extended from November 1995 through October 1996. In connection with the transitional services agreement, the Company recognized expenses of $0.9 million and $4.3 million in 1995 and 1996, respectively. No additional expenses have been incurred since the expiration of the transitional services agreement. In addition, costs of approximately $1.0 million were incurred in 1995 in connection with the closure and sale of a contract manufacturing facility. (4) On April 30, 1996, the Company purchased approximately 45% of the outstanding stock of Berifors. This investment was accounted for under the equity method. The results of operations and financial position reflect the investment in Berifors since April 30, 1996. In addition, 1996 operating income was adversely impacted by (i) approximately $1.0 million of start-up expenses associated with the relocation of switch production from the Boston and Stoughton, Massachusetts, locations to a new facility in Canton, Massachusetts, including costs associated with the reconfiguration and relocation of the production lines, and (ii) approximately $0.6 million of costs associated with the closure of a power distribution production facility. (5) Upon completion of the Offering, the Company will be taxed as a C corporation for federal and state income tax purposes. Accordingly, pro forma net income reflects federal and state income taxes as if the Company had been a C corporation based on the tax rates that were in effect during the periods reported. See "S Corporation Distribution and Management Reinvestment." (6) Earnings before interest, taxes, depreciation and amortization ("EBITDA") represents operating income plus depreciation and amortization. EBITDA should not be considered as an alternative measure of net income or cash provided by operating activities (both as determined in accordance with generally accepted accounting principles), but is presented to provide additional information related to the Company's debt service capability. EBITDA should not be considered in isolation or as a substitute for other measures of financial performance or liquidity. (7) Reflects an assumed $83.0 million S Corporation Distribution, an assumed $5.0 million Management Reinvestment pursuant to the Company Offering, and the reinstatement of $4.4 million and $6.2 million of current deferred income tax assets and long-term deferred income tax liabilities, respectively, as a result of the termination of the Company's status as an S corporation. (8) Gives effects to the issuance of the Common Shares in the Combined Offering and the application of the net proceeds therefrom as described in "Use of Proceeds." 8 10 RISK FACTORS Prospective investors should consider, in addition to the information set forth elsewhere in this Prospectus, the following matters in evaluating the Company and the Common Shares offered hereby. RELIANCE ON MAJOR CUSTOMERS; DISCONTINUANCE OF CERTAIN CONTRACT MANUFACTURING BUSINESS The Company is dependent on a small number of principal customers for a significant percentage of its net sales. In 1996, General Motors, Ford and Deere accounted for 39%, 18% and 10%, respectively, of the Company's net sales. The loss of any significant portion of its sales to these customers or any other significant customers would have a material adverse impact on the financial condition and results of operations of the Company. The contracts the Company has entered into with many of its customers provide for supplying the customers' requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of the Company's major customers could have a material adverse impact on the Company. The Company also competes to supply products for successor models and is subject to the risk that the customer will not select the Company to produce products on any such model, which could have a material adverse impact on the financial condition and results of operations of the Company. A division of General Motors has notified the Company that it is discontinuing all outsourcing of its wire harness requirements under contract manufacturing arrangements. The Company believes that by 1999, the General Motors division will produce in-house substantially all of its wire harnesses requirements previously supplied by the Company, although no assurance can be given that such sales by the Company will not end at an earlier date. In 1996, the Company's sales under this arrangement totaled approximately $105.6 million and contributed approximately $7.2 million in operating income. There can be no assurance that the Company will be able to offset reductions in its sales and operating profits resulting from the reduction in sales to the General Motors division. See "Business -- Contract Manufacturing." INDUSTRY CYCLICALITY AND SEASONALITY The markets for the Company's products have historically been cyclical. Because the Company's products are used principally in the production of vehicles for the automotive, heavy duty truck and agricultural vehicle markets, its sales and therefore its results of operations are significantly dependent on the general state of the economy and other factors which affect these markets. A decline in automotive, heavy duty truck and agricultural vehicle production could adversely impact the Company. In 1996, approximately 72% of the Company's net sales were made to the automotive market and approximately 27% were derived from medium and heavy duty truck and agricultural vehicle markets. Demand for the Company's products has been seasonal. The Company typically experiences decreased net sales during the third calendar quarter of each year due to the impact of scheduled OEM plant shutdowns in July for vacations and new model changeovers. The fourth quarter is also impacted by plant shutdowns for the holidays. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Information." OEM SUPPLIER CONSOLIDATION Since the early 1980s the OEM supply industry has undergone a significant consolidation as OEMs sought to lower costs, improve quality and increasingly purchase complete systems and modules rather than separate components. As a result of these competitive pressures, there can be no assurance that the Company will be able to raise or maintain gross margins on product sales to OEMs. ACQUISITION STRATEGY A substantial portion of the Company's growth in sales and earnings has been generated from acquisitions and subsequent improvements in the performance of the businesses acquired. The Company expects to 9 11 continue a strategy of identifying and acquiring businesses with complementary products or services. There can be no assurance that the Company will continue to identify suitable acquisition and joint venture candidates, obtain financing necessary to complete and support such acquisitions or acquire businesses on satisfactory terms, or that any business acquired by the Company, including Berifors, will be successfully integrated with the Company's operations or prove to be profitable. The Company could incur substantial indebtedness in connection with its acquisition strategy. The Company anticipates that acquisitions will occur in new geographic markets. Any failure to achieve successful integration of such acquisitions could have a material adverse impact on the financial condition and results of operations of the Company. See "Business -- Growth Strategy." COMPETITION Markets for the Company's products are highly competitive. Quality, service, price, timely delivery, and technological innovation are the primary elements of competition. Many of the Company's competitors are more diversified and have greater financial and other resources than the Company. In addition, with respect to certain of its products, some of the Company's competitors are divisions of its OEM customers. There can be no assurance that the Company's business will not be adversely affected by competition or that the Company will be able to maintain its profitability if the competitive environment changes. See "Business -- Markets and Competition." TECHNOLOGICAL CHANGE The Company's products are subject to changing technology, which could place the Company at a competitive disadvantage relative to alternative products introduced by competitors. The Company's success will depend on its ability to continue to meet customers' changing specifications with respect to performance, cost, quality and service by implementing and sustaining competitive technological advances. The Company's business may therefore require, from time to time, significant additional capital expenditures and investment in research and development and manufacturing and management information systems. There can be no assurance that the Company will be able to achieve the technological advances or introduce new products that may be necessary to remain competitive. The inability of the Company to continuously improve existing products and to develop new products and to achieve technological advances could have a material adverse impact on the financial condition and results of operations of the Company. See "Business -- Design and Engineering Support." LABOR RELATIONS As of June 30, 1997, the Company had about 3,800 employees, approximately 1,000 of whom were salaried and the balance of whom were paid on an hourly basis. Except for certain employees located in Chihuahua, Mexico, and Orebro and Stockholm, Sweden, the Company's employees are not represented by a union. There can be no assurance that additional employees of the Company will not be covered by collective bargaining agreements in the future or that any of the Company's facilities will not experience a work stoppage or other labor disruption. Any prolonged labor disruption involving the Company's employees or employees of the Company's customers, most of whom are covered by collective bargaining agreements, could have a material adverse impact on the financial condition and results of operations of the Company. See "Business -- Employees." ENVIRONMENTAL AND OTHER REGULATIONS The Company's operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. The Company believes that its business, operations and facilities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. The operation of the Company's manufacturing facilities entails risks and there can be no assurance that the Company will not incur material costs or liabilities in connection 10 12 with these operations. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future. In addition, although the Company intends to conduct "Phase I" environmental testing in connection with acquisitions in the United States of acquired businesses and additional testing (if deemed appropriate under the circumstances) in order to minimize the risks of encountering material environmental problems resulting from such acquisitions, there can be no assurance that the Company will not discover material unanticipated environmental problems requiring significant expenditures for corrective action or remediation following such acquisitions. See "Business -- Environmental Matters." DEPENDENCE ON KEY PERSONNEL The Company's success will depend, in part, on the efforts of its executive officers and other key employees. In addition, the future success of the Company will depend, among other factors, on the Company's ability to continue to attract and retain qualified personnel, particularly engineering personnel. The Company does not have employment agreements with, or "key man" life insurance, on any of its employees. The loss of the services of any of its key employees or the failure to attract or retain employees could have a material adverse effect on the financial condition and results of operations of the Company. See "Management." PRODUCT LIABILITY The Company is subject to the risk of exposure to product liability claims in the event that the failure of any of its products results in personal injury or death, and there can be no assurance that the Company will not experience any material product liability losses in the future. In addition, if any of the Company's products prove to be defective, the Company may be required to participate in a government-imposed or OEM-instituted recall involving such products. The Company maintains insurance against such product liability claims, but there can be no assurance that such coverage will be adequate for liabilities ultimately incurred or that it will continue to be available on terms acceptable to the Company. A successful claim brought against the Company that exceeds available insurance coverage or a requirement to participate in any product recall could have a material adverse impact on the financial condition and results of operations of the Company. See "Business -- Litigation." RISKS ASSOCIATED WITH FOREIGN OPERATIONS Giving pro forma effect to the Berifors acquisition, international sales accounted for approximately 9% of the Company's 1996 net sales and international assets accounted for approximately 15% of the Company's assets as of December 31, 1996. International sales and operations are subject to significant risks, including political and economic instability, restrictive trade policies, economic conditions in local markets, the imposition of product tariffs and the burden of complying with a wide variety of international and U.S. export laws. Additionally, to the extent any portion of the Company's net sales and expenses are denominated in currencies other than U.S. dollars, changes in exchange rates could have a material adverse impact on the financial condition and results of operations of the Company. CONTROL BY PRINCIPAL SHAREHOLDERS Following the completion of the Combined Offering, D.M. Draime, Draime family members and family trusts (collectively, the "Draime Family") are expected to own approximately % of the outstanding Common Shares (or approximately % if the Underwriters' overallotment option is exercised in full). As a result of such ownership, the Draime Family will be able to elect all of the directors of the Company and to control the Company's affairs. See "Principal Shareholders." DILUTION The initial public offering price is substantially higher than the net pro forma tangible book value per share of the Common Shares. Accordingly, purchasers of the Common Shares offered hereby will incur 11 13 immediate and substantial dilution in tangible book value per share of the Common Shares of $ , assuming an initial public offering price of $ per Common Share. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE Immediately upon consummation of the Combined Offering, the Company will have outstanding Common Shares ( if the Underwriters exercise in full their overallotment option). Of such Common Shares ( if the Underwriters exercise in full their overallotment option) will have been sold in the Combined Offering and will be freely transferable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except for any of those Common Shares owned at any time by an "affiliate" of the Company within the meaning of Rule 144 under the Securities Act, which sales will be subject to the volume limitations and certain other restrictions set forth in Rule 144. The sale of any substantial number of Common Shares following the Combined Offering could have a material adverse impact on the market price of the Common Shares. The Company and its directors, officers and current shareholders have agreed not to sell, offer for sale, or otherwise dispose of any Common Shares, subject to certain exceptions, for a period of 180 days from the date of this Prospectus without the prior written consent of Morgan Stanley & Co. Incorporated. Upon expiration of the 180 days, an aggregate of Common Shares will be eligible for sale in the public market without restriction. An additional Common Shares will be eligible for resale by existing shareholders who are affiliates, subject to the volume and manner of sale limitations imposed by Rule 144. See "Shares Eligible for Future Sale" and "Underwriters." DETERMINATION OF OFFERING PRICE AND ABSENCE OF PUBLIC MARKET Prior to the Combined Offering, there has been no public market for the Common Shares. Consequently, the initial public offering price has been determined by negotiation among the Company and the Representatives of the Underwriters based upon factors described under the caption "Underwriters." The stock market has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of the Common Shares without regard to the operating performance of the Company. In addition, the Company believes that factors such as changes in earnings estimates by analysts, quarterly fluctuations in the financial results of the Company or its competitors, general conditions in the industry, the overall economy and the financial markets could cause the price of the Common Shares to fluctuate substantially. There can be no assurance that an active trading market in the Common Shares will develop subsequent to the Combined Offering or, if developed, that it will be sustained. See "Underwriters." ANTI-TAKEOVER PROVISIONS Certain provisions in the Company's Second Amended and Restated Articles of Incorporation and its Amended and Restated Code of Regulations could have the effect of making more difficult or discouraging an acquisition of the Company deemed undesirable by its Board of Directors. These include the existence of authorized but unissued preferred shares containing such terms as the Board of Directors may approve, which could be issued by the Company's Board of Directors without shareholder approval. In addition, certain provisions of Ohio law could have the effect of deterring hostile takeovers or delaying, deterring or preventing a change in control of the Company, including transactions in which shareholders might otherwise receive a premium for their shares over current market prices. See "Description of Capital Shares -- Certain Provisions of Ohio Law." FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements that involve substantial known and unknown risks and uncertainties. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by and information currently available to the Company at the time such statements were made. When used in this Prospectus, the words "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. Prospective investors are cautioned that any such forward-looking statement is not a guarantee of 12 14 future performance and involves risks and uncertainties, and that actual results may differ materially from those in the forward-looking statement as a result of various factors. Actual results could differ materially from those expressed or implied in the forward-looking statements. THE COMPANY The Company was formed in 1965 as a manufacturer of wire harnesses for the agricultural vehicle market. Following expansion in 1977 into the automotive market, sales increased from approximately $1.6 million in 1976 to $105.4 million in 1987, with approximately 90% of the Company's 1987 sales being derived from the Company's contract manufacturing arrangement with a division of General Motors. In 1987, the Company began to transition away from contract manufacturing into a value-added designer and manufacturer of highly engineered products by developing internal engineering capabilities and pursuing an acquisition program to expand product offerings. See "Business -- Contract Manufacturing." ACQUISITIONS In October 1988, the Company acquired Pollak, a leading manufacturer of electronic and electromechanical switch products. In February 1992, the Company acquired TED, a manufacturer of electronic instrumentation components, modules and systems. In November 1995, the Company acquired the business, machinery and equipment, intellectual property rights and purchase contracts of the actuator business of Kelsey-Hayes. In April 1996, seeking to leverage its capabilities and diversify its OEM customer base, the Company acquired approximately 45% of Berifors, a Sweden-based manufacturer of electronic display panels and instrumentation for the European truck and commercial vehicle markets. Effective upon the completion of the Offering, the Company expects to acquire the remaining 55% of the outstanding stock of Berifors by issuing Common Shares to the sellers. As a result of this acquisition, the Company will be a leading worldwide supplier of instrumentation displays for heavy duty trucks to Mercedes Benz, Volvo and Scania. PROPOSED ACQUISITION The Company periodically evaluates acquisition opportunities in both domestic and international markets and expects to continue to do so in the future. The Company has entered into a letter of intent to acquire 50% of the stock of a Brazilian electronic components business which specializes in vehicle security devices. The letter of intent provides for a purchase price of approximately $17.0 million, subject to certain adjustments and contingencies, including the Company's satisfactory completion of business, legal, accounting and environmental due diligence reviews, negotiation of a definitive acquisition agreement, and approval of the transaction by the Company's Board of Directors. There can be no assurance that the Company will enter into a definitive acquisition agreement or consummate such acquisition. The Company intends to continue to pursue strategic acquisitions and alliances in both domestic and international markets. See "Business -- Competitive Advantages -- International Presence" and "Business -- Growth Strategy -- Expand Penetration of International Markets" and "-- Pursue Strategic Acquisitions and Alliances." 13 15 USE OF PROCEEDS The net proceeds to the Company from the Combined Offering are estimated to be approximately $ million (approximately $ million if the Underwriters' overallotment option is exercised in full), assuming an initial public offering price of $ per share and after deducting underwriting discounts and commissions and estimated offering expenses. The Company intends to use between approximately $81.0 million and $85.0 million of the net proceeds to fund the S Corporation Distribution and approximately $ million to repay indebtedness under the Company's revolving loan facility. The revolving loan facility matures on June 30, 2001 and requires interest to be paid quarterly at the Company's option at either (i) prime rate or (ii) LIBOR plus 1% to 1.5%, depending upon the Company's fixed charge coverage ratio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 5 of Notes to Financial Statements. After the Combined Offering, the Company will have approximately $ million available under its revolving loan facility. It is anticipated that the Company will use amounts available under its bank credit facilities for working capital and general corporate purposes, including possible acquisitions. See "Risk Factors -- Acquisition Strategy," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "The Company -- Proposed Acquisition." S CORPORATION DISTRIBUTION AND MANAGEMENT REINVESTMENT The Company has been treated as an S corporation for federal income tax purposes. Similar elections were made in states providing for conforming laws. As a result, the Company currently pays no federal income tax and virtually no state income tax, and the earnings of the Company are subject to taxation directly at the shareholder level. Effective with the Offering, the Company's S corporation status will be terminated, and the Company will become subject to corporate income taxation as a C corporation. As a result, estimated current deferred tax assets of $4.6 million and noncurrent deferred tax liabilities of $6.4 million will be recorded with an offsetting charge to net income. This one-time net charge of $1.8 million is expected to reduce net income for the third quarter of 1997. No adverse tax consequences to the Company are expected to result from termination of its S corporation status. The Company intends to pay to existing shareholders a distribution of substantially all of its previously undistributed S corporation taxable income as of the date of termination of its status as an S corporation (the "S Corporation Distribution"). The previously undistributed S corporation taxable income was taxed at the shareholder level in the year the income was earned. It is not possible at this time to determine the exact amount of the S Corporation Distribution. The Company currently estimates that undistributed S corporation taxable income as of the termination of the Company's S corporation status will be between approximately $81.0 million and $85.0 million. The Company anticipates distributing substantially all the S Corporation Distribution in connection with the Offering. The remaining balance of the S Corporation Distribution is anticipated to be paid after completion of the Company's 1997 income tax returns. Of the $81.0 million to $85.0 million S Corporation Distribution, the Management Investors, who are pre-Offering shareholders, will receive approximately $8.0 million of the S Corporation Distribution. Concurrent with the Offering not less than $5.0 million of such distribution will be used by the Management Investors to purchase Common Shares directly from the Company in the Management Reinvestment pursuant to the Company Offering. The Company may also make a distribution to its existing shareholders following the Offering in the event that S corporation taxable income is thereafter increased due to any Internal Revenue Service audit. The Company expects to enter into an indemnification agreement with existing shareholders with respect to any income tax attributable to periods prior to the termination of the Company's S corporation status. Purchasers of Common Shares in the Offering will not participate in the S Corporation Distribution or any future S Corporation Distributions. 14 16 DIVIDEND POLICY After payment of the S Corporation Distribution, all future earnings of the Company are expected to be retained for use in its business. The Company does not anticipate paying any cash dividends on its Common Shares in the foreseeable future. The payment of future dividends will be at the sole discretion of the Company's Board of Directors and will depend on, among other things, future earnings, capital requirements, contractual restrictions, the general financial condition of the Company, and general business conditions. The Company's existing revolving loan facility and the proposed new credit facility impose limitations on the amounts of dividends that can be paid. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 5 of the Notes to the Company's Financial Statements. CAPITALIZATION The following table sets forth as of March 31, 1997 the Company's (i) actual capitalization, (ii) pro forma capitalization giving effect to the recapitalization of the Common Shares to be effected prior to the Offering, an assumed $83.0 million S Corporation Distribution, an assumed $5.0 million Management Reinvestment pursuant to the Company Offering, and the reinstatement of approximately $1.8 million of net deferred income tax liabilities resulting from the termination of the Company's S corporation status, and (iii) pro forma capitalization as adjusted to reflect the sale of Common Shares in the Combined Offering at an assumed initial public offering price of $ per share (after deduction of underwriting discounts and estimated expenses of the Combined Offering) and the application of the estimated net proceeds therefrom. This table should be read in conjunction with the historical financial statements of the Company and the notes thereto which are included elsewhere in the Prospectus. See "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Capital Shares."
MARCH 31, 1997 -------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (UNAUDITED, DOLLARS IN THOUSANDS) Short-term debt: Current portion of long-term debt....................... $ 122 $ 122 $ -------- --------- --------- Total short-term debt.............................. $ 122 $ 122 $ ======== ========= ========= Long-term debt: Term loans.............................................. $ 3,442 $ 3,442 $ Revolving credit facility............................... 36,498 36,498 -------- --------- --------- Total long-term debt............................... 39,940 39,940 -------- --------- --------- Shareholders' equity: Preferred shares, without par value; to be authorized: 5,000,000 shares; issued and outstanding: none....... -- -- -- Class A common shares, without par value; authorized: 32,724 shares (actual); issued and outstanding: 15,465 shares (actual)............................... -- -- -- Class B common shares, without par value; authorized: 87,276 shares (actual); issued and outstanding: 84,937 shares (actual)............................... -- -- -- Common Shares, without par value; authorized: 60,000,000 shares pro forma and pro forma as adjusted; issued and outstanding: shares pro forma and shares pro forma as adjusted............... -- -- -- Additional paid-in capital.............................. 9,315 9,315 Retained earnings....................................... 84,636 4,826 -------- --------- --------- Total shareholders' equity......................... 93,951 14,141 -------- --------- --------- Total capitalization............................ $133,891 $ 54,081 $ ======== ========= =========
15 17 DILUTION The aggregate net tangible book value of the Company as of March 31, 1997 was $63.5 million, or $ per Common Share. Assuming the sale of the Common Shares in the Combined Offering at an assumed initial public offering price of $ per share and the application of the net proceeds therefrom to fund the S Corporation Distribution and repay debt, and assuming the change in the Company's tax status, the pro forma aggregate net tangible book value of the Company at March 31, 1997 would have been $ million, or $ per Common Share. This represents an immediate increase in net tangible book value of $ per Common Share to existing shareholders and an immediate dilution of $ per share to investors purchasing Common Shares in the Combined Offering. "Dilution per share" represents the difference between the price per share to be paid by new investors and the pro forma net tangible book value per share after the Combined Offering. The following table illustrates the per share dilution: Assumed initial public offering price per share........................ $ Net tangible book value per share at March 31, 1997(1)............... $ Increase attributable to price paid by investors in the Combined Offering.......................................................... Decrease attributable to S Corporation Distribution.................. Decrease attributable to change in tax status, net................... -------- Pro forma net tangible book value per share after the Combined Offering.......................................................... -------- Dilution in net tangible book value per share to new investors(2)...... $ ======== Assuming the Underwriters' overallotment option is exercised in full, pro forma net tangible book value upon completion of the Combined Offering would be $ per share, the immediate increase in pro forma net tangible book value of shares owned by existing stockholders would be $ per share, and the immediate dilution to new investors in the Combined Offering would be $ per share.
- --------------- (1) Net tangible book value (deficit) per share is determined by dividing the net tangible book value of the Company by the number of outstanding Common Shares. Net tangible book value is calculated as total assets, less goodwill, patents, trademarks and other intangible assets (net of amortization) and total liabilities. (2) Dilution is determined by subtracting pro forma net tangible book value per share from the assumed initial public offering price per share paid by investors in the Combined Offering. The following table summarizes as of March 31, 1997 (based on the assumptions set forth above regarding the Offering), the number of Common Shares purchased from the Company, the total consideration paid to the Company (equal, in the case of the existing shareholders, to the original consideration for the Common Shares held by them plus additional contributions made by them in respect of the Common Shares), and the average price per share paid by the existing shareholders and by the investors purchasing Common Shares in the Combined Offering (based on the initial public offering price of $ per share). See "Principal Shareholders."
SHARES PURCHASED TOTAL CONSIDERATION ------------------- -------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------- ------- -------- ------- ------------- Existing shareholders................... % $ % $ New investors........................... % % ------- --- -------- --- Total................................. 100% $ 100% $ ======= === ======== === =======
16 18 SELECTED FINANCIAL DATA The following table sets forth selected historical and pro forma data for the Company and should be read in conjunction with the financial statements and notes related thereto and other financial information included elsewhere herein. The selected historical data for the years ended December 31, 1994, 1995 and 1996 are derived from the Company's financial statements, which were audited by Arthur Andersen LLP, the Company's independent accountants. The selected historical data for the years ended December 31, 1992 and 1993 are derived from the combined financial statements of the Company. The combined financial statements of the Company have been prepared by the Company on a basis consistent with the Company's audited financial statements. The selected financial data for the three-month periods ended March 31, 1996 and 1997 are derived from unaudited interim period financial statements. The unaudited interim period financial statements for 1996 and 1997 have been prepared by the Company on a basis consistent with the Company's audited financial statements and, in the opinion of management, include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Company's results of operations for such period and financial condition for such date.
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, --------------------------------------------------------- ------------------- 1992(1)(2) 1993(1)(2) 1994(2) 1995(3) 1996(4) 1996 1997 ---------- ---------- --------- -------- -------- -------- -------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales................................. $175,586 $187,413 $ 225,531 $278,043 $363,748 $ 83,455 $108,064 Cost of goods sold........................ 131,396 139,933 164,974 211,712 288,142 64,927 82,125 -------- -------- -------- -------- -------- -------- -------- Gross profit.............................. 44,190 47,480 60,557 66,331 75,606 18,528 25,939 Selling, general and administrative expenses................................ 28,232 31,870 32,542 37,509 46,694 11,927 12,225 -------- -------- -------- -------- -------- -------- -------- Operating income.......................... 15,958 15,610 28,015 28,822 28,912 6,601 13,714 Interest expense, net..................... 2,686 2,221 2,344 2,014 4,317 1,061 913 Gain on the sale of fixed assets.......... -- -- -- -- -- -- (1,733) -------- -------- -------- -------- -------- -------- -------- Income before income taxes................ 13,272 13,389 25,671 26,808 24,595 5,540 14,534 Provision (credit) for income taxes....... 3,517 4,394 (995) 654 524 120 136 -------- -------- -------- -------- -------- -------- -------- Net income................................ $ 9,755 $ 8,995 $ 26,666 $ 26,154 $ 24,071 $ 5,420 $ 14,398 ======== ======== ======== ======== ======== ======== ======== PRO FORMA DATA: Income before income taxes................ $ 13,272 $ 13,389 $ 25,671 $ 26,808 $ 24,595 $ 5,540 $ 14,534 Provision for income taxes(5)............. 5,548 5,597 10,730 11,206 10,295 2,332 6,034 -------- -------- -------- -------- -------- -------- -------- Pro forma net income...................... $ 7,724 $ 7,792 $ 14,941 $ 15,602 $ 14,300 $ 3,208 $ 8,500 ======== ======== ======== ======== ======== ======== ======== Pro forma net income per share............ Weighted average number of shares outstanding............................. OTHER DATA: Research and development expense.......... $ 4,342 $ 5,096 $ 5,997 $ 6,664 $ 9,263 $ 2,198 $ 2,997 Capital expenditures...................... 12,369 5,669 9,046 14,767 14,083 3,633 2,656 Depreciation and amortization............. 6,251 6,696 6,870 7,979 9,966 2,468 3,055 EBITDA(6)................................. 22,209 22,306 34,885 36,801 38,878 9,069 16,769
MARCH 31, 1997 ------------------------------------- DECEMBER 31, PRO FORMA ---------------------------------------------------- AS 1992 1993 1994 1995 1996 ACTUAL PRO FORMA(7) ADJUSTED(8) -------- -------- -------- -------- -------- -------- ------------ ----------- (UNAUDITED) BALANCE SHEET DATA: Working capital................ $ 16,887 $ 21,246 $ 30,654 $ 34,851 $ 39,957 $ 39,732 $(33,847) Total assets................... 122,447 130,162 119,915 172,298 178,487 182,744 187,165 Long-term debt, less current portion...................... 35,459 29,784 28,845 47,999 51,156 39,940 39,940 Shareholders' equity........... 46,283 49,946 63,112 73,720 84,633 93,951 14,141
- --------------- (Footnotes on following page) 17 19 (Footnotes from prior page) (1) The combined financial data presented for 1992 and 1993 includes the combined results of operations and financial position of Stoneridge, Inc., Alphabet and Alphastac/Pollak. All intercompany transactions and balances were eliminated from the combined financial statements of these entities. (2) Effective January 1, 1994, Alphabet and Alphastac/Pollak were merged into the Company. The merger was accounted for as a pooling of interests as the merged entities were related through common ownership. Prior to the merger, the Company and Alphabet were taxed as S corporations for federal and, where qualified, state income tax purposes. Alphastac/Pollak was taxed as a C corporation for federal and state income tax purposes prior to the merger. Accordingly, the combined operating data includes Alphastac/Pollak's recorded provisions for income taxes of $3.5 million and $4.4 million in 1992 and 1993, respectively. In conjunction with the merger on January 1, 1994, the Company recognized income of $1.4 million in the provision for income taxes as a result of the elimination of Alphastac/Pollak deferred tax liabilities. (3) In 1995, the Company acquired the actuator business of Kelsey-Hayes. This acquisition was accounted for as a purchase. The results of operations and financial position reflect this acquisition as of November 1, 1995. In connection with the acquisition, the Company entered into a transitional services agreement with the seller for commercial and process engineering support. The term of the transitional services agreement extended from November 1995 through October 1996. In connection with the transitional services agreement, the Company recognized expenses of $0.9 million and $4.3 million in 1995 and 1996, respectively. No additional expenses have been incurred since the expiration of the transitional services agreement. In addition, costs of approximately $1.0 million were charged against 1995 operating income in connection with the closure and sale of a contract manufacturing facility. (4) On April 30 1996, the Company purchased approximately 45% of the outstanding stock of Berifors. This investment was accounted for under the equity method. The results of operations and financial position reflect the investment in Berifors since April 30, 1996. In addition, 1996 operating income was adversely impacted by (i) approximately $1.0 million of start-up expenses associated with the relocation of switch production from the Boston and Stoughton, Massachusetts, locations to a new facility in Canton, Massachusetts, including costs associated with the reconfiguration and relocation of the production lines, and (ii) approximately $0.6 million of costs associated with the closure of a power distribution production facility. (5) Upon completion of the Offering, the Company will be taxed as a C corporation for federal and state income tax purposes. Accordingly, pro forma net income reflects federal and state income taxes as if the Company had been a C corporation based on the tax rates that were in effect during the periods reported. See "S Corporation Distribution and Management Reinvestment." (6) Earnings before interest, taxes, depreciation and amortization ("EBITDA") represents operating income plus depreciation and amortization. EBITDA should not be considered as an alternative measure of net income or cash provided by operating activities (both as determined in accordance with generally accepted accounting principles), but is presented to provide additional information related to the Company's debt service capability. EBITDA should not be considered in isolation or as a substitute for other measures of financial performance or liquidity. (7) Reflects an assumed $83.0 million S Corporation Distribution, an assumed $5.0 million Management Reinvestment pursuant to the Company Offering, and the reinstatement of $4.4 million and $6.2 million of current deferred income tax assets and long-term deferred income tax liabilities, respectively, as a result of the termination of the Company's status as an S corporation. (8) Gives effect to the issuance of the Common Shares in the Combined Offering and the application of the net proceeds therefrom as described in "Use of Proceeds." 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems principally for the automotive, medium and heavy duty truck and agricultural vehicle markets. The Company's products interface with a vehicle's mechanical and electrical systems to activate, regulate, display and monitor vehicle performance, and control and distribute electrical power and signals. The Company's four principal product categories are power distribution products, switch products, instrumentation and information display products, and actuator products. Such product categories accounted for 52%, 29%, 11% and 8% of 1996 net sales, respectively, and 47%, 27%, 10% and 16% of first quarter 1997 net sales, respectively. Approximately 72% of the Company's 1996 net sales were derived from the automotive market and approximately 27% were derived from the medium and heavy duty truck and agricultural vehicle markets. The Company operates in one business segment. The Company has completed several acquisitions. The Company acquired Pollak, a manufacturer of electronic and electromechanical switch products in 1988. In addition, the Company acquired TED, a manufacturer of power conversion modules and sophisticated instrumentation components, modules and systems in 1992. The Company acquired the actuator business (including all related machinery and equipment, intellectual property rights and purchase contracts) of Kelsey-Hayes in November 1995 for $18.8 million. The acquisition was accounted for as a purchase and was financed through the Company's revolving credit facility. In addition, the Company entered into a transitional services agreement with Kelsey-Hayes related to commercial and process engineering support provided by Kelsey-Hayes in connection with the purchase of the actuator business. A total of $5.2 million in transitional services expenses was incurred, of which $0.9 million was recognized in 1995 and $4.3 million in 1996. No such expenses were incurred in 1997, nor does the Company anticipate incurring any such expenses in the future. In April 1996, the Company purchased approximately 45% of the outstanding common stock of Berifors for $8.8 million in cash. The initial investment has been accounted for under the equity method of accounting. Effective upon the completion of the Offering, the Company expects to acquire the remaining 55% of the outstanding common stock by issuing Common Shares and will use the consolidation method of accounting for the investment. The Company supplies a division of General Motors with wire harnesses pursuant to a contract manufacturing arrangement. The volume of wire harnesses produced by the Company under this contract manufacturing arrangement has declined each year since 1987 principally as a result of decreased sales volume for certain of the customer's vehicle models. The Company was notified in 1995 that as General Motors' vehicle electrical systems are redesigned, the General Motors division intended to in-source all of its wire harness needs. The Company believes that by 1999 this General Motors division will in-source substantially all wire harness requirements previously supplied by the Company. No assurance can be given that these sales by the Company will not end at an earlier date. Prior to 1995, the Company assembled wire harnesses with material provided by the customer with the Company recording sales revenue on shipments based on the value added in the manufacturing and assembly process. In October 1994, the General Motors division requested that the Company begin to purchase certain materials for the assembly of the wire harness product. As a result of this change, and despite the continued decline in the volume of wire harnesses provided, net sales under the contract manufacturing arrangement increased by $28.0 million in 1995 and $40.0 million in 1996. Included in the 1995 and 1996 net sales increases were an $11.1 million and $13.3 million decline in the production volume of contract manufactured wire harnesses, respectively. The Company generally begins working on products awarded for new or redesigned vehicle models two to five years prior to the OEM marketing of such vehicle models to the public. During such period, the Company incurs (i) costs related to the design and engineering of such product, (ii) costs related to the production of the tools used to manufacture the new product, and (iii) start-up costs associated with the initial production of such product. In general, design and engineering costs are expensed in the period incurred unless they are reimbursed by the customer, in which case they are capitalized and amortized over the expected life of such 19 21 product. Costs incurred in the production of the tools are generally capitalized and reimbursed by the customer prior to production or, to the extent not reimbursed, amortized over the life of the program. Start-up costs, which are generally incurred 30 to 60 days immediately prior to and immediately after initial production, are expensed as incurred. The most significant component of cost of goods sold is material cost. Excluding the increased material cost associated with the change in the contract manufacturing relationship with a division of General Motors, the cost of materials has been, and is expected to remain, relatively stable as a percent of cost of goods sold as most materials are generally available from multiple suppliers and are not subject to significant price fluctuations. Direct labor costs represent a relatively small percentage of cost of goods sold and have remained relatively consistent due to the Company's practice of automating the production of high volume products and using manufacturing locations which have lower labor costs to produce labor-intensive products. Indirect production support labor costs in contrast tend to vary with the level of production. The Company's selling, general and administrative ("SG&A") expenses consist of compensation and benefits, marketing costs, product development costs, administrative costs, overhead, and depreciation and amortization. Marketing costs include advertising, promotion, certain occupancy costs and other routine costs (travel, office supplies and telecommunications). Administrative costs consist principally of information technology, accounting, human resources, professional fees, certain occupancy costs, and other routine costs. Product development costs include advanced design, product analysis, computer-aided design ("CAD"), testing, modeling and process technology expenses. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of net sales represented by the items reflected in the Company's Statement of Operations.
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, ------------------------ --------------- 1994 1995 1996 1996 1997 ------ ------ ------ ------ ------ Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold............................... 73.1 76.1 79.2 77.8 76.0 ----- ----- ----- ----- ----- Gross profit..................................... 26.9 23.9 20.8 22.2 24.0 SG&A expenses.................................... 14.5 13.5 12.8 14.3 11.3 ----- ----- ----- ----- ----- Operating income................................. 12.4 10.4 8.0 7.9 12.7 Interest expense, net............................ 1.0 0.7 1.2 1.3 0.9 Other expense (income)........................... 0.0 0.0 0.0 0.0 (1.6) ----- ----- ----- ----- ----- Income before income taxes....................... 11.4 9.7 6.8 6.6 13.4 Provision (credit) for income taxes.............. (0.4) 0.2 0.2 0.1 0.1 ----- ----- ----- ----- ----- Net income....................................... 11.8% 9.5% 6.6% 6.5% 13.3% ===== ===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996 Net Sales. Net sales for the first three months of 1997 increased by $24.6 million, or 29.5%, to $108.1 million from $83.5 million for the same period in 1996. Sales of actuator products increased by $15.8 million to $17.6 million from $1.8 million due to the launch of a new four-wheel-drive actuator product and full production of doorlock actuator products. Full production of doorlock actuators was not reached until approximately November 1996. Sales of power distribution products increased by $4.7 million, or 10.1%, due to increased market penetration in the medium and heavy duty truck market and higher net sales to the agricultural vehicle market of $2.6 million and $2.1 million, respectively. The increase was partially offset by a sales decrease of $1.0 million under contract manufacturing arrangements. Sales of switch products increased by $2.6 million, or 9.8%, reflecting higher production levels in the automotive market. Sales of instrumentation 20 22 and information display products increased by $1.5 million, or 17.1%, due to the introduction of new products for the medium and heavy duty truck market. Cost of Goods Sold. Cost of goods sold for the first three months of 1997 increased by $17.2 million, or 26.5%, to $82.1 million from $64.9 million for the same period in 1996. As a percentage of net sales, cost of goods sold decreased to 76.0% in 1997 from 77.8% in 1996 while the corresponding gross profit margin increased to 24.0% from 22.2% in 1996. The improvement in gross profit margin resulted from increased efficiencies due to the consolidation of two contract manufacturing/power distribution production facilities. Selling, General and Administrative Expenses. SG&A expenses for the first three months of 1997 increased by $0.3 million, or 2.5%, to $12.2 million from $11.9 million for the same period in 1996. As a percentage of net sales, SG&A expenses decreased to 11.3% for the first three months of 1997 from 14.3% for the same period in 1996 reflecting the Company's ability to generate increased net sales in this period without substantial additional administrative overhead. An increase of $0.8 million in SG&A was due to the launch of the actuator product line which included development, marketing and administration costs. In addition, development and design costs of medium and heavy duty truck instrumentation and information display products and power distribution systems were responsible for a $0.8 million increase. These increases were partially offset by a $1.4 million decrease in expenses due to the expiration of the transition services agreement in October 1996. Interest Expense. Interest expense decreased by $0.1 million, or 13.9%, to $0.9 million for the first three months of 1997 from $1.1 million for the same period in 1996. The decrease was due to a reduction in average debt outstanding due to cash generated from operations. Other Income. Other income of $1.7 million for the first three months of 1997 represents a gain on the sale of certain transportation equipment. The Company received cash proceeds of $2.3 million from the sale, which was used to retire a note payable collateralized by such transportation equipment. Income Before Income Taxes. As a result of the foregoing, income before income taxes increased by $9.0 million for the first three months of 1997 to $14.5 million from $5.5 million for the same period in 1996. Provision for Income Taxes. Prior to the Offering, the Company was an S corporation for federal and, where qualified, state income tax purposes. Accordingly, the Company recognized income taxes of $0.1 million for foreign income and state franchise taxes for the first three months of both 1997 and 1996. Had the Company been subject to federal and state income taxes at the corporate level, the Company would have recorded provisions for income taxes of $6.0 million and $2.3 million for the first three months of 1997 and 1996, respectively. Net Income. As a result of the foregoing, net income increased by $9.0 million, or 165.6%, to $14.4 million of the first three months of 1997 from $5.4 million for the same period in 1996. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net Sales. Net sales for 1996 increased by $85.7 million, or 30.8%, to $363.7 million from $278.0 million in 1995. Of this increase, $53.4 million was due to materials purchased for contract manufacturing (previously supplied by the customer) with a division of General Motors. Such increase was partially offset by a 20.3% decline in unit volume, or $13.3 million of net sales. The acquisition of the actuator business in 1995 increased 1996 net sales by approximately $29.5 million. In addition, increased market penetration related to switch products and power distribution products resulted in increased sales of $12.4 million and $8.7 million, respectively. Partially offsetting these increases, net sales of power distribution, instrumentation and information displays product lines decreased by $15.9 million as a result of lower OEM production volumes of medium and heavy duty trucks and a decline in the market share of an automotive OEM customer. Net sales of power distribution products to the agricultural vehicle market increased by $5.6 million. 21 23 Cost of Goods Sold. Cost of goods sold for 1996 increased by $76.4 million, or 36.1%, to $288.1 million from $211.7 million in 1995. As a percentage of net sales, cost of goods sold increased to 79.2% in 1996 from 76.1% in 1995, while the corresponding gross profit margin decreased to 20.8% in 1996 from 23.9% in 1995. The change in the contract manufacturing arrangement with the division of General Motors caused a reduction in gross profit margin of 1.7%. Gross profit was adversely impacted by start-up inefficiencies and $1.0 million of expenses associated with the relocation of switch production to the Company's new Canton, Massachusetts facility. The remaining decrease was related to the decline in volume of instrumentation and information displays and power distribution product lines. Selling, General and Administrative Expenses. SG&A expenses for 1996 increased by $9.2 million, or 24.5%, to $46.7 million from $37.5 million in 1995. As a percentage of net sales, SG&A expenses decreased to 12.8% in 1996 from 13.5% in 1995 because the change in the contract manufacturing arrangement with a division of General Motors had minimal effect on SG&A expenses. The transitional services agreement expense related to the commercial and process engineering support for the relocation of the actuator business increased SG&A expenses by $4.3 million in 1996 compared to $0.9 million in 1995. These costs were incurred from November 1995 to October 1996. Product development and engineering costs increased by $2.6 million, or 39.0%, as a result of costs associated with the launch of power distribution systems and instrument displays for a medium duty vehicle, the launch of the four-wheel-drive and new doorlock actuator products and development costs associated with products to be launched in 1998. Costs associated with marketing and technical resource enhancements to provide improved customer support accounted for $1.4 million of the increase in SG&A expenses. Interest Expense. Interest expense for 1996 increased by $2.3 million, to $4.3 million from $2.0 million in 1995. The increase was due to additional borrowings to finance the acquisition of the actuator products business in November 1995 and the initial investment in Berifors in April 1996. In addition, the average borrowing rate increased to 7.4% in 1996 from 7.0% in 1995. Income Before Income Taxes. As a result of the foregoing, income before income taxes decreased by $2.2 million, or 8.2%, to $24.6 million in 1996 from $26.8 million in 1995. Provision for Income Taxes. Prior to the Offering, the Company was an S corporation for federal and, where qualified, state income tax purposes. Accordingly, the Company recognized provisions for income taxes of $0.5 million and $0.7 million for foreign income and state franchise taxes in 1996 and 1995, respectively. Had the Company been subject to federal and state income taxes at the corporate level, the Company would have recognized provisions for income taxes of approximately $10.3 million and $11.2 million in 1996 and 1995, respectively. Net Income. As a result of the foregoing, net income decreased by $2.1 million, or 8.0%, to $24.1 million in 1996 from $26.2 million in 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Net Sales. Net sales for 1995 increased by $52.5 million, or 23.3%, to $278.0 million from $225.5 million in 1994. Of this increase, $39.1 million was due to the previously discussed changes in the contract manufacturing relationship, which was partially offset by a 30% decline in unit volume, or $11.1 million in net sales, in product shipped under the arrangement. Switch and power distribution product sales increased $28.9 million as a result of new product sales and increased market share of existing products in the automotive and agricultural markets. A reduction in net sales of $0.5 million was due to the phaseout of certain non-core instrumentation and information display products. Cost of Goods Sold. Cost of goods sold for 1995 increased by $46.7 million, or 28.3%, to $211.7 million from $165.0 million in 1994. As a percentage of net sales, cost of goods sold increased to 76.1% in 1995 from 73.1% in 1994, causing the gross profit margin to decrease to 23.9% in 1995 from 26.9% in 1994. The change in the contract manufacturing arrangement with the division of General Motors caused a decrease in gross profit margin of 3.4%. Other items impacting gross profit margin were an unfavorable shift in the sales mix of switch 22 24 products, a favorable shift in the sales mix of power distribution products, and the decline in volume of certain instrumentation and information display products. Selling, General and Administrative Expenses. SG&A expenses for 1995 increased by $5.0 million, or 15.3%, to $37.5 million from $32.5 million in 1994. As a percentage of net sales, SG&A expenses decreased to 13.5% in 1995 from 14.5% in 1994 because the change in the contract manufacturing arrangement previously discussed had minimal effect on SG&A expenses. The overall increase resulted from the expansion of product engineering and design capabilities related to instrumentation and information display products, $0.9 million of transitional services expenses associated with the acquisition of the actuator business in November 1995, and one-time costs associated with quality and engineering initiatives, and higher support costs resulting from the expansion of the Chihuahua, Mexico facility. The closure and sale of a contract manufacturing facility in 1995 increased SG&A expenses by $1.0 million. Interest Expense. Interest expense for 1995 decreased by $0.3 million, or 14.1%, to $2.0 million from $2.3 million in 1994. The decrease was due to a lower average outstanding indebtedness. Income Before Income Taxes. As a result of the foregoing, income before income taxes increased by $1.1 million, or 4.4%, to $26.8 million in 1995 from $25.7 million in 1994. Provision for Income Taxes. Prior to the Offering, the Company was an S corporation for federal and, where qualified, state income tax purposes. Accordingly, the Company recognized income tax provisions of $0.7 million and $0.5 million for foreign income and state franchise taxes in 1995 and 1994, respectively. In addition, the Company recognized income of $1.5 million in 1994 related to the elimination of deferred income taxes for a subsidiary that was previously taxed at the corporate level. Excluding the elimination of deferred income taxes, had the Company been subject to federal and state income taxes at the corporate level, the Company would have recognized provisions for income taxes of approximately $11.2 million and $10.7 million in 1995 and 1994, respectively. Net Income. As a result of the foregoing, net income decreased by $0.5 million, or 1.9%, to $26.2 million in 1995 from $26.7 million in 1994. QUARTERLY INFORMATION The following table presents selected unaudited quarterly results for each quarter of 1995 and 1996 and the first quarter of 1997. The financial data is derived from the unaudited financial statements of the Company which have been prepared by the Company on a basis consistent with the Company's audited financial statements included elsewhere in this Prospectus and, in the opinion of management, include all adjustments 23 25 (consisting of only normal recurring adjustments) necessary for a fair presentation of the Company's results of operations for such periods. These operating results are not necessarily indicative of future performance.
THREE MONTHS ENDED -------------------------------------------------------------------------------------------- 1995 1996 1997 --------------------------------------- --------------------------------------- -------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 -------- ------- -------- ------- -------- ------- -------- ------- -------- (IN MILLIONS) STATEMENT OF OPERATIONS DATA: Net sales................. $ 71.1 $67.8 $ 57.0 $82.1 $ 83.5 $94.4 $ 89.8 $96.1 $108.0 Cost of goods sold........ 51.4 51.1 43.9 65.2 64.9 75.6 71.7 75.9 82.1 ------ ----- ------ ----- ------ ----- ------ ----- Gross profit.............. 19.7 16.7 13.1 16.9 18.6 18.8 18.1 20.2 25.9 SG&A expenses............. 8.3 8.9 8.3 12.0 12.0 12.1 11.8 10.9 12.2 ------ ----- ------ ----- ------ ----- ------ ----- Operating income.......... 11.4 7.8 4.8 4.9 6.6 6.7 6.3 9.3 13.7 Interest expense, net..... 0.5 0.5 0.5 0.5 1.1 0.8 1.0 1.4 0.9 Other expense (income).... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.7) ------ ----- ------ ----- ------ ----- ------ ----- Income before income taxes................... 10.9 7.3 4.3 4.4 5.5 5.9 5.3 7.9 14.5 Provision for income taxes................... 0.0 0.0 0.0 0.7 0.1 0.1 0.2 0.1 0.1 ------ ----- ------ ----- ------ ----- ------ ----- Net income................ $ 10.9 $ 7.3 $ 4.3 $ 3.7 $ 5.4 $ 5.8 $ 5.1 $ 7.8 $ 14.4 ====== ===== ====== ===== ====== ===== ====== ===== STATEMENT OF OPERATIONS DATA AS A PERCENTAGE OF NET SALES: Net sales................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold........ 72.3 75.4 77.0 79.4 77.8 80.1 79.8 79.0 76.0 ------ ----- ------ ----- ------ ----- ------ ----- Gross margin.............. 27.7 24.6 23.0 20.6 22.2 19.9 20.2 21.0 24.0 SG&A expenses............. 11.7 13.1 14.6 14.6 14.3 12.8 13.2 11.3 11.3 ------ ----- ------ ----- ------ ----- ------ ----- Operating income.......... 16.0 11.5 8.4 6.0 7.9 7.1 7.0 9.7 12.7 Interest expense, net..... 0.7 0.7 0.9 0.6 1.3 0.9 1.1 1.5 0.9 Other expense (income).... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.6) ------ ----- ------ ----- ------ ----- ------ ----- Income before income taxes................... 15.3 10.8 7.5 5.4 6.6 6.2 5.9 8.2 13.4 Provision for income taxes................... 0.0 0.0 0.0 0.9 0.1 0.1 0.2 0.1 0.1 ------ ----- ------ ----- ------ ----- ------ ----- Net income................ 15.3% 10.8% 7.5% 4.5% 6.5% 6.1% 5.7% 8.1% 13.3% ====== ===== ====== ===== ====== ===== ====== =====
Substantially all of the Company's sales and earnings are derived from the automotive, medium and heavy duty truck and agricultural vehicle markets. As a result, the Company's financial performance is typically the weakest in the third quarter and, to a lesser extent, the fourth quarter due to the impact of scheduled OEM plant shutdowns and holidays. After the three-month period ending March 31, 1995, gross margin began to decline due to lower sales volume and higher costs related to product launches and the relocation of certain manufacturing operations. Beginning in 1995, the Company's net sales and gross margin were impacted as the Company began to purchase materials used in its contract manufacturing operations. Of the Company's net sales increase in the three months ended December 31, 1995 and the full years 1995 and 1996, $23.6 million, $39.1 million and $53.4 million, respectively, were associated with the cost of these additional materials purchased by the Company. Certain one time items have also impacted the Company's quarterly results of operations. During the three-month period ended December 31, 1995, the Company incurred approximately $1.0 million in expenses in connection with the closing and sale of a contract manufacturing facility. In November 1995, the Company acquired the actuator business of Kelsey-Hayes, which increased SG&A expenses as a result of a transitional services agreement related to the acquisition of Kelsey-Hayes. The Company recognized expenses of $0.9 million and $4.3 million in 1995 and 1996, respectively, in connection with such agreement. Such expenses were incurred from November 1995 to October 1996. Throughout 1996, the Company incurred a total of approximately $1.0 million of expenses in connection with the relocation of switch product manufacturing to Canton, Massachusetts. In the period ended March 31, 1997, the Company recognized a $1.7 million gain on the sale of certain transportation equipment. 24 26 LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of funds have been, and are anticipated to continue to be, cash flow from operations and borrowings under the Company's credit facility. Net cash provided by operating activities was $25.3 million, $29.4 million and $25.5 million, in 1996, 1995, and 1994, respectively. The decrease in cash provided by operating activities in 1996 of $4.1 million compared to 1995 was caused by an increase in working capital and other operating assets of $4.4 million and lower net income of $2.1 million, offset by an increase in depreciation and amortization of $2.0 million and a non-cash charge for compensation expense under the Company's stock option plan of $0.4 million. The increase in working capital was primarily due to increased sales levels of power distribution systems and switch products. In addition, the purchase of the actuator product line did not include working capital associated with the business. As a result, the Company generated working capital to support the sale of these products. The increase in depreciation and amortization in 1996 was the result of a full year of depreciation on the actuator business machinery and equipment. The increase in cash provided by operating activities in 1995 of $3.9 million compared to 1994 was caused by a $1.8 million reduction in working capital and other operating asset requirements, and increases in non-cash operating charges of $2.6 million, partially offset by a decline in net income of $0.5 million. The reduction in working capital requirements was the result of programs designed to reduce inventory levels and correspondingly improve through-put. Increases in non-cash operating expenses were due to two months of depreciation for the actuator business machinery and equipment, increases in depreciation expense associated with switch products, and the elimination in 1994 of deferred income taxes for Alphastac/Pollak. Net cash used by investing activities was $18.1 million, $33.6 million and $6.4 million in 1996, 1995 and 1994, respectively. In 1996, investing activities included capital expenditures of $14.1 million and the investment of $8.8 million in Berifors, partially offset by cash proceeds of $4.8 million from the dispositions of two of the Company's facilities. In 1996, the Company's capital expenditures were primarily related to machinery and equipment for process improvement, the expansion of actuator production, and other capacity expansion. Investing activities in 1995 were comprised of the $18.8 million acquisition of the actuator business and capital expenditures of $14.8 million. In 1995, the Company's capital expenditures included approximately $7.6 million for the new Canton, Massachusetts, facility and the expansion of the Chihuahua, Mexico, facility. The Canton facility was built to support the growth of the Company's switch product business, and the Chihuahua facility was constructed to support growth in the power distribution business. Machinery and equipment purchases of approximately $7.2 million were related to process improvement and, to a lesser extent, new business requirements. In 1994, investing activities included capital expenditures of $9.0 million for machinery and equipment to manufacture new power distribution systems and switch products, offset by $2.6 million of cash proceeds received from the disposition of a contract manufacturing facility. The Company estimates that it will incur approximately $14.0 million of capital expenditures in 1997. These capital expenditures will be used primarily for the purchase of machinery and equipment to support new business awards, as well as to finance continued cost reduction efforts through automation. Net cash used by financing activities was $7.1 million and $18.2 million in 1996 and 1994, respectively, while net cash provided by financing activities was $3.4 million in 1995. Cash distributions were $13.2 million, $15.5 million and $13.6 million in 1996, 1995 and 1994, respectively, and were paid primarily to shareholders to satisfy income tax liabilities resulting from the Company's S corporation status. As a result of the foregoing operating, investing and financing activities, net borrowings increased $5.8 million and $19.0 million in 1996 and 1995, respectively, while net borrowings decreased $4.6 million in 1994. The Company has an $80.0 million revolving credit facility (of which $36.5 million was outstanding as of March 31, 1997), which matures on June 30, 2001. Interest on the revolving credit facility is payable at the Company's option at either prime or LIBOR plus 1.0% to 1.5%. The Company intends to use $ million of the net proceeds from the Combined Offering to repay debt outstanding under the revolving credit facility. The revolving credit facility contains various covenants which require the Company to maintain certain financial ratios, including minimum liquidity, net worth and fixed charge coverage. The Company was in 25 27 compliance with all covenants as of December 31, 1996 and March 31, 1997. The Company has entered into two interest rate swap agreements with notional amounts of $25.0 and $20.0 million. The interest rate swap agreements exchange the variable interest rate on the revolving credit facility for fixed rates. The Company may elect to terminate the interest rate swap agreements in conjunction with the repayment of the revolving credit facility. The Company does not anticipate a significant charge to terminate the interest rate swap agreements. Based on discussions with its principal lender, the Company intends to enter into a new credit agreement and expects that the new credit agreement, which would replace the revolving credit facility, will provide for borrowings of up to $125 million and have scheduled maturity in 2002. The Company anticipates its new credit agreement will generally contain less restrictive covenants and more favorable pricing terms than the current revolving credit facility. To date, no definitive agreements have been executed and no assurance can be given that the new credit agreement will be executed on such terms or entered into at all. The Company believes the net proceeds from the sale of Common Shares in the Combined Offering and funds generated by the Company's operations, together with funds available under the proposed new credit agreement, will provide the Company with sufficient liquidity and capital resources for working capital, capital expenditures and other needs for at least the next 24 months. However, any significant acquisitions for cash may require additional debt or equity financing. INFLATION Management believes that the Company's operations have not been adversely affected by inflation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Concurrent with the Offering, the Company will be treated as a C corporation for federal and state income tax purposes. Following termination of its status as an S corporation, the Company will be subject to federal and state income taxation on United States income. All pro forma income tax data have been calculated utilizing the provisions of Statement of Financial Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes." In accordance with SFAS 109, net deferred tax liabilities of $1.8 million will be recorded with an offsetting charge to net income. This one-time charge will be recorded as income tax expense in the third quarter of 1997. The Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in 1996. SFAS 121 requires long-lived assets and certain identifiable intangible assets to be reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of this standard did not have a significant impact on the financial condition and operating results of the Company. SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, a fair value-based method of accounting for employee stock options, the sale of stock under employee stock purchase plans or similar equity instruments. The Company has elected to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" as was previously required, and to comply, to the extent applicable, with pro forma disclosure of net income and earnings per share as if the fair value-based method of accounting had been applied. 26 28 BUSINESS OVERVIEW Stoneridge is a leading independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium and heavy duty truck and agricultural vehicle markets. The Company's products interface with a vehicle's mechanical and electrical systems to activate equipment and accessories, display and monitor vehicle performance, and control and distribute electrical power and signals. The Company has a leading market position in the design and manufacture of electrical and electronic modules and systems for the medium and heavy duty truck and agricultural vehicle markets. In the automotive market, the Company designs and manufactures specially designed and engineered electrical and electronic components and modules, typically on a sole-source basis. The Company's engineers and designers work closely with customers to design, develop and manufacture components, modules and systems to address specific vehicle requirements. The Company has long-standing relationships with its major customers, including General Motors (since 1950), Ford (since 1919), Deere & Company (since 1965) and Navistar International Corp. (since 1973). Approximately 72% of the Company's 1996 net sales were derived from the automotive market and approximately 27% were derived from the medium and heavy duty truck and agricultural vehicle markets. The Company's net sales were $363.7 million in the year ended December 31, 1996 and $108.1 million for the three-month period ended March 31, 1997. The Company's four principal product categories are: - Power Distribution Products. The Company designs and manufactures electrical power and signal distribution components, modules and systems, including fully integrated automotive and truck wiring systems and highly engineered products, such as power distribution panels, for the automotive, medium and heavy duty truck and agricultural vehicle markets. Power distribution systems coordinate and direct the operation of the entire electrical system within a vehicle or compartment. A significant portion of the Company's current power distribution business consists of contract manufacturing of wire harnesses for a division of General Motors (see "Business -- Contract Manufacturing"). - Switch Products. The Company designs and manufactures integrated electronic and electromechanical switch products which include hidden switches and customer-activated switches. These switches transmit a signal to a control device which activates specific functions. Hidden switches are those switches which are not typically seen by vehicle passengers but are utilized to activate selected functions such as brake lights, cruise control functions and electronic safety features related to air bag and anti-lock braking systems. Customer-activated switches are used by a vehicle's operator or passengers to manually activate headlights, rear defrosters, heated seats and other accessories. The Company sells these products principally to the automotive market. - Instrumentation and Information Display Products. The Company designs and manufactures electronic instrument clusters, driver message centers, power conversion products, multiplexed modules and electrical systems and electronic switch modules. These products collect, store and display vehicle information such as speed, pressure, maintenance data, trip information, operator performance, temperature, distance traveled, and driver messages related to vehicle performance. These products utilize state-of-the-art hardware, software and multiplexing technology and are sold principally to the medium and heavy duty truck and agricultural vehicle markets. - Actuator Products. The Company designs and manufactures electromechanical actuator products. These products enable users to deploy power functions in a vehicle and can be designed to integrate switching and control functions. These products include power door lock and four-wheel-drive actuators and are sold principally to the automotive market. These four product categories accounted for 52%, 29%, 11% and 8% of the Company's 1996 net sales, respectively, and 47%, 27%, 10% and 16% of first quarter 1997 net sales, respectively. The Company believes that it holds the number one or two market position in products which include (i) power and signal distribution systems for the North American agricultural market and (ii) driver instrumentation and information display systems for the worldwide medium and heavy duty truck markets. In the automotive market, where the Company focuses on component and module design and manufacturing, the 27 29 Company believes it is the largest manufacturer of pedal assembly, chassis and door-mounted hidden switches in North America and Europe. In addition to the Company's leading market positions, it is typically the sole supplier of products designed, developed and manufactured by the Company for specific vehicle platforms. CONTRACT MANUFACTURING The Company was formed in 1965 as a manufacturer of wire harnesses for the agricultural vehicle market. Following an expansion in 1977 into the automotive market, sales increased from approximately $1.6 million in 1976 to $105.4 million in 1987, with approximately 90% of the Company's 1987 sales being derived from the Company's contract manufacturing arrangement with a division of General Motors. Initially under the contract manufacturing arrangement, the Company supplied facilities and labor required to assemble wire harnesses to the specifications of, and from raw materials supplied by, the division of General Motors. In mid-1994, the division of General Motors requested that the Company begin purchasing the materials used in the production of wire harnesses. Of the Company's 1995 and 1996 net sales, $39.1 million and $53.4 million, respectively, were associated with the cost of these additional materials purchased by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." The Company was notified in 1995 that as General Motors' vehicle electrical systems are redesigned, the General Motors division intended to in-source all of its wire harness needs. The Company believes that by 1999 this General Motors division will in-source substantially all wire harness requirements previously supplied by the Company. However, no assurance can be given that net sales to the General Motors division will not end at an earlier date. The volume of wire harnesses produced by the Company for the General Motors division has declined each year since 1987. Three Company facilities previously utilized solely for contract manufacturing have been closed and the properties sold. In addition, one of the Company's facilities in Mexico has been transitioned from a contract manufacturing to a full-service facility. Currently, only one of the Company's facilities remains dedicated to contract manufacturing. See "The Company." INDUSTRY TRENDS The Company's performance and growth are related to certain trends within the automotive and medium and heavy duty truck markets, including the consolidation of the component supply industry, the increase in global sourcing and the increase in vehicle electronic content. Supplier Consolidation and Focus on System and Module Sourcing. The OEM supply industry has been experiencing significant consolidation as OEMs, in seeking to lower costs and improve quality, are increasingly purchasing complete systems and modules rather than separate component parts. As a result, OEMs have been actively reducing their supplier base and are more frequently awarding long-term, sole-source supply arrangements to suppliers which offer broad product lines, higher value-added products, system and module product capability, low costs and reliable service. The Company believes this trend will continue for the foreseeable future and should provide the Company with opportunities, based on its competitive strengths, to further expand its customer base and increase its market penetration with current customers. Global Sourcing. Regions such as Asia, Latin America, and Eastern Europe are expected to experience significant growth in vehicle demand over the next several years. Many OEMs are planning to increase their sales in emerging markets in a cost-effective manner by developing vehicles which can be designed in one vehicle center to a single global standard but produced and sold in several geographic markets, thereby allowing OEMs to reduce design costs, take advantage of low-cost manufacturing locations and improve product quality and consistency. As a result, OEMs increasingly are requiring their key suppliers to have the capability to manufacture in multiple geographic markets. Increasing Vehicle Electronic Content. OEMs of automobiles, medium and heavy duty trucks, and agricultural vehicles, are increasingly incorporating more electronic components, such as driver information displays, instrumentation, safety systems and comfort features, into their products. Increased utilization of systems and features on vehicles causes greater utilization of the products designed and manufactured by the Company. 28 30 According to a report by The Economist Intelligence Unit, average electrical and electronic content per vehicle is expected to increase from $863 in 1995 to $1,230 in 2000. COMPETITIVE ADVANTAGES Management believes that the Company's growth and financial performance are the result of certain competitive advantages the Company has attained in the markets it serves. These competitive advantages are derived from a bundling of several technical and commercial capabilities including the following. PRODUCT AND PROCESS DESIGN CAPABILITY The Company's wide range of products and its engineering expertise in electrical and electronic architecture enable the Company to create integrated engineered solutions to satisfy OEMs' specific application needs. To deliver cost-effective solutions for OEMs, the Company deploys multifunctional teams which include design and process engineers, program management specialists and quality, procurement and marketing personnel. Such teams ensure that products meet customer needs and can be manufactured cost-effectively in a just-in-time environment. Combined product and process designs enable the Company to maintain a lean manufacturing environment which minimizes cost and optimizes reliability while reducing warranty and service costs over the intended product life. The Company has recently upgraded its CAD/CAM systems, including three-dimensional color graphics, and the ability to interface with customer CAD systems. Using computer-aided design, and flexible manufacturing and multifunctional teams, the Company can cost-effectively manufacture products in both high and low volume environments depending on a given customer's specific needs. To ensure quality, all products are fully tested both electronically and functionally. The Company emphasizes Total Quality Management to continuously reduce costs, improve quality and eliminate non-value-added elements of the manufacturing process. ALIGNMENT WITH CUSTOMERS AND SUPPLIERS The Company works with OEMs and provides full-service support capabilities to its customers throughout the product development process from concept design through the design and implementation of the manufacturing processes. All facilities utilize electronic data interchange (EDI) of commercial and engineering data. In addition, Company applications engineers work on-site at major customers' design centers. The Company also works closely with its major suppliers to ensure compatible component design, quality, low-cost production, and simultaneous exchange of production data. These alignments and the Company's dedication to customer service have resulted in long-term relationships with the Company's primary customers and suppliers. INTERNATIONAL PRESENCE With the investment in Berifors, the Company has increased its international presence. The Company operates manufacturing facilities in the United States, Mexico and Sweden and maintains sales engineering offices in the United States, United Kingdom, Germany and Brazil. These facilities and the Berifors acquisition allow the Company to increasingly provide a global sourcing capability to its customers. For example, the Company was recently awarded a multiyear contract to provide instrument panel systems for Volvo in Europe, the United States and Brazil. The Company believes that it would not have been awarded this contract had it not been for the Company's presence in each of these markets. The Company continues to pursue strategic alliances, joint ventures and acquisitions throughout the world. See "-- Growth Strategy -- Expand Penetration of International Markets." LEAN MANUFACTURING To enhance manufacturing effectiveness, the Company has adopted lean manufacturing initiatives, including cost-effective automation, semiautomated cell manufacturing where appropriate, Total Quality Management and continuous improvement. These efforts throughout the Company have resulted in enhanced productivity and product quality and reduced inventory costs. Manufacturing flexibility enables the Company's 29 31 facilities to produce high or low volume components, modules and systems in a cost-effective manner and strengthens the Company's ability to meet the just-in-time and in-line sequence delivery schedules of many of its customers. GROWTH STRATEGY The Company seeks to grow primarily by leveraging its strong market positions and technical and manufacturing capabilities to provide highly engineered electrical and electronic components, modules and systems to the selected segments of the markets it serves. To achieve this goal the Company intends to: (i) focus on higher value-added systems and modules, (ii) expand new product development to increase vehicle platform penetration, (iii) expand penetration of international markets, and (iv) pursue strategic acquisitions and alliances. FOCUS ON HIGHER VALUE-ADDED SYSTEMS AND MODULES OEMs are increasingly seeking suppliers capable of manufacturing complete modules and systems for a vehicle rather than suppliers that produce only the component parts which comprise a module or system. Systems manufacturing offers OEMs the opportunity for significant cost savings and improved product quality and consistency. By capitalizing on the Company's existing product portfolio and through the combination of multifunctional electrical and electronic products, the Company intends to continue to expand its capabilities to provide additional integrated modules and systems. EXPAND NEW PRODUCT DEVELOPMENT TO INCREASE VEHICLE PLATFORM PENETRATION In order to increase its vehicle platform penetration, the Company has invested, and intends to continue to invest, significant amounts in its technology and design capabilities. The Company's research and development expenditures were $9.3 million, or 3.6%, of non-contract manufacturing sales in 1996. These development efforts have strengthened the Company's ability to provide higher value-added products and systems, and have resulted in the introduction of new products such as the four-wheel-drive actuator (shift on demand) and the auto-stick (which enables a driver to manually shift an automatic transmission using a unique electronic switch). The Company's technical centers in Massachusetts, Michigan, Ohio, Mexico and Sweden develop and test both new and existing products and concepts. In addition, through its advanced technologies group comprised of dedicated engineers, the Company concentrates on the development of its next generation of products. To further increase vehicle platform penetration, the Company has developed collaborative relationships with the design and engineering departments of its key OEM customers. These collaborative efforts have resulted both in the development of new and complementary products and the enhancement of existing products. EXPAND PENETRATION OF INTERNATIONAL MARKETS In 1996, approximately two-thirds of total worldwide vehicle production occurred outside North America. To meet OEMs' increasing preference for suppliers with global capabilities, the Company expects to expand its manufacturing operations into new geographic markets and pursue strategic acquisitions and alliances. Consistent with this strategy, the Company believes the Berifors acquisition will expand its ability to serve its customers in Europe. The Company has a technology transfer and marketing agreement with the switch division of Labinal, a leading European automotive supplier, and Berifors has a technology agreement with Kansei Corporation, a leading Japanese automotive instrumentation company. The Company also believes that increased international sales will allow the Company to mitigate the effects of cyclical downturns in a given geographic region and further diversify the Company's OEM customer base. PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES Strategic acquisitions and alliances have been, and the Company believes will continue to be, an important element in the Company's growth worldwide and in its efforts to capitalize on trends in the Company's markets. The Company has demonstrated the ability to successfully integrate and operate acquired 30 32 companies through structured business planning, focused product development, improved operating efficiency and the implementation of merit-based reward systems. Many of the markets in which the Company competes are highly fragmented, and the Company believes that numerous potential acquisitions and alliance opportunities are available and may permit the Company to (i) complement its range of product offerings, (ii) enhance its ability to supply existing products internationally, and (iii) broaden its ability to offer integrated systems to its customers in the heavy duty truck and agricultural vehicle markets. The Company also seeks to align itself with regional and international suppliers who offer complementary product lines in order to achieve efficiencies in research and development and capital investment, as well as enhanced systems capabilities. PRODUCTS The Company's products include vehicle electrical power and distribution systems, electronic and electrical switch products, electronic instrumentation and information display products, including European instrumentation and information display products manufactured by Berifors, and actuator products. The following table sets forth the approximate composition by product group represented by a percentage of the Company's net sales for the three fiscal years ended December 31, 1994, 1995, and 1996 and the three months ended March 31, 1996 and 1997:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------ ------------------------------ (ACTUAL) (PRO FORMA)(1) (ACTUAL) (PRO FORMA)(1) -------------------------- -------------- ------------- -------------- PRODUCT CATEGORY 1994 1995 1996 1996 1996 1997 1997 - ----------------------------------------- ---- ---- -------- -------------- ---- ---- -------------- Power Distribution Systems: Contract Manufacturing (GM)............ 17% 23% 29% 26% 29% 22% 20% Other Power Distribution Systems....... 29 28 23 21 26 25 23 Switch Products.......................... 33 33 29 27 32 27 25 Instrumentation and Information Display Products North America and other.............. 21 16 11 10 11 10 9 Europe............................... -- -- -- 9 -- -- 8 Actuator Products........................ -- -- 8 7 2 16 15 --- --- ------ --------- --- --- --------- Total.................................. 100% 100% 100% 100% 100% 100% 100% === === ====== ========= === === =========
- --------------- (1) Gives pro forma effect to the Berifors acquisition as if it had occurred on January 1, 1996. See "The Company." POWER DISTRIBUTION SYSTEMS Power distribution systems coordinate and direct the operations of the entire electrical system within a vehicle or compartment. The Company designs and manufactures integrated power distribution systems and modular assemblies. The Company has the ability to design the entire electrical system within a vehicle and to manufacture the system using a wide range of component parts purchased from qualified suppliers. Power distribution systems incorporate wiring, circuit protectors, connection components and terminals for a wide variety of vehicles and applications. Such systems are highly complex and are essential to the regulation, distribution, and delivery of appropriate amounts of power to perform all electrical and electronic functions within a vehicle, including audio, power train (including engine and transmission systems), lighting, navigational, safety and instrumentation systems. Power distribution systems contain fuses, circuit breakers and relays and are responsible for the regulation and distribution of electrical power throughout a vehicle. Specifically, power is channeled from the vehicle's electrical power source and routed in appropriate amounts to all vehicle electrical activities such as ignition, lighting, information displays, and brakes, power windows and locks, and refrigeration systems. 31 33 The Company's modular assemblies combine numerous electrical components integrated into cost-effective modular designs that can be readily installed into a vehicle. For example, the Company manufactures integrated armrest control centers that incorporate a power distribution system, switches to operate power accessories, wiring between the power source and the switches, connectors and the associated plastic cabinetry. Other fully integrated power distribution modules produced by the Company include instrument panels, seat assemblies and refrigeration control centers. SWITCH PRODUCTS The Company designs and manufactures integrated electronic and electromechanical switch products which include hidden switches and customer-activated switches. These switches transmit a signal to a control device which activates specific functions. The Company believes it is the largest supplier of pedal assembly, chassis and door mounted hidden switches used in vehicle production in North America and Europe. Hidden switches are those switches which are not typically seen by vehicle passengers but are utilized to activate selected functions such as activating brake lights, cruise control functions, electronic safety features related to air bag and anti-lock braking systems, and power train functions. Customer-activated switches are used by a vehicle's passenger to manually activate headlights, rear defrosters, heated seats and other accessories. Such switches require a high level of engineering and durability, given their frequent and consistent use. Customer- activated switches are manually controlled by a vehicle operator or passenger and are typically located in the passenger compartment of the vehicle. The Company produces switches that activate headlights, rear defrosters, heated seats, and other accessories. The Company's switches are frequently combined with other electrical and electronic products of the Company to create integrated modules or systems. INSTRUMENTATION AND INFORMATION DISPLAY PRODUCTS Utilizing state-of-the-art hardware, software and multiplexing technology, the Company designs and manufactures electronic instrument clusters, driver message centers, power conversion products, multiplexed modules and electrical systems and electronic switch modules. These products collect, store and display vehicle information, such as speed, pressure, maintenance data, trip information, operator performance, temperature, distance traveled, and driver messages related to vehicle performance. Electronic instrument clusters collect diagnostic information from sensors and electronic control units (engine, transmission and ABS) located throughout a vehicle. This information is processed by microprocessors and displayed with analog pointers, liquid crystal, vacuum fluorescent and electroluminescent displays. Driver message centers obtain and manipulate data from various sensors and controllers within a vehicle and display information in multilingual text format using liquid crystal, vacuum fluorescent and electroluminescent technology. Power conversion products for instrumentation and lighting convert 12-volt DC battery power to the DC and AC voltages needed to power displays effectively and with consistent brightness. Multiplexed modules are designed to be used in vehicle doors, engine brake control systems, vehicle instrumentation modules and systems and other electronic products within a vehicle. Multiplexing is a method of transmitting several sets of data in sequence along the same wire or cable to an electronic switch module which processes and distributes multiple pieces of information to appropriate destinations within a vehicle. The multiplexing process reduces the amount of wiring and sensors a vehicle must have thereby reducing overall vehicle cost. ACTUATOR PRODUCTS The Company designs and manufactures electromechanical actuator products. These products enable users to deploy power functions in a vehicle and can be designed to integrate switching and control functions. These products include power doorlock and four-wheel-drive actuators. Often operating in harsh environments, these components must be waterproof and temperature tolerant. Actuators are often designed to incorporate switching and electronic control functions, thereby increasing the value to the customer and, in most cases, reducing function cost and increasing reliability. The primary product designs couple power motors with custom-engineered mechanical gears to generate specific levels of torque, mechanical motion, response time and sound. Electromechanical actuators can be designed to incorporate logic switching and 32 34 electronic functions within the actuator itself, thereby minimizing the number of discrete components necessary to meet a customer's specific application requirements. A power doorlock actuator utilizes a fractional horsepower-motor, a compact gear train and an inertial clutch device to lock or unlock a vehicle's doors. The Company's four-wheel-drive actuator, when activated by a switch signal from the driver, enables "on-the-fly" shifting into and out of four-wheel-drive. CUSTOMERS AND SALES The Company sells its products principally to OEMs in the automotive, medium and heavy duty truck, agricultural vehicle and other vehicle markets. The Company's largest customers are General Motors, Ford and Deere. The following is a summary of the Company's customers that accounted for at least 2% of the Company's net sales in the past three years and pro forma for the year ended 1996, assuming Berifors was acquired by the Company on January 1, 1996.
YEAR ENDED DECEMBER 31, ---------------------------------------- ACTUAL PRO FORMA ------------------------- ---------- CUSTOMER 1994 1995 1996 1996(1) - -------------------------------------------------------- ----- ----- ----- ---------- General Motors (contract manufacturing)................. 16.6% 23.5% 28.9% 26.4% General Motors.......................................... 13.4 12.1 10.2 9.3 Ford.................................................... 13.3 12.6 18.4 16.8 Deere................................................... 10.3 10.6 9.6 8.8 Navistar................................................ 8.7 7.5 5.4 4.9 Volvo................................................... 6.8 6.1 3.0 5.2 Chrysler................................................ 2.6 3.4 4.1 3.8 Bosch................................................... 1.6 1.6 2.6 2.4 Carrier................................................. 3.7 3.0 2.4 2.2 Freightliner............................................ 1.2 1.0 2.0 1.8 ITT Automotive.......................................... 1.9 2.6 1.6 1.4 Ericsson................................................ 0.0 0.0 0.0 3.0 Other................................................... 19.9 16.0 11.8 14.0 ---- ---- ---- ---- Total................................................. 100.0% 100.0% 100.0% 100.0% ==== ==== ==== ====
- --------------- (1) Gives pro forma effect to the completion of the Berifors acquisition as if it had occurred on January 1, 1996 as described in "The Company." The Company is typically awarded contracts for particular vehicle models and model renewals with terms ranging from one to seven years. On platforms served, the Company believes it supplies significantly all of its products on a sole-sourced basis. Contracts do not generally require minimum purchases and certain contracts are subject to annual renewal. The Company sells to its customers principally through integrated customer-focused teams that typically consist of an account manager and several applications engineers. Account managers have overall responsibility for specific client relationships and work with applications engineers to provide customers with highly specialized technical service during the design and product development stages, as well as subsequent program management during the life of particular vehicle models. Applications engineers have specialized expertise in one or more of the Company's major product groups and work directly with customers to address specific customer product needs through component, module or system customization or the design of entirely new products. The Company operates six dedicated sales offices near major customers in Chicago, Detroit, Portland, Oregon, Frankfurt, Sao Paulo and Stockholm. The Company believes that by locating sales and technical offices close to its customers' operations, it is better able to develop collaborative relationships with its customers. As of June 30, 1997, the Company (excluding Berifors) employed 57 persons in its sales and marketing departments. 33 35 The following table presents an overview of the major vehicle models for which the Company (excluding Berifors) produced components, modules or systems in 1997:
AUTOMOTIVE MEDIUM AND HEAVY DUTY TRUCK & AGRICULTURAL - ---------------------------------- ------------------------------------------ CHRYSLER: Taurus DEERE Breeze Thunderbird Combine (Models -- 93-96) Caravan Town Car Four-Wheel Drive (Series Cherokee Tracer 9000) Concorde Villager MR Tractor (Series 7000) Dakota Windstar Scimitar (Series 8000) Dodge N-Truck Intrepid GM: FREIGHTLINER: Neon Astro Class 5, 6, 7 (medium duty) Ram Aurora Class 8 (heavy duty) Sebring Bonneville Stratus C/K Pickup MACK TRUCK: T-300 Utility Camaro Class 8 (heavy duty) Viper Cavalier Vision Delta 88 MERCEDES BENZ Voyager Firebird BRAZIL & MEXICO: Wrangler Grand Am Class 5, 6 (medium duty) Grand Prix FORD: LeSabre NAVISTAR: Bronco Park Avenue Class 5, 6, 7 (bus/medium Continental S-10 duty) Cougar Safari Class 8 (heavy duty) Crown Victoria Seville STS/SLS Econoline Skylark PACCAR Escort Sportvan Class 8 (heavy duty) Expedition Suburban Explorer Sunfire VOLVO TRUCK CORPORATION: F-Series Tahoe Class 7, 8 (heavy duty) Pickup Yukon Grand Marquis Mark VIII MAZDA: Mountaineer B2000 Mustang Quest Navigator Ranger Sable
DESIGN AND ENGINEERING The Company believes that engineering expertise and new product development are key factors in successfully obtaining new business and in maintaining strong relationships with existing customers. The Company's formal program management activities utilize customer-dedicated teams, which have full design, development, test and commercial responsibilities under the operational control of a single manager. Each new product program is monitored for cost, timing, and quality until it is successfully launched and in production. The Company's advanced technology group explores and develops next-generation technology. The Company operates technical centers in Boston and Canton, Massachusetts, Warren, Ohio, Ciudad Juarez, Mexico, and Stockholm, Sweden. These technical centers are responsible for the product design and manufacturing process. The Company's CAD systems are capable of sharing data with the Company's customers' systems and allow the Company to improve the function, fit and performance of its products within 34 36 vehicles. The Company also utilizes CAD links with its manufacturing facilities to maintain and enhance a cost-effective synchronous design and manufacturing capability. MANUFACTURING The Company seeks to design, implement and operate manufacturing processes and techniques that allow the Company to produce high quality products in a cost-effective and timely manner. Utilizing computer-aided design and flexible manufacturing techniques, the Company cost effectively produces high quality products in both high and low volume manufacturing environments depending on a given customer's needs. In addition, the Company has the capability to manufacture a broad range of products from relatively simple components to highly engineered complete modules and systems. A majority of the Company's manufacturing facilities are ISO 9000 and QS 9000 certified and the Company expects the remainder of its facilities will be certified by December 31, 1997. Power distribution systems are manufactured using a several-step process. Initially, different diameters of wire are processed and cut to a specified length using an automated system, and components such as terminals, connectors and seals are attached as appropriate. The second stage of the manufacturing process entails sonic welding, molding and the sub-assembly of complex circuits. Depending on the nature of the power distribution system being produced, the third stage of manufacturing entails attaching components such as clips, clamps, coverings, fuses, relays, circuit breakers, diodes, capacitors and other devices, including subassemblies, as required by the customer to complete the power distribution system. Final assembly takes place either on a stationary board or a paced conveyor system, depending on the volume of a given product being produced and its complexity. Where cost-effective, the Company incorporates automated manufacturing techniques. All final products are fully tested, both electronically and functionally, to ensure quality of all components. The Company manufactures power distribution systems in approximately 12 vehicle compartment families such as audio, power train (including engine and transmission systems), lighting, navigational systems and instrumentation systems and other categories. Once completed, the power distribution system coordinates and directs the operation of the entire electrical system within a vehicle or compartment. The Company produces switches and actuators utilizing various manufacturing processes depending on the product volume and design complexity needed by a customer. For high volume products, the Company typically utilizes synchronous palletized conveyors with pick-and-place assembly automation which eliminates direct assembly labor and improves quality. This automated assembly process includes 100% computer-controlled quality and consistency verification gates that check each step of the manufacturing process and test the finished product to assure conformance with customer specifications. Lower volume switch and actuator products use semiautomated assembly cells supplemented with manual labor when automation of such manufacturing processes is less cost-effective. Both semi and fully automated assembly processes utilize various fastening techniques such as ultrasonic welding, riveting, staking or brackening to complete the product assembly process. The Company's switch and actuator products incorporate approximately 6 to 50 separate components, depending on the complexity of the product being produced. Such components are typically purchased from outside vendors. The Company currently manufactures approximately 2000 switch and 50 actuator end products. The manufacturing of instrumentation and information displays entails using through-hole and surface mount technology to mount electronic components into printed circuit boards. These boards are scanned with infrared light to adhere such components to the board in a desired configuration. Connectors, transformers and other larger components are subsequently incorporated into the printed circuit boards manually. Once all additional components have been added, each board is wave-soldered to provide the necessary electrical connections. The final printed circuit board is attached to an instrument cluster or display housing. Additional components such as pointers, light pipes, movements and stepped motors are assembled onto a gauge and then calibrated for accuracy. Gauge lenses, rear shields and labels are added, in line sequence as appropriate, to the instrument cluster and information displays and the completed module or system is tested using computer-based automatic vision testing to ensure performance to customer specifications. The Company's flexible manufacturing capabilites facilitates just-in-time and in-line-sequences delivery schedules for many of its 35 37 customers. The Company manufactures approximately 150 different instrumentation and information display modules and systems or variations of such systems. MARKETS AND COMPETITION Markets in which the Company competes are highly competitive. The Company competes primarily based on quality, service, price, timely delivery and technological innovation. The Company's competitors include divisions of certain OEM customers and independent manufacturers of wire harnesses, actuators, switches and other products. Many of the Company's principal competitors are larger and have greater financial and other resources than the Company. There can be no assurance that competitors will not be able to take actions, including developing new technology or products or offering prolonged reduced pricing, which could adversely affect the Company. The Company competes for new business both at the beginning of the development of new models and upon the redesign of existing models. New model development generally begins two to five years before the marketing of such models to the public. Once a supplier has been selected to provide parts for a new program, an OEM usually will continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns. PRODUCTION MATERIALS The principal production materials used in the Company's manufacturing processes include wire, cable, plastic housings, and certain electrical components such as fuses, relays, and connectors. The Company generally purchases such materials subject to annual contracts. Such materials are readily available from multiple sources, but the Company generally establishes collaborative relationships with a qualified supplier for each of its key production materials in order to lower costs and enhance service and quality. PATENTS AND INTELLECTUAL PROPERTY The Company maintains and has pending various U.S. and foreign patents and other rights to intellectual property relating to its business, which it believes are appropriate to protect the Company's interests in existing products, new inventions, manufacturing processes and product developments. The Company does not believe any single patent is material to its business, nor would the expiration or invalidity of any patent have a material adverse effect on its business or its ability to compete. The Company is not currently engaged in any infringement litigation, nor are there any claims pending by or against the Company. 36 38 PROPERTIES The Company currently owns or leases nine manufacturing facilities, which together contain approximately one million square feet of manufacturing space. The following table provides information regarding the Company's facilities:
OWNED/ SQUARE LOCATION USE LEASED STATUS FOOTAGE - ------------------------------ -------------------------------------- ------------- ------- Arlington Heights, Illinois Sales/Engineering Office Leased 1,000 Boston, Massachusetts Division Office & Manufacturing; Actuator Products Owned 166,100 Canton, Massachusetts Division Office & Manufacturing; Switch Products Owned 126,500 Cortland, Ohio Engineering Office Leased 11,400 El Paso, Texas Office/Warehouse; Instrument and Information Display Products Owned 22,400 Greenwood, South Carolina(1) Manufacturing; Power Distribution Products Leased 56,000 Kent, Ohio Manufacturing; Power Distribution Products Owned 70,000 Mebane, North Carolina Manufacturing; Power Distribution Products Leased 51,000 Northhampton, Massachusetts Sales/Engineering Office Leased 200 Orwell, Ohio Manufacturing; Power Distribution Products Owned 72,000 Portland, Indiana Manufacturing; Power Distribution Products Owned 196,000 Southfield, Michigan Sales/Engineering Office Leased 4,200 Warren, Ohio Corporate Office Owned 7,500 Warren, Ohio Division Office Leased 15,300 Chihuahua, Mexico Manufacturing; Power Distribution Products Owned 133,000 Eschborn, Germany Sales/Engineering Office Leased 100 Juarez, Mexico Manufacturing; Instrument and Information Display Products Owned 178,000 Sao Paulo, Brazil Sales/Engineering Office Leased 200
- --------------- (1) Plant idled in first quarter of 1997. EMPLOYEES As of June 30, 1997, the Company had about 3,800 employees, approximately 1,000 of whom were salaried and the balance of whom were paid on an hourly basis. Except for certain employees located in Chihuahua, Mexico, and Orebro and Stockholm, Sweden, the Company's employees are not represented by a union. The Company believes that its relations with its employees are excellent. The Company believes strongly in employee education and sponsors a number of educational opportunities and programs for its employees. ENVIRONMENTAL MATTERS Under various federal, state and local laws, ordinances, and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in the property. This liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. Furthermore, a person that arranges for the disposal of a hazardous substance at another property or transports a hazardous substance for disposal or treatment at another property may be liable for the costs of removal or remediation of hazardous substances at that property, regardless of whether the person owns or operates that property. The costs of any such remediation or removal may be substantial, and the presence of any such substance, or the failure promptly to remediate any such substance, may adversely affect the property owner's ability to sell or lease the property or to borrow using it as collateral. Other federal, state and local laws, ordinances and regulations require abatement or removal of certain asbestos-containing materials, impose certain worker protection and 37 39 notification requirements, and govern emissions of and exposure to asbestos fibers in the air. Other federal, state and local laws, ordinances, and regulations and the common law impose on owners and operators certain requirements regarding conditions and activities that may affect human health or the environment. These conditions and activities include, for example, the presence of lead in drinking water, the presence of lead-containing paint in occupied structures, and the ownership or operation of underground storage tanks. Failure to comply with applicable requirements could result in difficulty in the lease or sale of any affected property or the imposition of monetary penalties, in addition to the costs required to achieve compliance and potential liability to third parties. The Company may be potentially liable for such costs or claims in connection with the ownership or operation of its properties. The Company believes it conducts all its operations in compliance in all material respects with the applicable environmental and occupational health and safety laws. As is the case with manufacturers in general, if a release of hazardous substances occurs on or from the Company's properties or at any associated off-site disposal location, if contamination from prior activities is discovered at any of the Company's properties, or if noncompliance with environmental regulations or permits is discovered, the Company may be held liable and the amount of such liability could be material. The Company regularly conducts an environmental assessment consistent with recognized standards of due diligence on properties and businesses which it acquires. To date, these assessments have not identified contamination in respect to acquired properties that would be reasonably likely to result in a material adverse effect on the Company's business, results of operations, or financial condition. As a general rule, the Company intends to use such assessments as part of the evaluation of proposed acquisitions. However, there can be no assurance that environmental assessments have identified, or will in the future identify, all material liabilities relating to the Company's properties and businesses, that any indemnification agreements that can be negotiated will cover all potential liabilities, or that changes in cleanup requirements or subsequent events at the Company's properties or at off-site locations will not result in significant costs to the Company. LITIGATION The Company has no pending litigation which it believes will have a material adverse impact upon the Company. The Company is subject to the risk of exposure to product liability claims in the event that the failure of any of its products causes personal injury or death to users of the Company's products, and there can be no assurance that the Company will not experience any material product liability losses in the future. In addition, if any of the Company's products prove to be defective, the Company may be required to participate in a government-imposed or OEM-instituted recall involving such products. The Company maintains insurance against such liability claims. 38 40 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning the directors and executive officers of the Company. The directors named below have been elected to serve until the next annual meeting of shareholders or until their successors are duly elected and qualified. Executive officers of the Company serve at the pleasure of the Board of Directors.
NAME AGE POSITION - ------------------------------ --- ------------------------------------------------------ D.M. Draime 64 Chairman of the Board of Directors, Assistant Secretary and Director Cloyd J. Abruzzo 47 President, Chief Executive Officer, Assistant Treasurer and Director Kevin P. Bagby 46 Chief Financial Officer and Treasurer Sten Forseke 38 Vice President of the Company and Managing Director of Berifors(1) Gerald V. Pisani 57 Vice President of the Company and President of Pollak Engineered Products Division David L. Thomas 48 Vice President of the Company and President of Alphabet Division Avery S. Cohen 60 Secretary and Director Richard E. Cheney 76 Director Sheldon J. Epstein 59 Director Earl L. Linehan 56 Director
- --------------- (1) Effective upon the acquisiton of Berifors as described under "The Company." D.M. Draime, founder of the Company, has served as Chairman of the Board of Directors of the Company and its predecessors since 1965 and as a director of the Company since 1988. Cloyd J. Abruzzo has served as President and Chief Executive Officer of the Company or its predecessors since June 1993 and as a director of the Company since 1993. From 1984 to June 1993, Mr. Abruzzo was the Vice President and Chief Financial Officer of the Company or its predecessor. Mr. Abruzzo serves as a director of Second National Bank of Warren. Kevin P. Bagby has served as Vice President and Chief Financial Officer since joining the Company in July 1995. Mr. Bagby was employed by Kelsey-Hayes as Director of Business Analysis from June 1994 to July 1995 and as Director of Finance for the Foundation Brakes Business Unit from January 1991 to June 1994. Sten Forseke has served as the co-founder and Managing Director of Berifors since 1988. Gerald V. Pisani has served as Vice President of the Company since 1989 and President of the Pollak Engineered Products Division since 1985. David L. Thomas has served as Vice President of the Company and President of the Company's Alphabet Division since 1989. Avery S. Cohen has served as Secretary and a director of the Company since 1988. He has been a partner in the law firm of Baker & Hostetler LLP since 1993. From 1989 to 1993, Mr. Cohen was a partner with the law firm of Benesch, Friedlander, Coplan & Aronoff. Richard E. Cheney has served as a director of the Company since 1988. From 1992 to 1993, he was Chairman Emeritus of Hill & Knowlton, Inc. and from 1987 to 1990 was Chairman of the Board of Directors of Hill & Knowlton, Inc., a public relations firm. Mr. Cheney serves as a director of Rowe Furniture, Inc., Chattem, Inc., and Alpine Lace Brands, Inc. 39 41 Sheldon J. Epstein has served as a director of the Company since 1988. He has been the managing member of Epstein, Woods & Dwyer, P.L.C., an independent public accounting firm, since 1995. From 1992 to 1994, Mr. Epstein was the managing partner of Epstein, Rehbock & Applebaum, an independent public accounting firm. Earl L. Linehan has served as a director of the Company since 1988. Since 1983, he has been the President of Woodbrook Capital Inc., a venture capital and investment firm. Since 1988, he has served as Chairman of Strescon Industries, Inc., a concrete manufacturer. COMMITTEES OF THE BOARD OF DIRECTORS The Company's Board of Directors has Audit, Compensation and Stock Option Committees. Each of these committees is comprised of the Company's three outside directors, Messrs. Cheney, Epstein and Linehan. Members of each committee serve at the pleasure of the Board. Audit Committee. The Company's Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and nonaudit fees, reviews the independent public accountants' management letters and the Company's responses, reviews the adequacy of the Company's internal accounting controls, and reviews major accounting or reporting changes. Compensation Committee. The Company's Compensation Committee reviews employment, development, reassignment and compensation matters involving corporate officers and other executive level employees, including issues relating to salary, bonus and incentive arrangements. Stock Option Committee. The Company's Stock Option Committee administers the Company's Long-Term Incentive Plan. INDEMNIFICATION The Company's Code of Regulations provides for the indemnification of directors and officers of the Company to the maximum extent permitted by Ohio law and for the advancement of expenses incurred in connection with the defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director of the Company upon the receipt of an undertaking to repay such amount unless it is ultimately determined that the director is entitled to indemnification. The Company maintains a directors' and officers' insurance policy which insures the officers and directors of the Company from any claim arising out of an alleged wrongful act by such persons in their respective capacities as officers and directors of the Company. COMPENSATION OF DIRECTORS Each member of the Company's Board of Directors who is not an employee of the Company receives an annual fee of $16,000 for serving as a director of the Company and receives a fee of $1,000 for each Board meeting attended. There is no additional fee received for attending committee meetings. Directors who are also employees of the Company do not receive any additional compensation for their services as directors. The Company reimburses out-of-pocket expenses incurred by all directors in connection with attending Board and committee meetings. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During the fiscal year ended December 31, 1996, Avery S. Cohen, a partner in Baker & Hostetler LLP, which provides legal services to the Company, and D.M. Draime served as members of the Company's compensation committee. Following the Offering, the Compensation Committee will not include Messrs. Cohen or Draime or any person who has been an executive officer of the Company. 40 42 LONG-TERM INCENTIVE PLAN The Company's Board of Directors adopted the Company's Long-Term Incentive Plan (the "Plan") on August 5, 1997. The Plan was approved by the Company's shareholders on August , 1997. The purpose of the Plan is to enable the Company to attract, retain and reward key employees of the Company and its affiliates and to strengthen the mutuality of interest between such key employees and the Company's shareholders. Grants of incentive or nonqualified share options, restricted shares, deferred shares, share purchase rights, share appreciation rights in tandem with options ("SARs"), other share-based awards, or any combination thereof, may be issued under the Plan to officers and key employees who are responsible for or contribute to the management, growth or profitability of the business of the Company and its affiliates. The Stock Option Committee administers the Plan and is responsible for determining the type, amount and timing of grants and awards. The members of the Stock Option Committee are not eligible to participate in the Plan. The Company has reserved Common Shares for issuance under the Plan. No participant in the Plan may be granted stock options or other share awards in any calendar year for more than Common Shares. The term of each option granted under the Plan may not exceed ten years from the date of grant, and the exercise price of share options may not be less than 100% of the fair market value (as defined in the Plan) of the shares on the date the option is granted. The Stock Option Committee may grant tandem SARs to any person granted an option under the Plan. Each tandem SAR will represent the right to receive, in cash or shares as the Stock Option Committee determines, a distribution in an amount equal to the excess of the fair market value of the option shares (to which the SAR corresponds) on the date of exercise over the exercise price for those shares. Each tandem SAR expires at the same time as its corresponding option. The exercise of an option will result in an immediate forfeiture of its corresponding SAR, and the exercise of an SAR will cause an immediate forfeiture of its corresponding option. The Plan provides that all options and tandem SARs will become exercisable on a change in control (as defined in the Plan) of the Company. The Stock Option Committee may award Common Shares under the Long-Term Incentive Plan and may place restrictions on the transfer or defer the date of receipt of those shares. Each award will specify any applicable restrictions or deferral date, the duration of those restrictions, and the time at which the restrictions lapse. Participants may be required to deposit shares with the Company during the period of any restrictions. The Stock Option Committee may also grant share purchase rights for which the purchase price may not be less than 100% of the fair market value (as defined in the Plan) on the date of grant. The Stock Option Committee may grant other awards of shares and other awards that are valued or otherwise based on the Company's Common Shares. The Plan provides for vesting, exercise or forfeiture of rights granted under the Plan on death, disability, termination of employment or a change of control. The Board of Directors may modify, suspend or terminate the Plan as long as it does not impair the rights of any participant. 41 43 EXECUTIVE COMPENSATION Summary of Cash and Certain Other Compensation. The following table sets forth information with respect to all compensation earned by the chief executive officer and the other four most highly compensated executive officers of the Company (each a "Named Executive Officer") for services rendered during the year ended December 31, 1996. The Company does not have employment agreements with any of its employees. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION NUMBER OF ------------------------------------ SECURITIES OTHER ANNUAL UNDERLYING SALARY BONUS COMPENSATION OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) COMPENSATION(1) - ------------------------------------ ---- -------- -------- ------------ ------------ --------------- Cloyd J. Abruzzo, 1996 $204,000 $250,000 $ 10,142 -- -- President and Chief Executive Officer 1995 192,000 200,000 9,624 -- -- 1994 180,000 180,000 9,274 -- -- D.M. Draime, 1996 $189,600 $250,000 $ 9,359 -- $ 174,157 Chairman of the Board of Directors 1995 189,600 700,000 6,324 -- 174,990 1994 189,600 750,000 8,449 -- 177,263 Gerald V. Pisani, 1996 $159,000 $140,000 $ 7,589 -- -- President of Pollak Division 1995 159,000 130,000 6,324 -- -- 1994 150,000 115,000 5,974 -- -- David L. Thomas, 1996 $144,000 $110,000 $ 4,712 -- -- President of Alphabet Division 1995 132,000 108,000 3,300 -- -- 1994 132,000 100,000 3,300 -- -- Kevin P. Bagby, 1996 $120,000 $ 65,000 $ 945 250 -- Chief Financial Officer(2) 1995 55,000 40,000 445 -- --
- --------------- (1) Represents the aggregate amount of life insurance premiums paid by the Company on a split-dollar life insurance policy. See "Certain Transactions." (2) Mr. Bagby's employment with the Company commenced in July 1995. Option Grants. The following table sets forth information regarding grants of share options made to the Named Executive Officers during 1996: OPTION GRANTS IN 1996
NUMBER OF SECURITIES PERCENTAGE OF UNDERLYING TOTAL OPTIONS OPTIONS GRANTED TO GRANTED EMPLOYEES IN EXERCISE PRICE EXPIRATION NAME (#) FISCAL YEAR PER SHARE DATE - ------------------------------------------------------------- --------- ------------- -------------- ---------- Cloyd J. Abruzzo............................................. -- -- -- -- D.M. Draime.................................................. -- -- -- -- Gerald V. Pisani............................................. -- -- -- -- David L. Thomas.............................................. -- -- -- -- Kevin P. Bagby............................................... 250(1) 7.9% $ 798.00 (1)
- --------------- (1) On June 30, 1996, the Company granted an option (the "Option") to Kevin P. Bagby to purchase 250 Class B Common Shares of the Company (the "Option Shares") ( Common Shares after giving effect to the recapitalization described under "Description of Capital Shares"). The Option, which had no expiration date, gave Mr. Bagby the right to purchase the Option Shares at a purchase price of $798.00 per share ($ per share after giving effect to the recapitalization described under "Description of Capital Shares"). Mr. Bagby exercised the Option on August 7, 1997. 42 44 Option Holdings. The following table sets forth information with respect to the options exercised by executive officers of the Company during 1996 and the aggregate number and value of shares underlying unexercised options held by each Named Executive Officer as of December 31, 1996: AGGREGATED OPTION EXERCISES IN 1996 AND 1996 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AS OF AS OF ACQUIRED DECEMBER 31, 1996 DECEMBER 31, 1996($) ON VALUE -------------------------- -------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE - ------------------------------------- ----------- ----------- ------------ ------------- ------------ ------------- Cloyd J. Abruzzo..................... -- -- -- -- -- -- D.M. Draime.......................... -- -- -- -- -- -- Gerald V. Pisani..................... -- -- -- -- -- -- David L. Thomas...................... 500(1) $90,065 -- -- -- -- Kevin P. Bagby....................... -- -- -- 250(1) -- $30,950
- --------------- (1) Before giving effect to the recapitalization described under "Description of Capital Shares." 43 45 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Shares as of August 8, 1997 by (i) each of the Company's directors and Named Executive Officers, (ii) each person who is known by the Company to beneficially own five percent or more of the outstanding Common Shares, and (iii) all of the directors and executive officers of the Company as a group.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY PRIOR TO THE OWNED AFTER THE COMBINED OFFERING COMBINED OFFERING ------------------ ------------------- NAME(1) NUMBER PERCENT NUMBER PERCENT - -------------------------------------------------------- ------ ------- ------ -------- D.M. Draime(2).......................................... 50,362 48.63% Scott N. Draime(3)...................................... 14,130 13.64 Cloyd J. Abruzzo(4)..................................... 12,154 11.73 Jeffrey P. Draime(5).................................... 11,186 10.80 Rebecca M. Gang(6)...................................... 6,778 6.54 Avery S. Cohen(7)(8).................................... 1,145 1.10 Gerald V. Pisani........................................ 2,419 1.18 David L. Thomas......................................... 500 * Kevin P. Bagby.......................................... 250 * Richard E. Cheney....................................... 250 * Sheldon J. Epstein(8)................................... 250 * Earl L. Linehan......................................... 250 * Sten Forseke............................................ -- -- All directors and executive officers of the Company as a group (10 persons).................................... 67,580 65.28%
- --------------- * Less than one percent. (1) Unless otherwise indicated, the beneficial owner has sole voting and investment power over such shares. The information regarding the beneficial ownership of Common Shares owned prior to the Offering includes Class A and Class B Common Shares before giving effect to the recapitalization described under "Description of Capital Shares." (2) Includes 9,803 Common Shares held by Mr. Draime as executor of the Estate of Steven A. Draime and 40,559 Common Shares held in trust for the benefit of Mr. Draime of which Mr. Draime is trustee. The address of Mr. Draime is 9400 East Market Street, Warren, Ohio 44484. (3) Includes 5,883 Common Shares held in trust for the benefit of Scott N. Draime of which Scott N. Draime is trustee, 895 Common Shares held in trust for the benefit of Scott N. Draime, of which Avery S. Cohen and Sheldon J. Epstein are co-trustees, and 7,352 Common Shares held in trusts for the benefit of Jeffrey P. Draime's children. The address of Scott N. Draime is 1209 Cerrito Grande, El Paso, Texas 79912. (4) Includes 2,154 Common Shares held in trust for the benefit of Cloyd J. Abruzzo of which Mr. Abruzzo is trustee and an aggregate of 10,000 Common Shares held in trusts for the benefit of D.M. Draime's children and grandchildren of which Mr. Abruzzo is trustee. The address of Mr. Abruzzo is 9400 East Market Street, Warren, Ohio 44484. (5) Includes 6,371 Common Shares held in trust for the benefit of Jeffrey P. Draime of which Jeffrey P. Draime is trustee, 895 Common Shares held in trust for the benefit of Jeffrey P. Draime, of which Avery S. Cohen and Sheldon J. Epstein are co-trustees, and 3,920 Common Shares held in trusts for the benefit of Scott N. Draime's children. The address of Jeffrey P. Draime is 8836 Singing Hills Drive, Warren, Ohio 44484. (6) Includes 895 Common Shares held in trust for the benefit of Ms. Gang of which Avery S. Cohen and Sheldon J. Epstein are co-trustees. The address of Rebecca M. Gang is 333 Rainbows End, Aurora, Ohio 44202. (7) Includes 895 Common Shares held under the Ohio Transfer to Minors Act for the benefit of William M. Draime and John A. Draime of which Mr. Cohen is custodian. (8) Does not include 2,685 Common Shares held in separate trusts for the benefit of Scott N. Draime, Jeffrey P. Draime and Rebecca M. Gang of which Mr. Cohen and Mr. Epstein are co-trustees (which shares are listed in the table above as being beneficially owned by Scott N. Draime, Jeffrey P. Draime and Rebecca M. Gang). (9) Includes 1,200 Common Shares held in separate trusts for the benefit of Gerald V. Pisani's children, of which Gerald V. Pisani's wife is the trustee. 44 46 CERTAIN TRANSACTIONS TRANSACTIONS WITH DIRECTORS The Company believes that all of its past and current transactions with affiliates have been made and entered into on terms neither materially more nor materially less favorable to the Company than those available from unaffiliated third parties. The Company has adopted a policy that future transactions with affiliates will be submitted for approval by a majority of the Company's disinterested directors. Chip Supply, Inc. D.M. Draime and certain of his family members own in the aggregate 60.0%, and Cloyd J. Abruzzo owns 1.17%, of Chip Supply, Inc., a Florida corporation ("Chip"). From January 1, 1996 to September 30, 1996, Chip leased a building located in Orlando, Florida from the Company. During this lease period, the Company received lease payments in the aggregate amount of $235,200. On September 30, 1996, the Company sold the leased building to Chip for $2.2 million. Chip borrowed funds to purchase the building, and the Company guaranteed the repayment of the loan. On June 30, 1997 the outstanding principal amount of the loan was approximately $2.1 million. The Company is also the guarantor for a $500,000 standby letter of credit issued in connection with this loan. As of July 31, 1997, there was no outstanding balance on the standby letter of credit. Alphabet Greenwood Facility. D.M. Draime is the sole owner of the Alphabet Division facility located in Greenwood, South Carolina. The Company leases the facility from Mr. Draime pursuant to a lease expiring on September 15, 2004. In each of 1994, 1995 and 1996, the Company made lease payments to Mr. Draime in the aggregate amount of $157,200. In February 1997, the Company restructured its operations and terminated its use of the Greenwood facility. The Company continues to make lease payments to Mr. Draime, and the Greenwood property is for sale. Hunters Square. D.M. Draime is a 25% owner of Hunters Square, Inc., an Ohio corporation ("HSI"), which owns Hunters Square, a shopping mall located in Warren, Ohio. The Company leases office space in Hunters Square for use as the headquarters of the Alphabet Division. The Company pays all maintenance, tax and insurance costs related to the operation of the office. Lease payments made by the Company to HSI in 1994, 1995 and 1996 were $118,763, $153,576 and $189,547, respectively. The Company continues to make lease payments as required under the lease agreement which terminates in June 2002. Technaflow, Inc. D.M. Draime, together with certain of his family members, owns 97.46%, and Cloyd J. Abruzzo owns 2.54%, of Technaflow, Inc., an Ohio corporation. The Company provides management services to Technaflow, Inc., including the review of operations and strategic initiatives, and has received a management fee of $300,000 annually from Technaflow, Inc. The Company has also paid the salary of the president of Technaflow, Inc., Wayne Reichard. Mr. Reichard was paid a salary of $177,912, $181,900 and $180,459 by the Company in 1994, 1995 and 1996, respectively. Effective August 5, 1997, all salary and benefits for Mr. Reichard are being paid by Technaflow, Inc. and the annual management fee paid to the Company was reduced to $60,000. Industrial Development Associates LP. Earl Linehan and D.M. Draime, as limited partners, own 11.81% and 10.00%, respectively, of Industrial Development Associates ("IDA"), a Maryland limited partnership real estate development company in which the Company is a general partner. Alphabet, a division of the Company, has entered into a lease agreement with IDA pursuant to which the Alphabet Division leases a facility located in Mebane, North Carolina, until June 15, 2001. Alphabet is responsible for all maintenance, taxes and insurance. Alphabet made lease payments to IDA of $107,606, $103,372, and $111,631 for 1994, 1995, and 1996, respectively. In addition, Alphabet subleases warehouse space in the same industrial park as the Mebane facility from Baumgartner, Inc. Baumgartner, Inc. leases the space from IDA. Alphabet made sub-lease payments to Baumgartner, Inc. of $74,622, and $78,577 in 1995 and 1996, respectivley. Relationship with Counsel. Avery S. Cohen, a Director of the Company, is a partner in Baker & Hostetler LLP, a law firm which has served as general outside counsel for the Company since 1993 and is expected to continue to do so in the future. 45 47 Insurance on the Life of D.M. Draime. The Company paid the premiums on a $12.0 million insurance policy on the life of D.M. Draime. From 1993 through 1996, the Company had paid aggregate premiums in the amount of $662,800 on this policy. Under the policy, upon the death of Mr. Draime the estate of Mr. Draime will receive the amount of the life insurance policy less the aggregate amount of the premiums paid by the Company, which amount will be paid to the Company. Upon or prior to the completion of the Offering, the Company will be reimbursed for the premiums paid on this policy by or on behalf of Mr. Draime. Shareholder Agreements. The Company, D.M. Draime and certain of the shareholders and persons owning options to purchase shares of the Company have entered into shareholder or share restriction agreements. Such agreements will terminate upon the consummation of the Offering. DESCRIPTION OF CAPITAL SHARES As of June 30, 1997, the Company's authorized capital shares consisted of 32,724 Class A Common Shares, without par value (Voting), and 87,276 Class B Common Shares, without par value (Nonvoting) of which 15,465 and 84,937 shares, respectively, were issued and outstanding. In anticipation of the Combined Offering, the Board of Directors and the current shareholders of the Company will adopt the Company's Second Amended and Restated Articles of Incorporation (the "Articles of Incorporation") to authorize a single class of 60 million Common Shares, without par value, and five million preferred shares, without par value ("Preferred Shares"). Effective upon the filing of such amendment, each of the then existing Class A Common Shares and Class B Common Shares will be recapitalized into Common Shares. Except as otherwise expressly stated, all references in this Prospectus to the Company's Articles of Incorporation or its capital shares (including the Common Shares) are to such after effectiveness of such amendment and recapitalization. Immediately following completion of the Combined Offering, there are expected to be Common Shares outstanding ( Common Shares if the Underwriters' overallotment option is exercised in full), and Common Shares reserved for issuance pursuant to the Plan and no preferred shares outstanding. The following description of the Company's capital shares and related matters is qualified in its entirety by reference to the Articles of Incorporation and the Company's Amended and Restated Code of Regulations, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. COMMON SHARES Holders of Common Shares are entitled to one vote per share on all matters submitted to a vote of the shareholders. Holders do not have the right to cumulate their votes in the election of directors. Subject to the rights of holders of Preferred Shares, holders of Common Shares are entitled to receive dividends if, as and when dividends are declared from time to time by the Company's Board of Directors out of assets legally available therefor. Upon liquidation, dissolution or winding up of the Company, the holders of Common Shares are entitled to share ratably in all assets of the Company after payment of liabilities and accrued but unpaid dividends and liquidation preferences on any outstanding Preferred Shares. The Common Shares have no preemptive or conversion rights and are not subject to further calls or assessment by the Company. There are no redemption or sinking fund provisions applicable to the Common Shares. The Common Shares being sold by the Company in the Combined Offering, when sold to the Underwriters and the Management Investors in the manner described in this Prospectus will be, and all currently outstanding Common Shares of the Company are, duly authorized, validly issued, fully paid and nonassessable. PREFERRED SHARES The Articles of Incorporation authorize the Board of Directors of the Company to fix the number of Preferred Shares and determine the designation of any series of the authorized Preferred Shares and to determine or alter the rights, preferences, privileges and restrictions granted or imposed upon any unissued series of Preferred Shares. As of the date of this Prospectus, the Company has not issued any Preferred Shares. The issuance of Preferred Shares could have the effect of delaying or preventing a change in control of the Company. The Company has no present intention to issue Preferred Shares. 46 48 CERTAIN PROVISIONS OF OHIO LAW Section 1701.59 of the Ohio Revised Code (the "Ohio Code") provides, with certain limited exceptions, that a director shall be held liable in damages for any action he takes or fails to take as a director only if it is proved by clear and convincing evidence that his action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the corporation or with reckless disregard for its best interest. In addition, Section 1701.59 of the Ohio Code provides that a director of an Ohio corporation, in determining what he reasonably believes to be in the best interests of the corporation, shall consider the interests of the corporation's shareholders and may consider, in his discretion, any of the following: (1) the interests of the corporation's employees, suppliers, creditors and customers; (2) the economy of the State of Ohio and the nation; (3) community and societal considerations; and (4) the long-term as well as short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation. The Ohio Code also authorizes Ohio corporations to indemnify officers and directors from liability if the officer or director acted in good faith and in a manner reasonably believed by the officer or director to be in or not opposed to the best interests of the corporation and, with respect to any criminal actions, if the officer or director had no reason to believe his action was unlawful. In the case of an action by or on behalf of a corporation, indemnification may not be made (i) if the person seeking indemnification is adjudged liable for negligence or misconduct, unless the court in which such action was brought determines such person is fairly and reasonably entitled to indemnification or (ii) if liability asserted against such person concerns certain unlawful distributions. The indemnification provisions of the Ohio Code require indemnification if a director or officer has been successful on the merits or otherwise in defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director or officer of the corporation. The indemnification authorized under Ohio law is not exclusive and is in addition to any other rights granted to officers and directors under the articles of incorporation or code of regulations of the corporation or any agreement between officers and director and the corporation. The Company's Code of Regulations provides for the indemnification of directors and officers of the Company to the maximum extent permitted by Ohio law as authorized by the Board of Directors of the Company, and for the advancement of expenses incurred in connection with the defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director of the Company upon the receipt of an undertaking to repay such amount unless it is ultimately determined that the director is entitled to indemnification. A corporation may purchase and maintain insurance or furnish similar protection on behalf of any officer or director against any liability asserted against him and incurred by him in his capacity, or arising out of the status, as an officer or director, whether or not the corporation would have the power to indemnify him against such liability under the Ohio Code. Chapter 1704 of the Ohio Code prohibits certain mergers, dispositions and acquisitions of assets, issuances or purchases of securities, liquidations or dissolutions, or reclassifications of the then outstanding shares of an Ohio corporation with 50 or more shareholders (an issuing public corporation) involving, or for the benefit of, certain holders of shares representing 10% or more of the voting power (other than a current 10% shareholder that does not increase its present proportional interest) (an "Interested Shareholder"), unless (a) the applicable transaction is approved by the directors of the Company prior to the shareholder becoming an Interested Shareholder, (b) the acquisition of 10% of the voting power is approved by the directors prior to the shareholder becoming an Interested Shareholder, or (c) the transaction involves an Interested Shareholder who has been such for at least three years and the transaction is approved by holders of two-thirds of the voting power of the Company (or a lesser proportion provided in the articles of incorporation) and the holders of a majority of the voting power not held by the Interested Shareholder or certain minimum price and form of consideration requirements are met. Section 1701.041 of the Ohio Code regulates control bids for corporations in Ohio having certain concentrations of Ohio shareholders and permits the Ohio Division of Securities to suspend a control bid if certain information is not provided to offerees. A control bid includes the purchase or offer to purchase any equity security of the Company from a resident of Ohio if, after the purchase of that security, the offeror would be directly or indirectly the beneficial owner of more than 10% of any class of issued and outstanding equity 47 49 securities of the Company. Section 1707.043 of the Ohio Code, the so-called "green mail disgorgement" statute, provides an Ohio corporation, or in certain circumstances the shareholders of an Ohio corporation, the right to recover profits realized under certain circumstances by persons who dispose of securities of a corporation within 18 months of proposing to acquire such corporation. Under Section 1701.831 of the Ohio Code, the acquisition of shares entitling the holder to exercise certain levels of voting power of the Company (one-fifth or more, one-third or more, or a majority) can be made only with the prior authorization of (i) the holders of at least a majority of the total voting power of the Company and (ii) the holders of at least a majority of the total voting power held by shareholders other than the proposed acquiror, officers of the Company elected or appointed by the directors, and directors of the Company who are also employees of the Company and excluding certain shares that are transferred after the announcement of the proposed acquisition and prior to the vote with respect to the proposed acquisition. It is possible that the foregoing provisions, as well as the ability of the Board to issue Preferred Shares, will discourage other persons from making a tender offer for or acquisition of substantial amounts of the Company's Common Shares, or may delay changes in control or management of the Company. REGISTRAR AND TRANSFER AGENT The registrar and transfer agent for the Common Shares is . SHARES ELIGIBLE FOR FUTURE SALE Upon the completion of the Combined Offering, the Company will have outstanding Common Shares, assuming no exercise of the Underwriters' overallotment option. The Common Shares sold in the Combined Offering will be freely tradeable (other than by an "affiliate" of the Company as such term is defined in the Securities Act) without restriction or further registration under the Securities Act. All of the remaining outstanding shares are "restricted securities" as the term is defined in Rule 144 (the "Restricted Shares"), and may not be sold in the public market except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below. Each of the Company and the directors, executive officers and the other shareholders of the Company has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ended 180 days after the date hereof, subject to certain exceptions, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchaser or otherwise transfer or dispose of, directly or indirectly, any Common Shares or any securities convertible into or exchangeable for Common Shares or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Shares, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Shares or such other securities, or otherwise. The number of outstanding shares subject to the lockup arrangements that will be available for sale in the public market, subject to compliance with Rule 144 upon expiration of the 180-day lockup period, will be approximately shares. See "Underwriters." In general, under Rule 144 as currently in effect, a person who has (or persons whose shares are aggregated who have) beneficially owned shares for at least one year, including an "affiliate," as that term is defined below, would be entitled to sell, within any three-month period, that number of shares that does not exceed the greater of (i) 1% of the then outstanding number of shares and (ii) the average weekly trading volume of the shares during the four calendar weeks preceding that sale. Sales pursuant to Rule 144 are also subject to certain manner-of-sale restrictions, notice requirements and the availability of information about the Company. A person who is not deemed an "affiliate" of the Company, and who has beneficially owned shares for at least two years, is entitled to sell such shares under Rule 144 without regard to the limitations described above. As defined in Rule 144, an "affiliate" of an issuer is a person who directly, or indirectly through the use of one or more intermediaries, controls, or is controlled by, or is under common control with, that issuer. Upon 48 50 completion of the Combined Offering, of the Restricted Shares will be eligible for sale under Rule 144, subject to the limitations described above and subject to the 180-day lock-up period, and beginning in August 1998, shares will be eligible for sale under Rule 144, subject to the limitations described above. In addition, any employee, officer or director of or consultant of the Company who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144 without having to comply with the public information, volume limitation or notice provisions of Rule 144. Prior to the date of this Prospectus, there has been no public market for the Common Shares. Trading of the Common Shares is expected to commence following the completion of the Combined Offering. No prediction can be made as to the effect, if any, that future sales of shares or the availability of shares for future sale will have on the market price prevailing from time to time. Sales of substantial amounts of Common Shares (including shares issued on the exercise of options), or the perception that such sales could occur, could adversely affect the market price of the Common Shares. 49 51 CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON SHARES The following discussion concerns certain United States federal income and estate tax consequences of the ownership and disposition of Common Shares applicable to Non-U.S. Holders of shares of the Common Shares. For purposes of this discussion, a "Non-U.S. Holder" is any person or entity other than (i) a citizen or resident of the United States, (ii) a corporation, partnership, or other entity created or organized in the United States or under the laws of the United States or of any State, or (iii) an estate or trust whose income is includable in gross income for United States federal income tax purposes, regardless of its source. This discussion (i) does not consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder in light of his or her particular circumstances, (ii) is based on current law which is subject to change (possibly on a retroactive basis), (iii) does not address all aspects of federal income and estate taxation, and (iv) does not deal with foreign, state, or local consequences that may be relevant to Non-U.S. Holders. Accordingly, each prospective investor is urged to consult its own tax advisor regarding the United States federal, state, local and non-U.S. income, estate, and other tax consequences of holding and disposing of shares of Common Shares. DIVIDENDS If dividends are paid to a Non-U.S. Holder, such Holder will be subject, except as described below, to United States withholding tax at a 30% rate or a lower rate specified by an applicable tax treaty. To determine the applicability of a tax treaty providing for a lower rate of withholding, dividends paid to an address in a foreign country generally are presumed under current Treasury Regulations to be paid to a resident of that country, absent knowledge that such presumption is not warranted. However, under Proposed Treasury Regulations that have not yet been put into effect, to claim the benefit of a lower rate of withholding specified in a treaty, Non-U.S. Holders of Common Shares would be required to file certain forms with the payor of the dividends. A Non-U.S. Holder eligible for a rate of United States withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund. Dividends will not be subject to withholding if they are either (i) effectively connected with a trade or business carried on by the Non-U.S Holder within the United States, or (ii) attributable to a United States permanent establishment maintained by the Non-U.S. Holder to which a tax treaty applies, and the Non-U.S. Holder files certain forms with the payor of dividends. Dividends effectively connected with such a trade or business or attributable to such a permanent establishment will generally be subject to United States federal income tax at regular rates and, in the case of a Non-U.S. Holder that is a corporation, may be subject to the branch profits tax at a rate of 30% (or lower rate specified by an applicable tax treaty). GAIN ON DISPOSITION A Non-U.S. Holder generally will not be subject to United States federal income or withholding tax on any gain recognized on a sale or other disposition of Common Shares unless (i) the Company is or has been a "U.S. real property holding corporation," as defined in Section 897(c)(2) of the Code, for United States federal income tax purposes (which the Company does not believe that it is or is likely to become) and the Non-U.S. Holder disposing of the Common Shares owned, directly or constructively, at any time during the five-year period preceding the disposition, more than five percent of outstanding Common Shares; (ii) the gain is effectively connected with the conduct of a trade or business within the United States carried on by the Non-U.S. Holder or, if a tax treaty applies, attributable to a permanent establishment maintained within the United States by a Non-U.S. Holder; (iii) in the case of a Non-U.S. Holder who is an individual, the holder holds the Common Shares as a capital asset and is present in the United States for 183 days or more during the taxable year of the disposition, and either (A) such Non-U.S. Holder has a "tax home," for U.S. federal income tax purposes, in the United States, and the gain from the disposition is not attributable to an office or other fixed place of business maintained by such Non-U.S. Holder in a foreign country, or (B) the gain from the disposition is attributable to an office or fixed place of business maintained by such Non-U.S. Holder in the United States; or (iv) the Non-U.S. Holder is subject to tax pursuant to provisions of the Code applicable to certain United States expatriates. 50 52 ESTATE TAX Common Shares owned or treated as owned by an individual Non-U.S. Holder at the date of death will be includable in the individual's gross estate for United States federal estate tax purposes unless an applicable tax treaty provides otherwise, and may be subject to United States federal estate tax. BACKUP WITHHOLDING AND INFORMATION REPORTING The Company must report annually to the Internal Revenue Service and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, each Non-U.S. holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of these information returns also may be made available under the provisions of a specific treaty or agreement to the tax authorities in the country in which the Non-U.S. Holder resides. Under current Treasury Regulations United States backup withholding (which generally is a withholding requirement imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the United States information reporting requirements) will generally not apply to dividends paid on Common Shares to a Non-U.S. Holder at an address outside the United States. However, under Proposed Treasury Regulations that have not yet been put into effect, dividends paid on Common Shares to a Non-U.S. Holder would be subject to backup withholding unless certain forms are filed with the payor of the dividends. The payment of the proceeds from the disposition of Common Shares by a Non-U.S. Holder to or through the United States office of a broker will be subject to information reporting and backup withholding unless the owner certifies, among other things, its name, address and status as a Non-U.S. Holder under penalties of perjury or otherwise establishes an exemption. The payment of the proceeds from the disposition of Common Shares to or through a non-U.S. office of a non-U.S. broker will not be subject to backup withholding and will generally not be subject to information reporting. However, unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder, information reporting (but not backup withholding) will apply to dispositions through a non- U.S. office of a Non-U.S. broker that is a United States person, a United States "controlled foreign corporation" for United States federal income tax purposes, or a person 50% or more of whose gross income from all sources for a certain three-year period was effectively connected with a United States trade or business. Under Proposed Treasury Regulations, backup withholding would also apply to proceeds from dispositions of Common Shares if the broker has actual knowledge that the payee is a United States person. The backup withholding and information reporting rules currently are under review by the Treasury Department, and their application to Common Shares is likely to change. 51 53 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters named below for whom Morgan Stanley & Co. Incorporated, and Donaldson, Lufkin & Jenrette Securities Corporation are acting as U.S. Representatives, and the International Underwriters named below for whom Morgan Stanley & Co. International Limited, and Donaldson, Lufkin & Jenrette Securities Corporation are acting as International Representatives, have severally agreed to purchase, and the Company has agreed to sell to them, severally, the respective number of Common Shares set forth opposite the names of such Underwriters below:
NUMBER OF NAME SHARES -------------------------------------------------------------------------- --------- U.S. Underwriters: Morgan Stanley & Co. Incorporated....................................... Donaldson, Lufkin & Jenrette Securities Corporation..................... --------- Subtotal................................................................ --------- International Underwriters: Morgan Stanley & Co. International Limited.............................. Donaldson, Lufkin & Jenrette Securities Corporation..................... --------- Subtotal................................................................ --------- Total................................................................ =========
The U.S. Underwriters and the International Underwriters, and the U.S. Representatives and the International Representatives, are collectively referred to as the "Underwriters" and the "Representatives," respectively. The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Common Shares offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the Common Shares offered hereby (other than those covered by the U.S. Underwriters' overallotment option described below) if any such shares are taken. Pursuant to the Agreement between U.S. and International Underwriters, each U.S. Underwriter has represented and agreed that, with certain exceptions: (i) it is not purchasing any Shares (as defined herein) for the account of anyone other than a United States or Canadian Person (as defined herein) and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any prospectus relating to the Shares outside the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has represented and agreed that, with certain exceptions: (i) it is not purchasing any Shares for the account of any United States or Canadian Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any prospectus relating to the Shares in the United States or Canada or to any United States or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter and an International Underwriter, the foregoing representations and agreements (i) made by it in its capacity as a U.S. Underwriter apply only to it in its capacity as a U.S. Underwriter and (ii) made by it in its capacity as an International Underwriter apply only to it in its capacity as an International Underwriter. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement between U.S. and International Underwriters. As used herein, "United States or Canadian Person" means any national or resident of the United States or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any political subdivision thereof (other than a branch located outside the United States and 52 54 Canada of any United States or Canadian Person), and includes any United States or Canadian branch of a person who is otherwise not a United States or Canadian Person. All Common Shares to be purchased by the Underwriters under the Underwriting Agreement are referred to herein as the "Shares." Pursuant to the Agreement between U.S. and International Underwriters, sales may be made between the U.S. Underwriters and International Underwriters of any number of Shares as may be mutually agreed. The per share price of any Shares so sold shall be the public offering price set forth on the cover page hereof, in United States dollars, less an amount not greater than the per share amount of the concession to dealers set forth below. Pursuant to the Agreement between U.S. and International Underwriters, each U.S. Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any Shares, directly or indirectly, in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and has represented that any offer or sale of Shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made. Each U.S. Underwriter has further agreed to send to any dealer who purchases from it any of the Shares a notice stating in substance that, by purchasing such Shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such Shares in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and that any offer or sale of Shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made, and that such dealer will deliver to any other dealer to whom it sells any of such Shares a notice containing substantially the same statement as is contained in this sentence. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has represented and agreed that (i) it has not offered or sold and, prior to the date six months after the closing date for the sale of the Shares to the International Underwriters, will not offer or sell, any Shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the offering of the Shares to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has further represented that it has not offered or sold, and has agreed not to offer or sell, directly or indirectly, in Japan or to or for the account of any resident thereof, any of the Shares acquired in connection with the distribution contemplated hereby, except for offers or sales to Japanese International Underwriters or dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law. Each International Underwriter has further agreed to send to any dealer who purchases from it any of the Shares a notice stating in substance that, by purchasing such Shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, any of such Shares, directly or indirectly, in Japan or to or for the account of any resident thereof except for offers or sales to Japanese International Underwriters or dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law, and that such dealer will send to any other dealer to whom it sells any of such Shares a notice containing substantially the same statement as is contained in this sentence. 53 55 The Underwriters initially propose to offer part of the Common Shares directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain dealers. After the initial offering of the Common Shares, the offering price and other selling terms may from time to time be varied by the Representatives. The Company has granted to the U.S. Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of additional Common Shares at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The U.S. Underwriters may exercise such option solely for the purpose of covering overallotments, if any, made in connection with the offering of the Common Shares offered hereby. To the extent such option is exercised, each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional Common Shares as the number set forth next to such U.S. Underwriter's name in the preceding table bears to the total number of Common Shares set forth next to the names of all U.S. Underwriters in the preceding table. The Underwriters have informed the Company that they do not intend sales to discretionary accounts to exceed five percent of the total number of Common Shares offered by them. Application will be made to list the Common Shares on the New York Stock Exchange under the proposed symbol "SRI." Each of the Company and the directors, executive officers and the other shareholders of the Company has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, and subject to certain exceptions it, will not, during the period ending 180 days after the date of this Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any Common Shares or any securities convertible into or exercisable or exchangeable for Common Shares or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Shares, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Shares or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to (x) the sale of Shares to the Underwriters, (y) the issuance by the Company of Common Shares upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this Prospectus of which the Underwriters have been advised in writing or (z) transactions by any person other than the Company relating to Common Shares or other securities acquired in open market transactions after the completion of the offering of the Shares. In order to facilitate the Offering of the Common Shares, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Shares. Specifically, the Underwriters may overallot in connection with the Offering, creating a short position in the Common Shares for their own account. In addition, to cover overallotments or to stabilize the price of the Common Shares, the Underwriters may bid for, and purchase, Common Shares in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an Underwriter or a dealer for distributing the Common Shares in the offering, if the syndicate repurchases previously distributed Common Shares in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Shares above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. At the request of the Company, the Underwriters have reserved for sale up to of the Common Shares offered hereby for sale at the initial offering price to certain officers and employees of the Company. The number of Common Shares available for sale to the general public will be reduced to the extent such 54 56 persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. All purchasers of the Common Shares reserved pursuant to this paragraph who are also directors or executive officers of the Company will be required to enter into agreements identical to those described above restricting the transferability of such shares for a period of 180 days after the date of this Prospectus. PRICING OF THE OFFERING Prior to the Offering, there has been no public market for the Common Shares. The initial public offering price will be determined by negotiations between the Company and the U.S. Representatives. Among the factors to be considered in determining the initial public offering price will be the future prospects of the Company and its industry in general, sales, earnings and certain other financial operating information of the Company in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company. The estimated initial public offering price range set forth on the cover page of this Preliminary Prospectus is subject to change as a result of market conditions and other factors. EXPERTS The audited financial statements and schedule of the Company, included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. LEGAL MATTERS The validity of the issuance of the Common Shares offered hereby will be passed upon for the Company by Baker & Hostetler LLP, Cleveland, Ohio. Avery S. Cohen, secretary and a director of the Company and the holder of Common Shares, is a partner in Baker & Hostetler LLP. Certain legal matters will be passed upon for the Underwriters by Katten Muchin & Zavis, Chicago, Illinois. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (of which this Prospectus is a part) under the Securities Act with respect to the Common Shares offered hereby. This Prospectus does not contain all of the information contained in the Registration Statement (certain portions of which have been omitted as permitted by the rules and regulations of the Commission), and reference is made to the Registration Statement and the exhibits thereto for further information with respect to the Company and the Common Shares to which this Prospectus relates. Statements contained herein concerning the provisions of any contract, agreement or other document are not necessarily complete, and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement for a more complete description of the matter involved, and each such statement is qualified in its entirety by such reference. The Registration Statement, including the exhibits and schedules filed therewith, may be inspected at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Chicago, Illinois 60606. You can request copies of these documents, upon payment of a duplication fee, by writing to the Commission. Please call the Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The Commission also maintains a Web site (address http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Company intends to furnish its shareholders with annual reports containing consolidated financial statements audited by its independent certified public accountants and with quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year. 55 57 STONERIDGE, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE ----- Report of Independent Public Accountants............................................ F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997..... F-3 Consolidated Statements of Income for the Years Ended December 31, 1994, 1995 and 1996 and for the Three Months Ended March 31, 1996 and 1997....................... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1995 and 1996 and for the Three Months Ended March 31, 1997................. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and for the Three Months Ended March 31, 1996 and 1997................... F-6 Notes to Consolidated Financial Statements.......................................... F-7 Schedule II -- Valuation and Qualifying Accounts.................................... F-17
F-1 58 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Stoneridge, Inc.: We have audited the accompanying consolidated balance sheets of Stoneridge, Inc. (an Ohio corporation) and Subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stoneridge, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements and included on page F-17 of this Prospectus is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 24, 1997 (except with respect to the matters discussed in Notes 11 and 14 as to which the date is August 8, 1997). F-2 59 STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
DECEMBER 31, MARCH PRO FORMA -------------------- 31, MARCH 31, 1997 1995 1996 1997 (NOTE 12) -------- -------- -------- -------------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents...................... $ 282 $ 357 $ -- $ -- Accounts receivable, less allowance for doubtful accounts of $453, $265, and $265... 49,477 46,783 53,184 53,184 Inventories.................................... 26,428 30,158 29,594 29,594 Deferred income taxes.......................... -- -- -- 4,421 Prepaid expenses and other..................... 9,243 5,357 5,807 5,807 -------- -------- -------- -------- Total current assets........................ 85,430 82,655 88,585 93,006 -------- -------- -------- -------- Property, Plant and Equipment, net............... 54,767 55,200 54,565 54,565 Other Assets: Goodwill and other intangibles, net............ 31,860 30,769 30,481 30,481 Investments and other.......................... 241 9,863 9,113 9,113 -------- -------- -------- -------- Total Assets..................................... $172,298 $178,487 $182,744 $187,165 ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt.............. $ 311 $ 3,001 $ 122 $ 122 Accounts payable............................... 34,219 21,365 23,945 23,945 Accrued expenses and other..................... 16,049 17,232 19,586 19,586 Accrued shareholder distributions.............. -- 1,100 5,200 83,200 -------- -------- -------- -------- Total current liabilities................... 50,579 42,698 48,853 126,853 -------- -------- -------- -------- Long-Term Debt, net of current portion........... 47,999 51,156 39,940 39,940 Deferred Income Taxes............................ -- -- -- 6,231 -------- -------- -------- -------- Total long term liabilities................. 47,999 51,156 39,940 46,171 -------- -------- -------- -------- Shareholders' Equity: Class A Common Shares(voting), 32,724 shares authorized, 15,465 shares issued and outstanding, stated at...................... -- -- -- -- Class B Common Shares(nonvoting), 87,276 shares authorized, 84,535 shares issued and outstanding at December 31, 1995 and 84,937 shares issued and outstanding at December 31, 1996 and March 31, 1997, stated at...... -- -- -- -- Additional paid-in capital..................... 7,958 9,195 9,315 9,315 Retained earnings.............................. 65,762 75,438 84,636 4,826 -------- -------- -------- -------- 73,720 84,633 93,951 14,141 -------- -------- -------- -------- Total Liabilities and Shareholders' Equity $172,298 $178,487 $182,744 $187,165 ======== ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-3 60 STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands except for per share data)
FOR THE YEARS ENDED FOR THE THREE MONTHS DECEMBER 31, ENDED MARCH 31, -------------------------------- -------------------- 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- (UNAUDITED) Net Sales.............................. $225,531 $278,043 $363,748 $ 83,455 $108,064 Costs and Expenses: Cost of goods sold................... 164,974 211,712 288,142 64,927 82,125 Selling, general and administrative expenses.......................... 32,542 37,509 46,694 11,927 12,225 -------- -------- -------- -------- -------- Operating income................ 28,015 28,822 28,912 6,601 13,714 Gain on sale of fixed assets......... -- -- -- -- (1,733) Interest expense, net................ 2,344 2,014 4,317 1,061 913 -------- -------- -------- -------- -------- Income Before Income Taxes............. 25,671 26,808 24,595 5,540 14,534 -------- -------- -------- -------- -------- Provision for Income Taxes: State and local income taxes......... 460 654 524 120 136 Income tax benefit from the elimination of deferred federal income taxes...................... (1,455) -- -- -- -- -------- -------- -------- -------- -------- (995) 654 524 120 136 -------- -------- -------- -------- -------- Net Income............................. $ 26,666 $ 26,154 $ 24,071 $ 5,420 $ 14,398 ======== ======== ======== ======== ======== PRO FORMA INCOME DATA (NOTE 12) (UNAUDITED): Income before federal taxes............ $ 24,595 $ 14,534 Pro forma adjustment -- Income taxes... 10,295 6,034 -------- -------- Pro forma net income................... $ 14,300 $ 8,500 -------- -------- Pro forma net income per share......... ======== ======== Pro forma weighted average shares outstanding..........................
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-4 61 STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
ADDITIONAL PAID-IN RETAINED CAPITAL EARNINGS TOTAL ---------- -------- -------- BALANCE, DECEMBER 31, 1993.................................. $7,958 $ 41,988 $ 49,946 Net income................................................ -- 26,666 26,666 Distributions declared.................................... -- (13,500) (13,500) ------ -------- -------- BALANCE, DECEMBER 31, 1994.................................. 7,958 55,154 63,112 Net income................................................ -- 26,154 26,154 Distributions declared.................................... -- (15,546) (15,546) ------ -------- -------- BALANCE, DECEMBER 31, 1995.................................. 7,958 65,762 73,720 Net income................................................ -- 24,071 24,071 Stock options exercised, net.............................. 225 -- 225 Compensation expense from stock option plans.............. 450 -- 450 Capital contribution...................................... 562 -- 562 Distributions declared.................................... -- (14,395) (14,395) ------ -------- -------- BALANCE, DECEMBER 31, 1996.................................. 9,195 75,438 84,633 Net income (unaudited).................................... -- 14,398 14,398 Compensation expense from stock option plans (unaudited)............................................ 120 -- 120 Distributions declared (unaudited)........................ -- (5,200) (5,200) ------ -------- -------- BALANCE, MARCH 31, 1997 (UNAUDITED)......................... $9,315 $ 84,636 $ 93,951 ====== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-5 62 STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FOR THE THREE FOR THE YEARS ENDED MONTHS DECEMBER 31, ENDED MARCH 31, ----------------------------- ------------------ 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- (UNAUDITED) OPERATING ACTIVITIES: Net income................................. $26,666 $26,154 $24,071 $ 5,420 $14,398 Adjustments to reconcile net income to net cash from operating activities -- Depreciation and amortization........... 6,870 7,979 9,966 2,468 3,055 Gain on sale of fixed assets............ -- -- -- -- (1,733) Compensation expense for stock option plans................................. -- -- 450 -- 120 Income tax benefit from the elimination of deferred federal income taxes...... (1,455) -- -- -- -- Changes in operating assets and liabilities -- Accounts receivable, net.............. (4,898) (18,504) 2,694 12,910 (6,401) Inventories........................... (6,442) (4,495) (3,730) (5,584) 564 Prepaid expenses and other assets..... 1,796 (4,609) 4,599 199 (1,368) Other assets, net..................... (145) 23 (1,014) 885 1,505 Accounts payable...................... 1,650 19,560 (12,854) (13,214) 2,580 Accrued expenses and other liabilities........................ 1,450 3,262 1,089 1,551 6,454 ------- ------- ------- ------- ------- Net cash from operating activities....................... 25,492 29,370 25,271 4,635 19,174 ------- ------- ------- ------- ------- INVESTING ACTIVITIES: Equity investment.......................... -- -- (8,834) -- -- Capital expenditures....................... (9,046) (14,767) (14,083) (3,633) (2,656) Proceeds from sale of property, plant and equipment............................... 2,600 -- 4,850 -- 2,300 Assets purchased through acquisition....... -- (18,800) -- -- -- ------- ------- ------- ------- ------- Net cash from investing activities....................... (6,446) (33,567) (18,067) (3,633) (356) ------- ------- ------- ------- ------- FINANCING ACTIVITIES: Cash distributions paid.................... (13,610) (15,546) (13,201) (1,055) (5,080) Proceeds from long-term debt............... 25,368 -- 3,512 -- -- Repayments of long-term debt............... (20,984) (247) (410) (75) (2,648) Net borrowings (repayments) under revolving credit facility......................... (9,000) 19,200 2,745 -- (11,447) Stock options exercised, net............... -- -- 225 -- -- ------- ------- ------- ------- ------- Net cash from financing activities....................... (18,226) 3,407 (7,129) (1,130) (19,175) ------- ------- ------- ------- ------- NET CHANGE IN CASH........................... 820 (790) 75 (128) (357) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................................... 252 1,072 282 282 357 ------- ------- ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD... $ 1,072 $ 282 $ 357 $ 154 $ -- ======= ======= ======= ======= =======
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-6 63 STONERIDGE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND 1997 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED. ) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) 1. ORGANIZATION AND NATURE OF BUSINESS: Effective January 1, 1994, Alphabet, Inc. (Alphabet) and Alphastac, Inc. (Alphastac) were merged into Stoneridge, Inc. (Stoneridge). Stoneridge (an Ohio corporation) was the surviving entity of the above merger transaction. Since Alphabet, Alphastac and Stoneridge shared common ownership, the merger of these entities was accounted for in a manner similar to a pooling of interest. The Company is an independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium and heavy duty truck, and agricultural vehicle markets and operates in one business segment. The Company and its consolidated subsidiaries sell products principally to customers located in North America. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Stoneridge and its majority subsidiaries (collectively, the Company). All significant intercompany balances have been eliminated in consolidation. The accompanying consolidated balance sheet as of March 31, 1997, and the consolidated statements of operations, shareholders' equity and cash flows for the three month periods ended March 31, 1996 and 1997 are unaudited. In the opinion of management , such consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of results for these interim periods. The results of the three month period ended March 31, 1997 are not necessarily indicative of results to be expected for the entire year. Unaudited pro forma balances reflect the termination of S Corporation status as discussed in Note 12. CASH AND CASH EQUIVALENTS The Company considers all short-term investments with original maturities of three months or less to be cash equivalents. Cash equivalents are stated at cost which approximates fair value. ACCOUNTS RECEIVABLE Revenues are principally generated from the automotive, medium and heavy duty truck, and agricultural vehicle markets. Due to the nature of these industries, a significant portion of sales and related accounts receivable are concentrated in a relatively low number of customers. In 1995, three customers accounted for approximately 36%, 13% and 11% of net sales, while the top 5 customers accounted for 72% of net sales. The same three customers accounted for approximately 39%, 18% and 10% of the Company's 1996 net sales, and its top five customers accounted for approximately 76% of its 1996 net sales. Accounts receivable from the Company's five largest customers aggregated approximately $39,713 and $38,383 at December 31, 1995 and 1996, respectively. A division of General Motors has notified the Company that it is discontinuing all outsourcing of its wire harness requirements under contract manufacturing arrangements. The Company believes that by 1999, the General Motors division will produce in-house substantially all of its wire harnesses requirements previously supplied by the Company, although no assurance can be given that such sales by the Company will not end at an earlier date. In 1996, the Company's sales under this arrangement totaled approximately $105.6 million and F-7 64 STONERIDGE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND 1997 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED.) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) contributed approximately $7.2 million in operating income. There can be no assurance that the Company will be able to offset reductions in its sales and operating profits resulting from the reduction in sales to the General Motors division. INVENTORIES Inventories are valued at the lower of cost or market, determined by using the last-in, first-out (LIFO) method of inventory accounting. Inventory cost includes material, labor and overhead and consists of the following:
DECEMBER 31, ------------------- MARCH 31, 1995 1996 1997 ------- ------- --------- Raw materials............... $17,738 $17,983 $19,433 Work in progress............ 4,107 6,063 6,414 Finished goods.............. 6,684 8,224 6,038 Less-LIFO reserve........... (2,101) (2,112) (2,291) ------- ------- ------- Total..................... $26,428 $30,158 $29,594 ======= ======= =======
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost and consist of the following:
DECEMBER 31, ------------------- MARCH 31, 1995 1996 1997 ------- ------- --------- Land and land improvements.......................... $ 4,876 $ 3,724 $ 3,724 Buildings and improvements.......................... 32,058 27,718 28,318 Machinery and equipment............................. 29,987 32,947 34,936 Office furniture and fixtures....................... 6,717 8,270 7,100 Tooling............................................. 11,123 13,630 14,049 Vehicles............................................ 3,109 3,911 3,949 Leasehold improvements.............................. 743 1,416 1,016 ------- ------- ------- 88,613 91,616 93,092 Less-Accumulated depreciation and amortization...... 33,846 36,416 38,527 ------- ------- ------- $54,767 $55,200 $54,565 ======= ======= =======
Depreciation is provided by both the straight-line and accelerated methods over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 1994, 1995 and 1996 was $6,338, $7,284 and $8,686, and for the three months ended March 31, 1996 and 1997, $2,232 and $2,724, respectively. Depreciable lives within each property classification are as follows: F-8 65 STONERIDGE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND 1997 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED.) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) Buildings and improvements........... 10-40 years Machinery and equipment.............. 5-10 years Office furniture and fixtures........ 3-10 years Tooling.............................. 2-5 years Vehicles............................. 3-5 years Leasehold improvements............... 8 years
Maintenance and repair expenditures which are not considered betterments and do not extend the useful life of property are charged to expense as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is credited or charged to income. GOODWILL The primary component of goodwill and other intangible assets, net of accumulated amortization in the accompanying consolidated balance sheets represents the excess of the purchase price paid over the fair market value of acquired assets and assumed liabilities. Goodwill is being amortized over 40 years on a straight-line basis. Amortization expense totaled approximately $532, $695 and $1,180 in 1994, 1995 and 1996, and $236 and $286 for the three-month periods ended March 31, 1996 and 1997, respectively. Accumulated amortization as of December 31, 1995 and 1996 was $4,294 and $5,474, respectively, and $5,760 as of March 31, 1997. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following:
DECEMBER 31 ------------------ MARCH 31, 1995 1996 1997 ------- ------- --------- Compensation related obligations............ $ 8,339 $ 9,402 $ 8,950 Insurance related obligations............... 1,785 2,329 2,365 Other....................................... 5,925 5,501 8,271 ------- ------- ------- $16,049 $17,232 $19,586 ======= ======= =======
INCOME TAXES The Company is an S Corporation for income tax purposes. Accordingly, the Company's profits are taxed directly to its shareholders for federal income tax and certain state income tax purposes. Certain state taxes, as well as local income taxes, are paid directly by the Company. State and local income taxes paid for the years ended December 31, 1994, 1995 and 1996 were approximately $164, $922 and $383, respectively, and $195 and $171 for the three month periods ended March 31, 1996 and 1997, respectively. Alphastac, which was merged into the Company on January 1, 1994, was previously taxed as a C Corporation. As a result of the merger, Alphastac's premerger deferred federal income tax liabilities of $1,455 were reversed to income as a tax benefit from the elimination of deferred federal income taxes and included in the Company's December 31, 1994 consolidated statement of income. As a result of the public offering discussed in Note 11, the Company will terminate its S Corporation status. Accordingly, the Company will be subject to federal and state income taxes as a C Corporation. On a F-9 66 STONERIDGE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND 1997 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED.) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) pro forma basis as of March 31, 1997, upon conversion to a C Corporation, deferred income tax assets and deferred income tax liabilities of approximately $4,421 and $6,231, respectively, will be recorded with an offsetting charge to net income. Such amounts have been determined in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Translation adjustments of the Company's foreign subsidiaries whose functional currency is U.S. dollars and transaction gains and losses are included in the accompanying consolidated statements of income for all periods presented. All translation and transaction activity was insignificant in 1994, 1995, 1996 and through March 31, 1997. REVENUE RECOGNITION The Company recognizes revenues from the sale of products at the point of passage of title, which is generally at the time of shipment. RESEARCH AND DEVELOPMENT EXPENSES Expenses associated with the development of new products and changes to existing products are charged to expense as incurred. The costs amounted to $5,997, $6,664 and $9,263 in 1994, 1995, and 1996 and $2,198 and $2,997 for the three month periods ended March 31, 1996 and 1997, respectively. INCOME PER SHARE Except for pro forma disclosures, income per share for all periods presented has been omitted as the presentation of such information is not meaningful. RECLASSIFICATIONS Certain amounts in the prior periods' consolidated financial statements have been reclassified to conform to the current period's presentation. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS Financial instruments held by the Company include cash and cash equivalents, accounts receivable, accounts payable, revolving credit facility, long-term debt, and interest rate swap agreements. The book value of cash and cash equivalents, accounts receivable and payables are considered to be representative of fair value because of the short maturity of these instruments. The fair values of borrowings under the revolving credit facility and long-term debt are based on rates available to the Company for debt with comparable terms and maturities. The interest rate swap agreements convert floating rate debt under the Company's revolving credit facility to fixed rate debt. The difference between the floating interest rate and the fixed interest rate which is to be paid or received is recognized in interest expense as the floating interest rate changes over the life of the agreement. F-10 67 STONERIDGE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND 1997 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED.) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) ACCOUNTING ESTIMATES The preparation of 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, including certain self-insured risks 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. Since actual results could differ from those estimates, the Company revises its estimates and assumptions as new information becomes available. ACCOUNTING STANDARDS The Company adopted Statement of Financial Accounting Standard No. 121 (SFAS 121) "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in 1996. SFAS 121 requires long-lived assets and certain identifiable intangible assets to be reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of this standard did not effect the Company's financial statements. Management periodically reviews the realizability of long-lived assets of the Company in accordance with SFAS 121. 3. ASSETS PURCHASED THROUGH ACQUISITION: On November 1, 1995, the Company acquired the ongoing actuator business, and the related machinery and equipment, intellectual property rights and purchase contracts from Kelsey-Hayes. The Company also entered into a certain transition services agreement with the seller in conjunction with this acquisition. In connection with the transition services agreement, the seller provided certain services during the period November 1, 1995 through October 31, 1996 for cash consideration of $5,200. The Company recorded $946 and $4,254 of expense in 1995 and 1996, respectively, relative to the transition services agreement. The acquisition was accounted for as a purchase and the excess of the cost over the fair value of the assets acquired, totaling approximately $14,000, was reflected as goodwill in the accompanying consolidated balance sheet. Total consideration paid by the Company with respect to this acquisition including payments under the transition services agreement was approximately $24,000. 4. INVESTMENT: In 1996, the Company purchased 45% of the outstanding common stock of a foreign company which designs and manufactures electronic components for the transportation industry for approximately $8,834. The investment was accounted for under the equity method of accounting. The excess of the amount paid over the book value of the assets acquired, totaling $7,200, is being amortized over 40 years on a straight-line basis. Amortization expense was $100 in 1996 and $45 for the three months ended March 31, 1997. 5. LONG-TERM DEBT: The Company has an $80 million revolving credit facility with a bank group. The revolving credit facility is payable in full on June 30, 2001 and requires a commitment fee of 1/4% on the unused balance. Interest is payable quarterly at the Company's option of either (i) prime rate or (ii) LIBOR plus a margin of 1% to 1.5%, depending upon the Company's fixed charge coverage ratio, as defined. The Company has entered into a $25 million interest rate swap agreement with a member of the bank group whereby its contractual interest rate was swapped through February 1999 for a fixed rate of 5.795% plus F-11 68 STONERIDGE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND 1997 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED.) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) a margin of 1% to 1.5%, depending upon the Company's fixed charge coverage ratio, as defined. The notional amount under the swap agreement remains at $25 million through maturity. Additionally, the Company has entered into a separate $20 million interest rate swap agreement with a member of the bank group whereby its contractual interest rate was swapped through August 1999 for a fixed rate of 6.28% plus a margin of 1% to 1.5%, depending upon the Company's fixed charge coverage ratio, as defined, provided the LIBOR rate is less than 7.50%. This swap agreement is ineffective when the LIBOR rate is equal to or greater that 7.50%. The notional amount under the swap agreement remains at $20 million through maturity. The Company is exposed to credit loss under the swap agreements in the event of nonperformance by the bank. As of December 31, 1996, the Company would have paid approximately $257 to the bank had it elected to terminate these interest rate swap agreements. The weighted average interest rate in effect for the years ended December 31, 1994, 1995 and 1996 was approximately 7.2%, 7.0% and 7.4%, respectively, including the effects of the interest rate swap agreements. The revolving credit facility is secured by the Company's accounts receivable, inventories, equipment and real estate. Long-term debt consists of the following:
DECEMBER 31, MARCH ------------------- 31, 1995 1996 1997 ------- ------- ------- Borrowings under revolving credit facility........... $45,200 $47,945 $36,498 Note payable to financing company, repaid in full in February 1997...................................... 2,781 2,580 -- Note payable to financing company, collateralized by specific property, plant and equipment, due in monthly installments of $37, including variable rate interest based annually on the yield of two-year Treasury securities, constant maturity of United States Government plus 2.15% with a balloon payment of $1,087, maturing in April 2006.......... -- 3,415 3,374 Other................................................ 329 217 190 ------- ------- ------- 48,310 54,157 40,062 Less-Current maturities.............................. 311 3,001 122 ------- ------- ------- $47,999 $51,156 $39,940 ======= ======= =======
The revolving credit facility contains various covenants which require, among other things, the maintenance of several financial ratios and minimum net worth levels while restricting capital expenditures and shareholder distributions. The Company was in compliance with these covenants at December 31, 1996 and March 31, 1997. F-12 69 STONERIDGE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND 1997 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED.) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) Future maturities of long-term debt as of December 31, 1996 are as follows: 1997.............................................. $ 3,001 1998.............................................. 287 1999.............................................. 208 2000.............................................. 225 2001.............................................. 48,066 Thereafter........................................ 2,370 ------- $ 54,157 =======
Interest paid for the years ended December 31, 1994, 1995 and 1996 was approximately $2,072, $1,892 and $3,844, respectively, and $869 and $913 for the periods ending March 31, 1996 and 1997, respectively. 6. OPERATING LEASE COMMITMENTS: The Company leases equipment, vehicles and a building from third parties under operating lease agreements. The Company also leases some of its facilities from certain related parties. The leases are accounted for as operating leases and are for various terms ranging from three to 20 years with additional renewal options. The Company is generally responsible for repairs and maintenance, taxes and insurance. For the years ended December 31, 1994, 1995 and 1996, lease expense totaled $1,562, $1,683 and $2,255, respectively, and $420 and $564 for the three months ended March 31, 1996 and 1997, respectively, under these agreements. Future minimum operating lease commitments at December 31, 1996, are as follows:
THIRD PARTY RELATED PARTY ----------- ------------- 1997........................... $ 1,098 $ 571 1998........................... 562 577 1999........................... 164 584 2000........................... 90 590 2001........................... 6 486 Thereafter..................... -- 883
7. STOCK OPTION PLANS AND STOCK RESTRICTIONS: In March 1995, the Company granted 651 options to key executives to purchase Class B nonvoting common shares at $671 per share. The options were vested upon grant and all 651 options were exercised. In June 1996, the Company granted an additional 1,000 options to directors and 2,150 options to key executives to purchase Class B nonvoting common shares at $798 per share. The options granted to directors were vested upon grant. The options granted to key executives vest ratably over two years. The Company recorded compensation expense of $450 for the year ended December 31, 1996, and $120 for the three months F-13 70 STONERIDGE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND 1997 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED.) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) ended March 31, 1997, in the accompanying consolidated financial statements relative to these options. As of March 31, 1997, all 3,150 stock options were outstanding. Transfers of all options or shares issued under this agreement are restricted and subject to rights of first refusal by the Company. 8. EMPLOYEE BENEFIT PLANS: The Company has a defined contribution profit sharing plan covering substantially all of the employees. Company contributions are discretionary; however, a portion of these contributions are based upon a percentage of employee compensation, as defined in the plan. The Company's policy is to fund all profit sharing costs accrued. There are no unfunded prior service costs. For the years ended December 31, 1994, 1995 and 1996 contributions amounted to $1,512, $1,538 and $1,356, respectively. For the three months ended March 31, 1996 and 1997, contributions amounted to $351 and $334, respectively. Additionally, the Company has a defined contribution profit sharing retirement plan, which covers certain other employees. The plan includes the provisions of a Section 401(k) plan and allows employees to contribute up to 14% of their eligible compensation. Company contributions are determined by the Board of Directors; however the Company must match 50% of the participating employees' contributions up to a maximum of 3% of their eligible compensation. For the years ended December 31, 1994, 1995 and 1996 the Company's contributions amounted to $800, $950 and $1,125, respectively, and for the three month periods ended March 31, 1996 and 1997, amounted to $301 and $290, respectively. The Company does not provide any material retirement, postretirement or postemployment benefits to its employees. 9. RELATED PARTY TRANSACTIONS: In 1996, the Company sold a building to an affiliated entity for $2,200. The excess of the sales price over the carrying value of the building was $562 and was recorded as a capital contribution. During 1996, prior to the sale of this building, the Company received approximately $235 in lease payments and recognized related depreciation and interest expense totaling approximately $108. In 1994 and 1995, the Company recognized lease revenue of $278 and depreciation and interest expense of $207 and $194, respectively. The Company is the guarantor of a $2,200 loan to this affiliated entity which was used to fund the building purchase. The Company is the guarantor on a $500 standby letter of credit for a related party loan; however, there were no balances outstanding on this loan as of December 31, 1996 and March 31, 1997. The Company provides management services to a related company in the amount of $300 annually and also pays the salary of certain key personnel, amounting to $178, $182 and $180 in 1994, 1995 and 1996, respectively. Beginning in August 1997, the salary payments will be paid by the related company and the management fee will be reduced to $60 annually. In connection with a split dollar arrangement, the Company has an interest in and pays the policy premiums on an insurance policy for D.M. Draime. As of December 31, 1996, the Company had paid premiums in the amount of $663. In the event of the death of Mr. Draime, his estate will receive the full amount of the life insurance policy less the aggregate amount of premiums paid which will be reimbursed to F-14 71 STONERIDGE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND 1997 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED.) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) the Company. Upon or prior to the completion of the Offering, the Company will be reimbursed for the premiums paid on this policy by or on behalf of Mr. Draime. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS: A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and payables are considered to be representative of fair value because of the short maturity of these instruments. In management's opinion, the estimated fair value of the Company's long-term debt approximates book value as under the terms of the borrowings arrangements, a significant portion of the obligations are subject to fluctuating market rates of interest. Off-balance sheet derivative financial instruments as of December 31, 1995 and 1996, held for purposes other than trading, include two swap agreements which mature during 1999. The notional amounts and fair values of the swap agreements are as follows:
DECEMBER 31, ------------------ MARCH 31, 1995 1996 1997 ------- ------- --------- Notional Amount.................... $25,000 $45,000 $45,000 Fair Value......................... (26) (257) 169
11. PUBLIC OFFERING OF COMMON SHARES: The Company intends to file a Registration Statement relating to the initial public offering of its common shares (the Offering). The net proceeds from the issuance and sale of common shares will be used for the partial repayment of debt and the payment to the pre-offering shareholders of approximately $81 million to $85 million as an S Corporation distribution (S Corporation Distribution). As a result of the Offering, the S Corporation status will terminate and the Company will be responsible for the corporate income taxes on its earnings from that date forward. Certain officers and employees will reinvest at least $5 million of their distribution (Management Reinvestment) In connection with the Company's proposed Offering, the Company intends to amend its Articles of Incorporation to change the authorized share capital of the Company from 37,724 shares of Class A Common, voting, without par value, and 87,276 shares of Class B Common, non-voting, without par value, to 60,000,000 Common Shares, without par value (the Common Shares), and 5,000,000 shares of voting preferred shares, without par value. In addition, the amended Articles of Incorporation will provide that each Class A Common Share and Class B Common Share will automatically become a number of Common Shares to be determined. All applicable share and per share data have been adjusted accordingly. Acquisition: Effective upon the completion of the Offering, the Company expects to acquire the remaining 55% of the outstanding stock of Berifors by issuing Common Shares to the sellers. Tax Indemnification: The Company and its principal shareholders have entered into a tax indemnification agreement relating to their respective tax liabilities. The agreement provides, among other things, for (i) the indemnification by the Company of the principal shareholders against all losses, liabilities, interest, penalties, and attorneys' and accountants' fees resulting from any additional federal or state income taxes imposed upon the principal shareholders as a result of the change in S Corporation income of the Company for any period in F-15 72 STONERIDGE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1996 AND 1997 AND FOR THE PERIODS THEN ENDED ARE UNAUDITED.) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) which the Company was treated for federal and certain state income tax purposes as an S Corporation (the S Corporation Periods); and (ii) indemnification of the Company by the principal shareholders against certain liabilities and losses with respect to federal and state income taxes, including interest, penalties and attorneys' and accountants' fees resulting from any decrease in such shareholders' S Corporation income from the Company during the S Corporation Periods. Long-Term Incentive Plan: Grants of incentive or nonqualified share options, restricted shares, deferred shares, share purchase rights, share appreciation rights in tandem with options, other share-based awards, or any combination thereof, may be made under the plan to officers and key employees who are responsible for or contribute to the management, growth or profitability of the business of the Company and its affiliates. The Stock Option Committee of the Board of Directors will administer the plan and determine the type, amount and timing of grants and awards. The Company will reserve Common Shares for issuance under the plan. No participant in the plan may be granted stock options or other share awards in any calendar year for more than shares. The share limitations, shares reserved and the terms of outstanding awards will be adjusted, as the Stock Option Committee deems appropriate, in the event of a share dividend, split or other change in the corporate structure of the Company affecting the shares. The plan provides for vesting, exercise or forfeiture of rights granted under the plan on death, disability, termination of employment or a change of control. The Board of Directors may modify, suspend or terminate the plan as long as it does not impair the rights thereunder of any participant. 12. UNAUDITED PRO FORMA INFORMATION: The unaudited pro forma balance sheet data presented assumes on March 31, 1997, (i) an $83.0 million S Corporation Distribution, (ii) a $5.0 million Management Reinvestment, and (iii) termination of its S Corporation status, and in connection therewith, reinstated $6,231 of deferred income tax liabilities, and $4,421 of deferred income tax assets. The unaudited pro forma net income for the year ended December 31, 1996 and for the three months ended March 31, 1997 assumes that the Company is subject to income taxes as a C Corporation. Unaudited pro forma net income per share has been calculated by dividing pro forma net income by the weighted average number of Common Shares outstanding ( ) and the number of Common Shares ( ) to be issued in connection with the Offering. 13. COMMITMENT AND CONTINGENCIES: In the ordinary course of business, the Company is involved in various legal proceedings, workers' compensation and product liability disputes. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of operations or the financial position of the Company. 14. SUBSEQUENT EVENT: On July 25, 1997, the Company entered into a letter of intent to acquire 50% of the stock of a Brazilian electronic components business which specializes in vehicle security devices. The aggregate purchase price in the letter of intent is approximately $17,000. The acquisition is subject to certain contingencies, including the Company's satisfactory completion of business, legal, accounting and environmental due diligence reviews, negotiation of a definitive agreement and approval of the transaction by the Company's Board of Directors. F-16 73 STONERIDGE, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD ---------- ---------- ---------- ---------- ---------- Allowance for doubtful accounts Year ended December 31, 1994 173 7 -- 7 173 Year ended December 31, 1995 173 325 -- 45 453 Year ended December 31, 1996 453 43 -- 231 265
F-17 74 [LOGO] 75 PROSPECTUS (Subject to Completion) Issued August 8, 1997 Shares STONERIDGE, INC. COMMON SHARES ------------------ OFFERING TO THE DIRECTORS, EXECUTIVE OFFICERS AND MANAGEMENT EMPLOYEES OF THE COMPANY The Shares are being offered directly by the Company. Common Shares sold pursuant to this offering will be issued by the Company and will not be underwritten or subject to the arrangements described herein under "Underwriters." Accordingly, the information in the Prospectus relating to the Company's initial public offering on the Cover Page is not applicable. All proceeds from this offering will be payable to the Company and will be used for general corporate purposes. The price paid per share in this offering will be the initial public offering price paid per share less underwriting discounts and commissions. This offering is conditioned upon the completion of the Company's initial public offering and is expected to be consummated concurrently with such initial public offering. ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------ , 1997 76 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the fees and expenses in connection with the issuance and distribution of the securities being registered hereunder. Except for the SEC registration fee, NASD filing fee and NYSE filing fee, all amounts are estimates. SEC registration fee.................................................... $37,576 NASD filing fee......................................................... 12,900 NYSE filing fee......................................................... * Accounting fees and expenses............................................ * Legal fees and expenses................................................. * Blue Sky fees and expenses (including counsel fees)..................... * Printing and engraving expenses......................................... * Transfer agent's and registrar's fees and expenses...................... * Miscellaneous expenses.................................................. * ------- TOTAL......................................................... $ * =======
- --------------- * To be completed by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Ohio Revised Code (the "Code") authorizes Ohio corporations to indemnify officers and directors from liability if the officer or director acted in good faith and in a manner reasonably believed by the officer or director to be in or not opposed to the best interests of the corporation, and, with respect to any criminal actions, if the officer or director had no reason to believe his action was unlawful. In the case of an action by or on behalf of a corporation, indemnification may not be made (i) if the person seeking indemnification is adjudged liable for negligence or misconduct, unless the court in which such action was brought determines such person is fairly and reasonably entitled to indemnification or (ii) if liability asserted against such person concerns certain unlawful distributions. The indemnification provisions of the Ohio Code require indemnification if a director or officer has been successful on the merits or otherwise in defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director or officer of the corporation. The indemnification authorized under Ohio law is not exclusive and is in addition to any other rights granted to officers and directors under the articles of incorporation or code of regulations of the corporation or any agreement between officers and directors and the corporation. A corporation may purchase and maintain insurance or furnish similar protection on behalf of any officer or director against any liability asserted against him and incurred by him in his capacity, or arising out of the status, as an officer or director, whether or not the corporation would have the power to indemnify him against such liability under the Ohio Code. The Registrant's Code of Regulations provides for the indemnification of directors and officers of the Registrant to the maximum extent permitted by Ohio law as authorized by the Board of Directors of the Registrant, for the advancement of expenses incurred in connection with the defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director of the Registrant upon the receipt of an undertaking to repay such amount unless it is ultimately determined that the director is entitled to indemnification. The Code of Regulations authorizes the Registrant to purchase and maintain insurance on behalf of any director, officer, employee or agent of the Registrant against any liability asserted against them in such capacity or arising out of their status as such, whether or not the Registrant would have power to indemnify such officer, employee or agent against such liability under the provisions of the Code of Regulations of the Registrant. The Registrant maintains a directors' and officers' insurance policy which insures the officers and directors of the Registrant from any claim arising out of an alleged wrongful act by such persons in their respective capacities as officers and directors of the Registrant. Reference is made to Section of the Underwriting Agreement, a copy of which is filed herewith as Exhibit 1.1, for information concerning indemnification arrangements among the Registrant and the Underwriters. II-1 77 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Within the past three years, in connection with the exercise of options granted to its senior officers and directors, the Registrant, relying on the exemption from registration contained in Section 4(2) of the Securities Act of 1933, has issued Class B Common Shares (after giving effect to the recapitalization described in "Description of Capital Shares") to the following individuals on or about the following dates and for the following aggregate cash exercise prices in connection with previously granted options:
AGGREGATE INDIVIDUAL DATE SHARES EXERCISE PRICE - ----------------------------------- --------------------- ------ -------------- Kevin P. Bagby..................... August 7, 1997 250 $199,500 Michael Bagby...................... August 7, 1997 100 79,800 Thomas Beaver...................... August 7, 1997 250 199,500 Richard Cheney..................... August 7, 1997 250 199,500 Alberto Chretin.................... August 7, 1997 250 199,500 Avery Cohen........................ August 7, 1997 250 199,500 Chia Day........................... August 7, 1997 250 199,500 Richard Emerine.................... August 7, 1997 100 79,800 Sheldon Epstein.................... August 7, 1997 250 199,500 David Gargas....................... August 7, 1997 100 79,800 Howard Goldberg.................... August 7, 1997 250 199,500 William Haushalter................. August 7, 1997 250 199,500 William Hull....................... August 7, 1997 100 79,500 Earl Linehan....................... August 7, 1997 250 199,500 Mark Oakes......................... August 7, 1997 250 199,500 Edward F. Mosel.................... June 30, 1996 151 101,321 David Thomas....................... June 30, 1996 500 335,500
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS -- The following is a list of exhibits in this Registration Statement.
EXHIBIT NO. DESCRIPTION - ------ ------------------------------------------------------------------------------------ 1.1* Proposed Form of Underwriting Agreement. 3.1 Proposed Form of Second Amended and Restated Articles of Incorporation of the Company. 3.2 Proposed Form of Amended and Restated Code of Regulations of the Company. 4.1* Specimen Share Certificate. 5.1 Form of Opinion of Baker & Hostetler LLP regarding the legality of the Common Shares being registered. 10.1 Long-Term Incentive Plan 10.2 Lease dated October 1, 1993 between D.M. Draime and Alphabet, Inc. (the Company's predecessor) with respect to the Company's Greenwood, North Carolina facility. 10.3 Lease Agreement between Industrial Development Associates and the Alphabet Division, with respect to the Company's Mebane, North Carolina facility. 10.4 Lease Agreement between Hunters Square, Inc. and Alphabet, Inc., with respect to the Company's division headquarters for the Alphabet Division. 10.5 Contract Manufacturing Agreement dated January 3, 1993 with a division of General Motors. 10.6* Share Exchange Agreement relating to the Berifors Acquisition 23.1 Consent of Baker & Hostetler LLP (to be contained in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 24.1 Powers of Attorney (contained in the signature pages). 27.1 Financial Data Schedule for three-months ended March 31, 1997. 27.2 Financial Data Schedule for three-months ended March 31, 1996. 27.3 Financial Data Schedule for the year ended December 31, 1996. 27.4 Financial Data Schedule for the year ended December 31, 1995. 27.5 Financial Data Schedule for the year ended December 31, 1994.
- --------------- * To be filed by Amendment II-2 78 (b) FINANCIAL STATEMENT SCHEDULE Schedule II -- Valuation of Qualifying Accounts is located at page F-17. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 79 SIGNATURES Pursuant to the requirements of the Securities act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Warren, State of Ohio, on the 5th day of August, 1997. STONERIDGE, INC. By: /s/ CLOYD J. ABRUZZO ------------------------------------ Cloyd J. Abruzzo, President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears, below hereby constitutes and appoints D.M. Draime, Cloyd J. Abruzzo and Avery S. Cohen, or any one of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to the Registration Statement, including post-effective amendments, and registration statements filed pursuant to Rule 462 under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and does hereby grant unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. II-4 80 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on the 5th day of August, 1997.
SIGNATURE TITLE - --------------------------------------------- -------------------------------------- /s/ CLOYD J. ABRUZZO President, Chief Executive Officer, - --------------------------------------------- Assistant Secretary and Director Cloyd J. Abruzzo (principal executive officer) /s/ KEVIN P. BAGBY Chief Financial Officer and Treasurer - --------------------------------------------- (principal financial officer and Kevin P. Bagby principal accounting officer) /s/ D.M. DRAIME Director - --------------------------------------------- D.M. Draime /s/ AVERY S. COHEN Director - --------------------------------------------- Avery S. Cohen /s/ RICHARD E. CHENEY Director - --------------------------------------------- Richard E. Cheney /s/ SHELDON J. EPSTEIN Director - --------------------------------------------- Sheldon J. Epstein /s/ EARL L. LINEHAN Director - --------------------------------------------- Earl L. Linehan
II-5 EX-3.1 2 EXHIBIT 3.1 1 Exhibit 3.1 SECOND AMENDED AND RESTATED --------------------------- ARTICLES OF INCORPORATION ------------------------- OF -- STONERIDGE, INC. ---------------- FIRST: The name of the Corporation shall be "Stoneridge, Inc." SECOND: The place in the State of Ohio where the principal office of the Corporation is to be located is in Howland Township, Trumbull County. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be formed under Sections 1701.01 to 1701.98, inclusive, of the Ohio Revised Code and any amendments heretofore or hereafter made thereto. FOURTH: The authorized number of shares of the Corporation is 65,000,000, consisting of 60,000,000 Common Shares, without par value (hereinafter referred to as "Common Shares"), and 5,000,000 Serial Preferred Shares, without par value (hereinafter referred to as "Serial Preferred Shares"). DIVISION A The Serial Preferred Shares shall have the following express terms: SECTION 1. SERIES. The Serial Preferred Shares may be issued from time to time in one or more series. All Serial Preferred Shares shall be of equal rank and shall be identical, except in respect of the matters that may be fixed by the Board of Directors as hereinafter provided, and each share of a series shall be identical with all other shares of such series, except as to the dates from which dividends shall accrue and be cumulative. Subject to the provisions of Sections 2 through 6, both inclusive, of this Division, which provisions shall apply to all Serial Preferred Shares, the Board of Directors hereby is authorized to cause such shares to be issued in one or more series and with respect to each such series to determine and fix prior to the issuance thereof (and thereafter, to the extent provided in clause (b) of this Section) the following: (a) The designation of the series, which may be by distinguishing number, letter or title; (b) The authorized number of shares of the series, which number the Board of Directors may (except when otherwise provided in the creation of 2 the series) increase or decrease from time to time before or after the issuance thereof (but not below the number of shares thereof then outstanding); (c) The dividend rate or rates of the series, including the means by which any such rate may be established; (d) The date or dates from which dividends shall accrue and be cumulative and the dates on which and the period or periods for which dividends, if declared, shall be payable, including the means by which any such date or period may be established; (e) The redemption rights and redemption price or prices, if any, for shares of the series; (f) The terms and amount of the sinking fund, if any, for the purchase or redemption of shares of the series; (g) The amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; (h) Whether the shares of the series shall be convertible into Common Shares or shares of any other class and, if so, the conversion rate or rates or price or prices, any adjustments thereof and all other terms and conditions upon which such conversion may be made; and (i) Restrictions (in addition to those set forth in Subsection 5(b) of this Division) on the issuance of shares of the same series or of any other class or series. The Board of Directors is authorized to adopt from time to time amendments to the Second Amended and Restated Articles of Incorporation fixing, with respect to each such series, the matters described in clauses (a) through (i), both inclusive, of this Section and is authorized to take such actions with respect thereto as may be required by law in order to effect such amendments. SECTION 2. DIVIDENDS. (a) The holders of Serial Preferred Shares of each series, in preference to the holders of Common Shares and of any other class of shares ranking junior to the Serial Preferred Shares, shall be entitled to receive out of any funds legally available for the payment of dividends on Serial Preferred Shares, when and as declared by the Board of Directors, dividends in cash at the rate or rates for such series fixed in accordance with the provisions of Section 1 of this Division A and no more, payable on the dates fixed for such series. Such dividends shall accrue and be cumulative, in the case of shares of each particular series, from and after the date or dates fixed with respect to -2- 3 such series. No dividends shall be paid upon or declared or set apart for any series of Serial Preferred Shares for any dividend period unless at the same time a like proportionate dividend payable for the dividend periods terminating on the same or any earlier date, ratably in proportion to the respective annual dividend rates fixed therefor, shall have been paid upon or declared or set apart for all Serial Preferred Shares of all series then issued and outstanding and entitled to receive such dividend. (b) So long as any Serial Preferred Shares shall be outstanding no dividend, except a dividend payable in Common Shares or other shares ranking junior to Serial Preferred Shares, shall be paid or declared or any distribution be made, except as aforesaid, in respect of the Common Shares or any other shares ranking junior to Serial Preferred Shares, nor shall any Common Shares or any other shares ranking junior to Serial Preferred Shares be purchased, retired or otherwise acquired by the Corporation, except out of the proceeds of the sale of Common Shares or other shares of the Corporation ranking junior to Serial Preferred Shares received by the Corporation subsequent to the date of first issuance of Serial Preferred Shares of any series, unless: (1) All accrued and unpaid dividends on Serial Preferred Shares, including the full dividends for all current dividend periods, shall have been declared and paid or a sum sufficient for payment thereof set apart; and (2) There shall be no arrearage with respect to the redemption of Serial Preferred Shares of any series from any sinking fund provided for shares of such series in accordance with Section 1 of this Division A. SECTION 3. REDEMPTION. (a) Subject to the express terms of each series and the provisions of Subsection 5(c)(3) of this Division A, the Corporation: (1) May, from time to time at the option of the Board of Directors, redeem all or any part of any redeemable series of Serial Preferred Shares at the time outstanding at the applicable redemption price for such series fixed in accordance with Section 1 of this Division A; and (2) Shall, from time to time, make such redemptions of each series of Serial Preferred Shares as may be required to fulfill the requirements of any sinking fund provided for shares of such series at the applicable sinking fund redemption prices fixed in accordance with Section 1 of this Division A; -3- 4 and shall in the case of any such redemption pay all accrued and unpaid dividends to the redemption date. (b) (1) Notice of every such redemption shall be mailed, postage prepaid, to the holders of record of Serial Preferred Shares to be redeemed at their respective addresses then appearing on the books of the Corporation, not less than 30 days nor more than 60 days prior to the date fixed for such redemption, or such other time prior thereto as the Board of Directors shall fix for any series pursuant to Section 1 of this Division A prior to the issuance thereof. At any time after notice as provided above has been deposited in the mail, the Corporation may deposit the aggregate redemption price of Serial Preferred Shares to be redeemed, together with accrued and unpaid dividends thereon to the redemption date, with any bank or trust company in Cleveland, Ohio, or New York, New York, having capital and surplus of not less than $50,000,000, named in such notice and direct that there be paid to the respective holders of Serial Preferred Shares so to be redeemed amounts equal to the redemption price of Serial Preferred Shares so to be redeemed, together with such accrued and unpaid dividends thereon, on surrender of the share certificate or certificates held by such holders; and upon the deposit of such notice in the mail and the making of such deposit of money with such bank or trust company, such holders shall cease to be shareholders with respect to such shares; and from and after the time such notice shall have been so deposited and such deposit of money shall have been so made, such holders shall have no rights or claim against the Corporation with respect to such shares, except only the right to receive such money from such bank or trust company without interest or to exercise before the redemption date any unexpired privileges of conversion. If less than all of the outstanding Serial Preferred Shares are to be redeemed, the Corporation shall select by lot the shares so to be redeemed in such manner as shall be prescribed by the Board of Directors. (2) If the holders of Serial Preferred Shares which have been called for redemption shall not within five years after such deposit claim the amount deposited for the redemption thereof, any such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company and the Corporation shall be relieved of all responsibility in respect thereof and to such holders. (c) Any Serial Preferred Shares which are (1) redeemed by the Corporation pursuant to the provisions of this Section, (2) purchased and delivered in satisfaction of any sinking fund requirements provided for shares of such series, (3) converted in accordance with the express terms thereof, or (4) otherwise acquired by the Corporation, shall resume the status of authorized but unissued Serial Preferred Shares without serial designation. -4- 5 SECTION 4. LIQUIDATION. (a) (1) In any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of Serial Preferred Shares of any series shall be entitled to receive in full out of the assets of the Corporation, including its capital, before any amount shall be paid or distributed among the holders of Common Shares or any other shares ranking junior to Serial Preferred Shares, the amounts fixed with respect to shares of such series in accordance with Section 1 of this Division, plus an amount equal to all dividends accrued and unpaid thereon to the date of payment of the amount due pursuant to such liquidation, dissolution or winding up of the affairs of the Corporation. If the net assets of the Corporation legally available therefor are insufficient to permit the payment upon all outstanding Serial Preferred Shares of the full preferential amount to which they are entitled pursuant to this subsection 4(a)(1), then such net assets shall be distributed ratably upon all outstanding Serial Preferred Shares in proportion to the full preferential amount to which each such share is entitled. (2) After payment to the holders of Serial Preferred Shares of the full preferential amounts as aforesaid, the holders of Serial Preferred Shares, as such, shall have no right or claim to any of the remaining assets of the Corporation. (b) The merger or consolidation of the Corporation into or with any other corporation or entity, the merger of any other corporation or entity into the Corporation, or the sale, lease or conveyance of all or substantially all the assets of the Corporation, shall not be deemed to be a dissolution, liquidation or winding up for the purposes of this Section 4. SECTION 5. VOTING. (a) The holders of Serial Preferred Shares shall have no voting rights, except as provided in this Section or as required by law. (b) (1) If, and so often as, the Corporation shall be in default in the payment of the equivalent of the full dividends on any series of Serial Preferred Shares at the time outstanding, whether or not earned or declared, for a number of dividend payment periods (whether or not consecutive) which in the aggregate contain at least 540 days, the holders of Serial Preferred Shares of all series, voting together as one separate class, shall be entitled to elect, as herein provided, two members of the Board of Directors of the Corporation; provided, however, that the holders of Serial Preferred Shares shall not have or exercise such special class voting rights except at meetings of such shareholders for the election of directors at which the holders of not -5- 6 less than 50% of the outstanding Serial Preferred Shares of all series then outstanding are present in person or by proxy; and provided further that the special class voting rights provided for in this subsection 5(b)(1) when the same shall have become vested shall remain so vested until all accrued and unpaid dividends on Serial Preferred Shares of all series then outstanding shall have been paid, whereupon the holders of Serial Preferred Shares shall be divested of their special class voting rights in respect of subsequent elections of directors, subject to the revesting of such special class voting rights on another default of the type specified in this subsection 5(b)(1). (2) In the event of default entitling the holders of Serial Preferred Shares to elect two directors as specified in paragraph (1) of this Subsection, a special meeting of such holders for the purpose of electing such directors shall be called by the Secretary of the Corporation upon written request of, or may be called by, the holders of record of at least 10% of Serial Preferred Shares of all series at the time outstanding, and notice thereof shall be given in the same manner as that required for the annual meeting of shareholders; provided, however, that the Corporation shall not be required to call such special meeting if the annual meeting of shareholders shall be called to be held within 120 days after the date of receipt of the foregoing written request from the holders of Serial Preferred Shares; provided further, however, that if that annual meeting is not so held within such 120-day period, a special meeting shall be called as soon as is practicable after the Corporation becomes aware that such annual meeting will not be so held. At any meeting at which the holders of Serial Preferred Shares shall be entitled to elect directors, the holders of 50% of Serial Preferred Shares of all series at the time outstanding, present in person or by proxy, shall be sufficient to constitute a quorum, and the vote of the holders of a majority of such shares so present at any such meeting at which there shall be such a quorum shall be sufficient to elect the members of the Board of Directors which the holders of Serial Preferred Shares are entitled to elect as herein provided. Notwithstanding any provision of these Second Amended and Restated Articles of Incorporation or the Amended and Restated Code of Regulations of the Corporation or any action taken by the holders of any class of shares fixing the number of directors of the Corporation, the two directors who may be elected by the holders of Serial Preferred Shares pursuant to this Subsection shall serve in addition to any other directors then in office or proposed to be elected otherwise than pursuant to this Subsection. Nothing in this Subsection shall prevent any change otherwise permitted in the total number of or classifications of directors of the Corporation nor require the resignation of any director elected otherwise than pursuant to this Subsection. Notwithstanding any classification of the other directors of the Corporation, the two directors elected by the holders of Serial -6- 7 Preferred Shares shall be elected annually for terms expiring at the next succeeding annual meeting of shareholders. (3) The terms of office of all directors then in office elected by holders of Serial Preferred Shares as provided in this Subsection shall terminate immediately upon the expiration of the term of office during which there occurs any divesting of the special class voting rights of these holders. If the office of any director elected by such holders becomes vacant by reason of death, resignation, removal from office or otherwise, the holders of a majority of Serial Preferred Shares of all series at the time outstanding, present in person or by proxy at a special meeting of shareholders called and held in accordance with Subsection (2) above, shall elect a successor who shall hold office for the unexpired term in respect of which such vacancy occurred. (c) The affirmative vote of the holders of at least two-thirds of Serial Preferred Shares at the time outstanding, voting together as one separate class, shall be necessary to effect any one or more of the following (but so far as the holders of Serial Preferred Shares are concerned, such action may be effected with such vote): (1) Any amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Second Amended and Restated Articles of Incorporation or of the Code of Regulations of the Corporation which affects adversely the preferences or voting or other rights of the holders of Serial Preferred Shares; provided, however, neither the amendment of the Second Amended and Restated Articles of Incorporation so as to authorize, create or change the authorized or outstanding number of Serial Preferred Shares or of any shares ranking on a parity with or junior to Serial Preferred Shares nor the amendment of the provisions of the Code of Regulations so as to change the number or classification of directors of the Corporation shall be deemed to affect adversely the preferences or voting or other rights of the holders of Serial Preferred Shares; and provided further, that if any amendment, alteration or repeal affects adversely the preferences or voting or other rights of one or more but not all series of Serial Preferred Shares at the time outstanding, only the affirmative vote of the holders of at least two-thirds of the number of shares at the time outstanding of the series so affected shall be required; (2) The authorization, creation or increase in the authorized number of shares, or of any security convertible into shares, in either case ranking prior to the Serial Preferred Shares; or (3) The purchase or redemption (for sinking fund purposes or otherwise) of less than all Serial Preferred Shares then outstanding -7- 8 except in accordance with a share purchase offer made to all holders of record of Serial Preferred Shares, unless all dividends on all Serial Preferred Shares then outstanding for all previous dividend periods shall have been declared and paid or funds therefor set apart and all accrued sinking fund obligations applicable thereto shall have been complied with. SECTION 6. DEFINITIONS. For the purposes of this Division: (a) Whenever reference is made to shares "ranking prior to Serial Preferred Shares," such reference shall mean all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends or as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation are given preference over the rights of the holders of Serial Preferred Shares; (b) Whenever reference is made to shares on a parity with Serial Preferred Shares, such reference shall mean all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends and as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of a Corporation rank equally (except as to the amounts fixed therefor) with the rights of the holders of Serial Preferred Shares; and (c) Whenever reference is made to shares "ranking junior to Serial Preferred Shares," such reference shall mean all shares of the Corporation other than those defined under Subsections (a) and (b) of this Section 6 as shares "ranking prior to" or "on a parity with" Serial Preferred Shares. DIVISION B The Common Shares shall have the following express terms: The Common Shares shall be subject to the express terms of Serial Preferred Shares and any series thereof. Each Common Share shall be equal to each other Common Share and the holders thereof shall be entitled to one vote for each Common Share on all matters presented to the shareholders of the Corporation. Each Class A and Class B Common Share issued and outstanding immediately prior to the filing of these Second Amended and Restated Articles of Incorporation, and each share held at such time by the Corporation as a treasury share, is changed, effective upon that filing, into _____ Common Shares, with any fractional Common Share to which a holder would otherwise be entitled being rounded down to the nearest whole share. -8- 9 FIFTH: No holder of shares of the Corporation of any class shall be entitled as such, as a matter of right, to subscribe for or purchase shares of the Corporation of any class, now or hereafter authorized, or to subscribe for or purchase securities convertible into or exchangeable for shares of the Corporation of any class or to which shall be attached or appertain any warrants or rights entitling the holder thereof to subscribe for or purchase shares of the Corporation of any class, except such rights of subscription or purchase, if any, for such consideration and upon such terms and conditions as its Board of Directors from time to time may determine. SIXTH: To the extent permitted by law, the Corporation, by action of its Board of Directors and without action by its shareholders, may purchase or otherwise acquire shares of any class issued by it at such times, for such consideration and upon such terms and conditions as its Board of Directors may determine. SEVENTH: Except as otherwise provided in these Second Amended and Restated Articles of Incorporation or the Code of Regulations of the Corporation as in effect from time to time, notwithstanding any provision of Sections 1701.01 to 1701.98, inclusive, of the Ohio Revised Code and any amendments heretofore or hereafter made thereto, requiring for any purpose the vote, consent, waiver, or release of the holders of shares entitling them to exercise two-thirds or any other proportion of the voting power of the Corporation or of any class or classes of shares thereof, any action may be taken by the vote of the holders of shares entitling them to exercise a majority of the voting power of the Corporation, or of such class or classes, unless the proportion designated by such statute cannot be altered by these Second Amended and Restated Articles of Incorporation. EIGHTH: No shareholder may cumulate such shareholder's voting power in the election of directors. NINTH: No person who is serving or has served as a director of the Corporation shall be personally liable to the Corporation or any of its shareholders for monetary damages for breach of any fiduciary duty of such person as a director by reason of any act or omission of such person as a director; but the foregoing provision shall not eliminate or limit the liability of any person (a) for any breach of such person's duty of loyalty as a director to the Corporation or its shareholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 1701.95 of the Ohio Revised Code, (d) for any transaction from which such person derived any improper personal benefit, or (e) to the extent that such liability may not be limited or eliminated by virtue of Section 1701.13 of the Ohio Revised Code or any successor section or statute. Any repeal or modification of this NINTH Article by the shareholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. TENTH: If any provision (or portion thereof) of these Second Amended and Restated Articles of Incorporation shall be found to be invalid, prohibited, or unenforceable for any reason, the remaining provisions (or portions thereof) of these Second Amended and Restated Articles of Incorporation shall remain in full force and effect, and shall be construed -9- 10 as if such invalid, prohibited, or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of the Corporation and its shareholders that each such remaining provision (or portion thereof) of these Second Amended and Restated Articles of Incorporation remain, to the fullest extent permitted by law, applicable and enforceable as to all shareholders, notwithstanding any such finding. ELEVENTH: These Second Amended and Restated Articles of Incorporation supersede and take the place of the heretofore existing Amended and Restated Articles of Incorporation and all amendments thereto. -10- EX-3.2 3 EXHIBIT 3.2 1 Exhibit 3.2 AMENDED AND RESTATED CODE OF REGULATIONS OF STONERIDGE, INC. ARTICLE I --------- Meetings of Shareholders ------------------------ Section 1. ANNUAL MEETINGS. The annual meeting of shareholders shall be held at such time and on such date as may be fixed by the Board of Directors and stated in the notice of the meeting, for the election of directors, the consideration of reports to be laid before such meeting and the transaction of such other business as may properly come before the meeting. Section 2. SPECIAL MEETINGS. Special meetings of the shareholders shall be called upon the written request of the president, the directors by action at a meeting, a majority of the directors acting without a meeting, or of the holders of shares entitling them to exercise fifty percent (50%) of the voting power of the Corporation entitled to vote thereat. Special meetings may not be called by any other person. Calls for such meetings shall specify the purposes thereof. No business other than that specified in the call shall be considered at any special meeting. Section 3. NOTICES OF MEETINGS. Unless waived, written notice of each annual or special meeting stating the time, place, and the purposes thereof shall be given by personal delivery or by mail to each shareholder of record entitled to vote at or entitled to notice of the meeting, not more than sixty (60) days nor less than seven (7) days before any such meeting. If mailed, such notice shall be directed to the shareholder at his address as the same appears upon the records of the Corporation and shall be deemed to have been given at the time when it was mailed. Any shareholder, either before or after any meeting, may waive any notice required to be given by law or under these Regulations. Section 4. PLACE OF MEETINGS. Meetings of shareholders shall be held at the principal office of the Corporation unless the Board of Directors determines that a meeting shall be held at some other place within or without the State of Ohio and causes the notice thereof to so state. Section 5. QUORUM. The holders of shares entitling them to exercise a majority of the voting power of the Corporation entitled to vote at any meeting, present in person or by proxy, shall constitute a quorum for the transaction of business to be considered at such meeting; provided, however, that no action required by law or by the Second 2 Amended and Restated Articles of Incorporation (as they may be amended from time to time, the "Articles of Incorporation") or these Regulations to be authorized or taken by the holders of a designated proportion of the shares of any particular class or of each class may be authorized or taken by a lesser proportion. The holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present, may adjourn such meeting from time to time until a quorum shall be present. Section 6. RECORD DATE. The Board of Directors may fix a record date for any lawful purpose, including, without limiting the generality of the foregoing, the determination of shareholders entitled to (i) receive notice of or to vote at any meeting, (ii) receive payment of any dividend or distribution, (iii) receive or exercise rights of purchase of or subscription for, or exchange or conversion of, shares or other securities, subject to any contract right with respect thereto, or (iv) participate in the execution of written consents, waivers or releases. Said record date shall not be more than sixty (60) days preceding the date of such meeting, the date fixed for the payment of any dividend or distribution or the date fixed for the receipt or the exercise of rights, as the case may be. If a record date shall not be fixed, the record date for the determination of shareholders who are entitled to notice of, or who are entitled to vote at, a meeting of shareholders shall be the close of business on the date next preceding the day on which notice is given, or the close of business on the date next preceding the day on which the meeting is held, as the case may be. Section 7. PROXIES. A person who is entitled to attend a shareholders' meeting, to vote thereat, or to execute consents, waivers or releases, may be represented at such meeting or vote thereat, and execute consents, waivers and releases, and exercise any of his other rights, by proxy or proxies appointed by a writing signed by such person. Section 8. CONDUCT OF MEETING. Unless otherwise determined by the Board of Directors prior to the meeting, the chairman of any meeting of the shareholders shall determine the order of business and shall have the authority in his discretion to regulate the conduct of such meeting, including, without limitation, by imposing restrictions on the persons (other than shareholders of the Corporation or their duly appointed proxies) who may attend any such meeting of shareholders, whether any shareholder or his proxy may be excluded from any shareholders' meeting based upon any determination by the chairman, in his sole discretion, that any such person has unduly disrupted or is likely to disrupt the proceedings thereat, and the circumstances under which any person may make a statement or ask questions at any meeting of shareholders. ARTICLE II ---------- Directors --------- Section 1. NUMBER OF DIRECTORS. Until changed in accordance with the provisions of this section (or as otherwise provided in the Corporation's Articles of Incorporation), the number of directors of the Corporation, none of whom need be -2- 3 shareholders, shall be six (6). The number of directors may be increased or decreased by action of the Board of Directors upon the vote of the majority of the board or by the vote of the shareholders that are present in person or by proxy at a meeting to elect directors at which a quorum is present and that are holders of a majority of the shares represented at the meeting and entitled to vote on the proposal; provided, however, that in no case shall the number be fewer than five (5) or more than twelve (12); and provided, further, that no decrease in the number of directors shall have the effect of removing any director prior to the expiration of his term of office. Notwithstanding the foregoing, the aggregate number of members of the Board of Directors shall automatically increase by the number of directors elected pursuant to Article Fourth, Division A, subsection 5(b) of the Articles of Incorporation of the Company, such directors to be elected and hold office in accordance with such provisions of the Articles of Incorporation of the Company, notwithstanding any other provision of this Code of Regulations. Section 2. ELECTION OF DIRECTORS. (a) Directors shall be elected at the annual meeting of shareholders, but when the annual meeting is not held or directors are not elected thereat, they may be elected at a special meeting called and held for that purpose. Such election shall be by ballot whenever requested by any shareholder entitled to vote at such election; but, unless such request is made, the election may be conducted in any manner approved at such meeting. At each meeting of shareholders for the election of directors, the candidates receiving the greatest number of votes entitled to be cast shall be elected as directors. Section 3. NOMINATIONS. (a) QUALIFICATIONS. Directors of the Corporation need not be shareholders or residents of the State of Ohio. No person shall be appointed or elected a director of the Corporation unless: (i) such person is elected to fill a vacancy in the Board of Directors pursuant to section 6 of this Article II; or (ii) such person is nominated for election as a director of the Corporation in accordance with this section. Nominations of candidates for election as directors at any meeting of shareholders called for election of directors (an "Election Meeting") may be made by the Board of Directors or a committee thereof or any shareholder of record providing written notification to the Secretary of the Company of such nomination(s). At the request of the Secretary, each proposed nominee shall provide the Corporation with such information concerning himself as is required under the rules and regulations of the Securities and Exchange Commission (the "Commission") to be included in the Corporation's proxy statement soliciting proxies for the election of such nominee as a director. (b) SUBSTITUTION OF NOMINEES. In the event that a person is validly designated as a nominee in accordance with this Code of Regulations and shall thereafter become unable -3- 4 or unwilling to stand for election to the Board of Directors, the Board of Directors or a committee thereof may designate a substitute nominee upon delivery, not fewer than five (5) days prior to the date of an Election Meeting, of a written notice of the Secretary setting forth such information regarding such substitute nominee as would have been required to be delivered to the Secretary pursuant to this Code of Regulations had such substitute nominee been initially proposed as a nominee. Section 4. TERM OF OFFICE. Each director shall hold office until the annual meeting next succeeding his election and until his successor is elected and qualified, or until his earlier resignation, removal from office or death. Section 5. REMOVAL. All the directors or any individual director may be removed from office, without assigning any cause, by the vote of the holders of a majority of the voting power entitling them to elect directors in place of those to be removed. In case of any such removal, a new director may be elected at the same meeting for the unexpired term of each director removed. Section 6. VACANCIES. Vacancies in the Board of Directors may be filled by a majority vote of the remaining directors until an election to fill such vacancies is had. A vacancy or vacancies in the Board of Directors shall be deemed to exist if the number of directors is increased by the Board of Directors. Shareholders entitled to elect directors shall have the right to fill any vacancy in the board (whether the same has been temporarily filled by the remaining directors or not) at any meeting of the shareholders called for that purpose, and any directors elected at any such meeting of shareholders shall serve until the next annual election of directors and until their successors are elected and qualified. Section 7. QUORUM AND TRANSACTION OF BUSINESS. A majority of the whole authorized number of directors shall constitute a quorum for the transaction of business, except that a majority of the directors in office shall constitute a quorum for filling a vacancy on the board. Whenever less than a quorum is present at the time and place appointed for any meeting of the board, a majority of those present may adjourn the meeting from time to time until a quorum shall be present. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board. Section 8. ANNUAL MEETING. Annual meetings of the Board of Directors shall be held immediately following annual meetings of the shareholders, or as soon thereafter as is practicable. If no annual meeting of the shareholders is held, or if directors are not elected thereat, then the annual meeting of the Board of Directors shall be held immediately following any special meeting of the shareholders at which directors are elected, or as soon thereafter as is practicable. If such annual meeting of directors is held immediately following a meeting of the shareholders, it shall be held at the same place at which such shareholders' meeting was held. Section 9. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times and places, within or without the State of Ohio, as the Board of Directors may, by resolution or by-law, from time to time determine. The secretary shall -4- 5 give notice of each such resolution or by-law to any director who was not present at the time the same was adopted, but no further notice of such regular meeting need be given. Section 10. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the chairman of the board, the president, any vice president, or a majority of the Board of Directors, and shall be held at such times and places, within or without the State of Ohio, as may be specified in such call. Section 11. NOTICE OF ANNUAL OR SPECIAL MEETINGS. Notice of the time and place of each annual or special meeting shall be given to each director by the secretary or by the person or persons calling such meeting. Such notice need not specify the purpose or purposes of the meeting and may be given in any manner or method and at such time so that the director receiving it may have reasonable opportunity to participate in the meeting. Such notice shall, in all events, be deemed to have been properly and duly given if mailed at least forty-eight (48) hours prior to the meeting and directed to the residence of each director as shown upon the secretary's records and, in the event of a meeting to be held through the use of communications equipment, if the notice sets forth the telephone number at which each director may be reached for purposes of participation in the meeting as shown upon the secretary's records and states that the secretary must be notified if a director desires to be reached at a different telephone number. The giving of notice shall be deemed to have been waived by any director who shall participate in such meeting and may be waived, in a writing, by any director either before or after such meeting. Section 12. TELEPHONIC MEETINGS. To the extent permitted by law, members of the Board of Directors or any committee thereof may participate in a meeting of such body through the use of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participants in a meeting pursuant to this Section shall constitute presence in person at such meeting. Section 13. COMPENSATION. The directors, as such, shall be entitled to receive such reasonable compensation for their services as may be fixed from time to time by resolution of the board, and expenses of attendance, if any, may be allowed for attendance at each annual, regular or special meeting of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of the executive committee, if any, or of any standing or special committee may by resolution of the board be allowed such compensation for their services as the Board of Directors may deem reasonable, and additional compensation may be allowed to directors for special services rendered. Section 14. BY-LAWS. For the government of its actions, the Board of Directors may adopt by-laws consistent with the Articles of Incorporation of the Corporation and this Code of Regulations. -5- 6 ARTICLE III ----------- Committees ---------- Section 1. EXECUTIVE COMMITTEE. The Board of Directors may from time to time, by resolution passed by a majority of the whole board, create an executive committee of three or more directors, the members of which shall be elected by the Board of Directors to serve at the pleasure of the board. If the Board of Directors does not designate a chairman of the executive committee, the executive committee shall elect a chairman from its own number. Except as otherwise provided herein and in the resolution creating an executive committee, such committee shall, during the intervals between the meetings of the Board of Directors, possess and may exercise all of the powers of the Board of Directors in the management of the business and affairs of the Corporation, other than that of filling vacancies among the directors or in any committee of the directors. The executive committee shall keep full records and accounts of its proceedings and transactions. All action by the executive committee shall be reported to the Board of Directors at its meeting next succeeding such action and shall be subject to control, revision and alteration by the Board of Directors, provided that no rights of third persons shall be prejudicially affected thereby. Vacancies in the executive committee shall be filled by the directors, and the directors may appoint one or more directors as alternate members of the committee who may take the place of any absent member or members at any meeting. Section 2. MEETINGS OF EXECUTIVE COMMITTEE. Subject to the provisions of this Code of Regulations, the executive committee shall fix its own rules of procedure and shall meet as provided by such rules or by resolutions of the Board of Directors, and it shall also meet at the call of the president, the chairman of the executive committee or any two members of the committee. Unless otherwise provided by such rules or by such resolutions, the provisions of Section 10 of Article II relating to the notice required to be given of meetings of the Board of Directors shall also apply to meetings of the executive committee. A majority of the executive committee shall be necessary to constitute a quorum. The executive committee may act in a writing, or by telephone with written confirmation, without a meeting, but no action by writing of the executive committee shall be effective unless concurred in by all members of the committee. Section 3. OTHER COMMITTEES. The Board of Directors may by resolution provide for such other standing or special committees as it deems desirable, and discontinue the same at pleasure. Each such committee shall have such powers and perform such duties, not inconsistent with law, as may be delegated to it by the Board of Directors. The provisions of Section 1 and Section 2 of this Article shall govern the appointment and action of such committees so far as the same are consistent with such appointment and unless otherwise provided by the Board of Directors. Vacancies in such committees shall be filled by the Board of Directors or as the Board of Directors may provide. -6- 7 ARTICLE IV ---------- Officers -------- Section 1. GENERAL PROVISIONS. The Board of Directors shall elect a president, such number of vice presidents as the board may from time to time determine, a secretary and a treasurer and, in its discretion, a chairman of the Board of Directors. The Board of Directors may from time to time create such offices and appoint such other officers, subordinate officers and assistant officers as it may determine. The president, any vice president who succeeds to the office of the president, and the chairman of the board shall be, but the other officers need not be, chosen from among the members of the Board of Directors. Any two of such offices, other than that of president and vice president, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Section 2. TERM OF OFFICE. The officers of the Corporation shall hold office at the pleasure of the Board of Directors, and, unless sooner removed by the Board of Directors, until the annual meeting of the Board of Directors following the date of their election and until their successors are chosen and qualified. The Board of Directors may remove any officer at any time, with or without cause. A vacancy in any office, however created, shall be filled by the Board of Directors. ARTICLE V --------- Duties of Officers ------------------ Section 1. CHAIRMAN OF THE BOARD. The chairman of the board, if one be elected, shall preside at all meetings of the Board of Directors and shall have such other powers and duties as may be prescribed by the Board of Directors. Section 2. PRESIDENT. The president shall be the chief executive officer of the Corporation and shall exercise supervision over the business of the Corporation and over its several officers, subject, however, to the control of the Board of Directors. He shall preside at all meetings of shareholders, and, in the absence of the chairman of the board, or if a chairman of the board shall not have been elected, shall also preside at meetings of the Board of Directors. He shall have authority to sign all certificates for shares and all deeds, mortgages, bonds, agreements, notes, and other instruments requiring his signature; and shall have all the powers and duties prescribed by Chapter 1701 of the Revised Code of Ohio and such others as the Board of Directors may from time to time assign to him. Section 3. VICE PRESIDENTS. The vice presidents shall have such powers and duties as may from time to time be assigned to them by the Board of Directors or the president. At the request of the president, or in the case of his absence or disability, the vice president designated by the president (or in the absence of such designation, the vice president designated by the board) shall perform all the duties of the president and, when so acting, shall have all the powers of the president. The authority of vice presidents to sign in -7- 8 the name of the Corporation certificates for shares and deeds, mortgages, bonds, agreements, notes and other instruments shall be coordinate with like authority of the president. Section 4. SECRETARY. The secretary shall keep minutes of all the proceedings of the shareholders and Board of Directors and shall make proper record of the same, which shall be attested by him; shall have authority to execute and deliver certificates as to any of such proceedings and any other records of the Corporation; shall have authority to sign all certificates for shares and all deeds, mortgages, bonds, agreements, notes and other instruments to be executed by the Corporation which require his signature; shall give notice of meetings of shareholders and directors; shall produce on request at each meeting of shareholders a certified list of shareholders arranged in alphabetical order; shall keep such books and records as may be required by law or by the Board of Directors; and, in general, shall perform all duties incident to the office of secretary and such other duties as may from time to time be assigned to him by the Board of Directors or the president. Section 5. TREASURER. The treasurer shall have general supervision of all finances; he shall receive and have in charge all money, bills, notes, deeds, leases, mortgages and similar property belonging to the Corporation, and shall do with the same as may from time to time be required by the Board of Directors. He shall cause to be kept adequate and correct accounts of the business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, stated capital and shares, together with such other accounts as may be required, and upon the expiration of his term of office shall turn over to his successor or to the Board of Directors all property, books, papers and money of the Corporation in his hands; and shall have such other powers and duties as may from time to time be assigned to him by the Board of Directors or the president. Section 6. ASSISTANT AND SUBORDINATE OFFICERS. The Board of Directors may appoint such assistant and subordinate officers as it may deem desirable. Each such officer shall hold office during the pleasure of the Board of Directors, and perform such duties as the Board of Directors or the president may prescribe. The Board of Directors may, from time to time, authorize any officer to appoint and remove subordinate officers, to prescribe their authority and duties, and to fix their compensation. Section 7. DUTIES OF OFFICERS MAY BE DELEGATED. In the absence of any officer of the Corporation, or for any other reason the Board of Directors may deem sufficient, the Board of Directors may delegate, for the time being, the powers or duties, or any of them, of such officer to any other officer or to any director. -8- 9 ARTICLE VI ---------- Indemnification and Insurance ----------------------------- Section 1. INDEMNIFICATION IN NON-DERIVATIVE ACTIONS. The Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the Corporation, by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. Section 2. INDEMNIFICATION IN DERIVATIVE ACTIONS. The Corporation shall indemnify any person who was or is a party, or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust, or other enterprise against expenses, including attorneys' fees, actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of (a) any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless, and only to the extent that the Court of Common Pleas, or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as the Court of Common Pleas or such court shall deem proper, or (b) any action or suit in which the only liability asserted against a director is pursuant to Section 1701.95 of the Ohio Revised Code. Section 3. INDEMNIFICATION AS MATTER OF RIGHT. To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Section 1 or 2 of this Article VI, or in defense of any claim, issue, or matter therein, he shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him in connection therewith. -9- 10 Section 4. DETERMINATION OF CONDUCT. Any indemnification under Sections 1 and 2 of this Article VI, unless ordered by a court, shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 and 2 of this Article VI. Such determination shall be made (a) by a majority vote of a quorum consisting of directors of the Corporation who were not and are not parties to or threatened with any such action, suit, or proceeding, or (b) if such a quorum is not obtainable or if a majority vote of a quorum of disinterested directors so directs, in a written opinion by independent legal counsel, other than an attorney or a firm having associated with it an attorney who has been retained by or who has performed services for the Corporation or any person to be indemnified within the past five years, or (c) by the shareholders or (d) by the Court of Common Pleas or the court in which such action, suit, or proceeding was brought. Any determination made by the disinterested directors under Section 4(a) or by independent legal counsel under Section 4(b) of this Article VI shall be promptly communicated to the person who threatened or brought the action or suit, by or in the right of the Corporation under Section 2 of this Article VI, and within ten days after receipt of such notification, such person shall have the right to petition the Court of Common Pleas or the court in which such action or suit was brought to review the reasonableness of such determination. Section 5. ADVANCE PAYMENT OF EXPENSES. Expenses, including attorneys' fees, incurred in defending any action, suit, or proceeding referred to in Sections 1 or 2 of this Article VI, shall be paid by the Corporation in advance of the final disposition of such action, suit, or proceeding as authorized by the directors in the specific case upon receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay such amount, unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article VI. Section 6. NONEXCLUSIVITY. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under the Articles of Incorporation or the Amended and Restated Code of Regulations or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 7. LIABILITY INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, domestic or foreign, nonprofit or for profit, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VI or of Chapter 1701 of the Ohio Revised Code. -10- 11 ARTICLE VII ----------- Certificates for Shares ----------------------- Section 1. FORM AND EXECUTION. Certificates for shares, certifying the number of fully paid shares owned, shall be issued to each shareholder in such form as shall be approved by the Board of Directors. Such certificates shall be signed by the president or a vice president and by the secretary or an assistant secretary or the treasurer or an assistant treasurer; provided, however, that if such certificates are countersigned by a transfer agent and/or registrar, the signatures of any of said officers and the seal of the Corporation upon such certificates may be facsimiles, engraved, stamped or printed. If any officer or officers, who shall have signed, or whose facsimile signature shall have been used, printed or stamped on any certificate or certificates for shares, shall cease to be such officer or officers, because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates, if authenticated by the endorsement thereon of the signature of a transfer agent or registrar, shall nevertheless be conclusively deemed to have been adopted by the Corporation by the use and delivery thereof and shall be as effective in all respects as though signed by a duly elected, qualified and authorized officer or officers, and as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be an officer or officers of the Corporation. Section 2. TRANSFER AND REGISTRATION OF CERTIFICATES. The Board of Directors shall have authority to make such rules and regulations, not inconsistent with law, the Second Amended and Restated Articles of Incorporation or this Amended and Restated Code of Regulations, as it deems expedient concerning the issuance, transfer and registration of certificates for shares and the shares represented thereby. Section 3. LOST, DESTROYED OR STOLEN CERTIFICATES. A new share certificate or certificates may be issued in place of any certificate theretofore issued by the Corporation which is alleged to have been lost, destroyed or wrongfully taken upon (a) the execution and delivery to the Corporation by the person claiming the certificate to have been lost, destroyed or wrongfully taken of an affidavit of that fact, specifying whether or not, at the time of such alleged loss, destruction or taking, the certificate was endorsed, and (b) the furnishing to the Corporation of indemnity and other assurances satisfactory to the Corporation and to all transfer agents and registrars of the class of shares represented by the certificate against any and all losses, damages, costs, expenses or liabilities to which they or any of them may be subjected by reason of the issue and delivery of such new certificate or certificates or in respect of the original certificate. Section 4. REGISTERED SHAREHOLDERS. A person in whose name shares are of record on the books of the Corporation shall conclusively be deemed the unqualified owner and holder thereof for all purposes and to have capacity to exercise all rights of ownership. Neither the Corporation nor any transfer agent of the Corporation shall be bound to recognize any equitable interest in or claim to such shares on the part of any other person, -11- 12 whether disclosed upon such certificate or otherwise, nor shall they be obliged to see to the execution of any trust or obligation. ARTICLE VIII ------------ Fiscal Year ----------- The fiscal year of the Corporation shall end on December 31 of each year, or on such other date as may be fixed from time to time by the Board of Directors. ARTICLE IX ---------- Seal ---- The Board of Directors may provide a suitable seal containing the name of the Corporation. If deemed advisable by the Board of Directors, duplicate seals may be provided and kept for the purposes of the Corporation. ARTICLE X --------- Amendments ---------- This Amended and Restated Code of Regulations may be amended, or new regulations may be adopted, at any meeting of shareholders called for such purpose by the affirmative vote of, or without a meeting by the written consent of, the holders of shares entitling them to exercise a majority of the voting power of the Corporation on such proposal. -12- EX-5.1 4 EXHIBIT 5.1 1 Exhibit 5.1 ____________ __, 1997 Stoneridge, Inc. 9400 East Market Street Warren, Ohio 44484 Gentlemen: As counsel for Stoneridge, Inc., an Ohio corporation (the "Company"), we are familiar with the Company's Registration Statement on Form S-1, as amended (the "Registration Statement"), filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), in connection with a proposed public offering and sale of up to Common Shares, without par value (the "Shares"), of the Company. In connection with the foregoing, we have examined (a) the Second Amended and Restated Articles of Incorporation in the form filed as an Exhibit to the Registration Statement and the Amended and Restated Code of Regulations of the Company, (b) the proposed form of Underwriting Agreement filed as an exhibit to the Registration Statement (the "Underwriting Agreement") with respect to the Common Shares, and (c) such records of the corporate proceedings of the Company and such other documents as we deemed necessary to render this opinion. Based upon such examination, we are of the opinion that upon the filing of the Company's Second Amended and Restated Articles of Incorporation in the form filed as an Exhibit to the Registration Statement with the Secretary of State of the State of Ohio, the Shares will be duly authorized and, when issued and sold pursuant to the duly executed Underwriting Agreement (in substantially the form filed as an exhibit to the Registration Statement) and in the manner contemplated by the Registration Statement, will be legally issued, fully paid and nonassessable. 2 Stoneridge, Inc. _________ __, 1997 Page 2 We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and the reference to us under the caption "Legal Matters" in the Prospectus that is a part of the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. Very truly yours, EX-10.1 5 EXHIBIT 10.1 1 EXHIBIT 10.1 STONERIDGE, INC. LONG-TERM INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS. The purpose of the Stoneridge, Inc. Long-Term Incentive Plan (the "Plan") is to enable Stoneridge, Inc. (the "Company") to attract, retain and reward key employees of the Company and of its Affiliates and to strengthen the mutuality of interests between such key employees and the Company's shareholders by offering such key employees equity or equity-based incentives. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any entity (other than the Company and its Subsidiaries) that is designated by the Board as a participating employer under the Plan. (b) "Award" means any award of Stock Options, Restricted Shares, Deferred Shares, Share Purchase Rights, Share Appreciation Rights or Other Share- Based Awards under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Change in Control" has the meaning set forth in Section 11(b). (e) "Change in Control Price" has the meaning set-forth in Section 11(d). (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (g) "Committee" means the Committee referred to in Section 2 of the Plan. (h) "Company" means Stoneridge, Inc., an Ohio corporation, or any successor corporation. (i) "Deferred Shares" means an award of the right to receive Shares at the end of a specified period granted pursuant to Section 7. (j) "Disability" means disability as determined under procedures established by the Committee for purposes of the Plan. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2 (l) "Fair Market Value" means, as of any date, the mean between the highest and lowest quoted selling price, regular way, of the Shares on such date on the New York Stock Exchange or, if no such sale of the Shares occurs on the New York Stock Exchange on such date, then such mean price on the next preceding day on which the Shares were traded. If the Shares are no longer traded on the New York Stock Exchange, then the Fair Market Value of the Shares shall be determined by the Committee in good faith. (m) "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code or any successor section thereto. (n) "Non-Employee Director" has the meaning set forth in Rule 16b-3(b)(3)(i) as promulgated by the Securities and Exchange Commission (the "Commission") under the Exchange Act, or any successor definition adopted by the Commission. (o) "Non-Qualified Stock Option", means any Stock Option that is not an Incentive Stock Option. (p) "Other Share-Based Award" means an award granted pursuant to Section 10 that is valued, in whole or in part, by reference to, or is otherwise based on, Shares. (q) "Outside Director" has the meaning set forth in Section 162(m) of the Code and the regulations promulgated thereunder. (r) "Plan" means the Stoneridge, Inc. Long-Term Incentive Plan, as amended from time to time. (s) "Potential Change in Control" has the meaning set forth in Section 11(c). (t) "Restricted Shares" means an award of shares that is granted pursuant to Section 6 and is subject to restrictions. (u) "Section 16 Participant", means a participant under the Plan who is then subject to Section 16 of the Exchange Act. (v) "Shares" mean, the common shares, without par value, of the Company. (w) "Share Appreciation Right" means an award of a right to receive an amount from the Company that is granted pursuant to Section 9. -2- 3 (x) "Stock Option" or "Option means any option to purchase Shares (including Restricted Shares and Deferred Shares, if the Committee so determines) that is granted Pursuant to Section 5. (y) "Share Purchase Right" means an award of the right to purchase Shares that is granted pursuant to Section 8. (z) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 2. ADMINISTRATION. The Plan shall be administered by the Stock Option Committee of the Board (the "Committee"). The Committee shall consist of three or four directors of the Company, as designated by the Board from time to time, all of whom shall be Non-Employee Director and Outside Directors. Such directors shall be appointed by the Board and shall serve as the Committee at the pleasure of the Board. The functions of the Committee specified in the Plan shall be exercised by the Board if and to the extent that no Committee exists which has the authority to so administer the Plan. The Committee shall have full power to interpret and administer the Plan and full authority to select the individuals to whom Awards will be granted and to determine the type and amount of Awards to be granted to each participant, the consideration, if any, to be paid for such Awards, the timing of such Awards, the terms and conditions of Awards granted under the Plan, the terms and conditions of the related agreements which will be entered into with participants and to certify that any performance goals are satisfied. As to the selection of and grant of Awards to participants who are not Section 16 Participants, the Committee may delegate its responsibilities to members of the Company's management consistent with applicable law. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreements relating thereto); to direct employees of the Company or other advisors to prepare such materials or perform such analyses as the Committee deems necessary or appropriate; and otherwise to supervise the administration of the Plan. Any interpretation and administration of the Plan by the Committee, and all actions and determinations of the Committee, shall be final, binding and conclusive on the Company, its shareholders, Subsidiaries, Affiliates, all participants in the Plan, their respective legal representatives, successors and assigns, and all persons claiming under or through any of them. No member of the Board or of the Committee shall incur any liability for any action taken or omitted, or any determination made, in good faith in connection with the Plan. -3- 4 SECTION 3. SHARES SUBJECT TO THE PLAN. (a) Aggregate Shares Subject to the Plan. Subject to adjustment as provided below in Section 3(c), the total number of Shares reserved and available for Awards under the Plan is ____________. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. (b) Forfeiture or Termination of Awards of Shares. If any Shares subject to any Award granted hereunder are forfeited or an Award otherwise terminates or expires without the issuance of Shares, the Shares subject to such Award shall again be available for distribution in connection with future Awards under the Plan as set forth in Section 3(a), unless the participant who had been awarded such forfeited Shares or the expired or terminated Award has theretofore received dividends or other benefits of ownership with respect to such Shares. For purposes hereof, a participant shall not be deemed to have received a benefit of ownership with respect to such Shares by the exercise of voting rights or the accumulation of dividends which are not realized because of the forfeiture of such Shares or the expiration or termination of the related Award without issuance of such Shares. (c) Adjustment. In the event of any merger, reorganization, consolidation, recapitalization, share dividend, share split, combination of shares or other change in corporate structure of the Company affecting the Shares, such substitution or adjustment shall be made in the aggregate number of Shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding options granted under the Plan, in the number and purchase price of shares subject to outstanding Share Purchase Rights granted under the Plan, and in the number of shares subject to Restricted Share Awards, Deferred Share Awards and any other outstanding Awards granted under the Plan as may be approved by the Committee, in its sole discretion; provided that the number of shares subject to any Award shall always be a whole number. (d) Annual Award Limit. No participant may be granted Stock Options or Awards under the Plan with respect to an aggregate of more than 300,000 Shares (subject to adjustment as provided in Section 3(c) hereof) during any calendar year. SECTION 4. ELIGIBILITY. Officers and other key employees of the Company and its Subsidiaries and Affiliates, if any, who, in the discretion of the Committee, are responsible for or contribute to the management, growth or profitability of the business of the Company or its Subsidiaries or Affiliates, if any, are eligible to be granted Awards under the Plan. SECTION 5. STOCK OPTIONS. (a) Grant. Stock Options may be granted alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside the Plan. The Committee shall determine the individuals to whom, and the time or times -4- 5 at which, grants of Stock Options will be made, the number of Shares purchasable under each Stock Option and the other terms and conditions of the Stock Option in addition to those set forth in Sections 5(b) and 5(c). Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types which shall be indicated on their face: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. Subject to Section 5(c) hereof, the Committee shall have the authority to grant to any participant Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options. (b) Terms and Conditions. Options granted under the Plan shall be evidenced by Option Agreements, shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (1) Option Price. The option price per share of Shares purchasable under a Non-Qualified Stock Option or an Incentive Stock Option shall be determined by the Committee at the time of grant and shall be not less than 100% of the Fair Market Value of the Shares at the date of grant (or, with respect to an incentive stock option, 110% of the Fair Market Value of the Shares at the date of grant in the case of a participant who at the date of grant owns Shares possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or Subsidiary corporations (as determined under Section 424(d), (e) and (f) of the Code)). (2) Option Term. The term of each Stock Option shall be fixed by the Committee and may not exceed ten years from the date the Option is granted (or, with respect to an Incentive Stock Options, five years in the case of a participant who at the date of grant owns Shares possessing more than ten percent of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations (as determined under Section 424(d), (e) and (f) of the Code)). (3) Exercise. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that, except as provided in Section 5(b)(6) and Section 11, unless otherwise determined by the Committee at or after grant, no Stock Option shall be exercisable prior to six months and one day following the date of grant. If any Stock Option is exercisable only in installments or only after specified exercise dates, the Committee may waive, in whole on in part, such installment exercise provisions, and may accelerate any exercise date or dates, at any time at or after grant based on such factors as the Committee shall determine, in its sole discretion. (4) Method of Exercise. Subject to any installment exercise provisions that apply with respect to such Stock Option, and the six month and -5- 6 one day holding period set forth in Section 5(b)(3), Stock Options may be exercised in whole or in part, at any time during the option period, by giving to the Company written notice of exercise specifying the number of Shares to be purchased. Such notice shall be accompanied by payment in full of the option price of the Shares for which the Option is exercised in cash or by the delivery of Shares having a Fair Market Value on the date of exercise equal to the exercise price. Stock Options may also be exercised in any other matter approved by the Committee (either with respect to (i) the exercise of a particular Stock Option or (ii) the exercise of Stock Options generally), including, but not limited to, so-called net or cash-less exercises. No Shares shall be issued pursuant to an exercise of an Option until full payment has been made. A participant shall not have rights to dividends or any other rights of a shareholder with respect to any Shares subject to an Option unless and until the participant has given written notice of exercise, has paid in full for such Shares, has given, if requested, the representation described in Section 14(a) and such Shares have been issued to him. (5) Non-Transferability of Options. No Stock Option shall be transferable by the participant other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the participant's lifetime, only by the participant or, subject to Sections 5(b)(3) and 5(c), by the participant's authorized legal representative if the participant is unable to exercise an option as a result of the participant's Disability; provided, however, that if so provided in the instrument evidencing the Option, the Committee may permit any optionee to transfer the Option during his lifetime to one or more members of his family, or to one or more trusts for the benefit of one or more members of his family, provided that no consideration is paid for the transfer and that such transfer would not result in the loss of any exemption under Rule 16b-3 for any Option that the Committee does not permit to be so transferred. The transferee of an Option shall be subject to all restrictions, terms, and conditions applicable to the Option prior to its transfer, except that the Option shall not be further transferable inter vivos by the transferee. The Committee may impose on any transferable Option and on the Common Shares to be issued upon the exercise of the Option such limitations and conditions as the Committee deems appropriate. (6) Termination by Death. Subject to Section 5(c), if any participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of death, any Stock Option held by such participant may thereafter be exercised, to the extent such Option was exercisable at the time of death or would have become exercisable within one year from the time of death had the participant continued to fulfill all conditions of the Option during such period (or on such accelerated basis as the Committee may determine at or after grant), by the estate of the participant (acting through its fiduciary), -6- 7 for a period of one year (or such other period as the Committee may specify at or grant) from the date of such death. The balance of the Stock Option shall be forfeited. (7) Termination by Reason of Disability. Subject to Sections 5(b)(3) and 5(c), if a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of Disability, any Stock Option held by such participant may thereafter be exercised, to the extent such Option was exercisable at the time of termination or would have become exercisable within one year from the time of termination had the participant continued to fulfill all conditions of the Option during such period (or on such accelerated basis as the Committee may determine at or after grant), by the participant or by the participant's duly authorized legal representative if the participant is unable to exercise the Option as a result of the participant's Disability, for a period of one year (or such other period as the Committee may specify at or after grant), from the date of such termination of employment; provided, however, that in no event may any such Option be exercised prior to six months and one day from the date of grant; and provided, further, that if the participant dies within such one-year period (or such other period as the Committee shall specify at or after grant), any unexercised Stock Option held by such participant shall thereafter be exercisable by the estate of the participant (acting though its fiduciary) to the same extent to which it was exercisable at the time of death for a period of one year from the date of such termination of employment. The balance of the Stock Option shall be forfeited. (8) Other Termination. Unless otherwise determined by the Committee at or after the time of granting any Stock Option, if a participant's employment by the Company or any Subsidiary or Affiliate is terminated for any reason other than death or Disability, all Stock Options held by such participant shall thereupon terminate 90 days after the date of such termination. (c) Incentive Stock Options. Notwithstanding Sections 5(b)(6) and (7), an Incentive Stock Option shall be exercisable by (i) a participant's authorized legal representative (if the participant is unable to exercise the Incentive Stock Option as a result of the participant's Disability) only if, and to the extent, permitted by Section 422 of the Code and Section 16 of the Exchange Act and the rules and regulations promulgated thereunder and (ii) by the participant's estate, in the case of death, or authorized legal representative, in the case of Disability, no later than 10 years from the date the Incentive Stock Option was granted (in addition to any other restrictions or limitations which may apply). Anything in the Plan to the contrary notwithstanding, no term or provision of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the participants affected, to disqualify any Incentive Stock Option under such Section 422 or any successor section thereto. -7- 8 (d) Buyout Provisions. The Committee may at any time buy out for a payment in cash, Shares, Deferred Shares or Restricted Shares an option previously granted, based on such terms and conditions as the Committee shall establish and agree upon with the participant, provided that no such transaction involving a Section 16 Participant shall be structured or effected in a manner that would violate, or result in any liability on the part of the participant under, Section 16 of the Exchange Act or the rules and regulations promulgated thereunder. SECTION 6. RESTRICTED SHARES. (a) Grant. Restricted Shares may be issued alone, in addition to or in tandem with other Awards under the Plan or cash awards made outside of the Plan. The Committee shall determine the individuals to whom, and the time or times at which, grants of Restricted Shares will be made, the number of Restricted Shares to be awarded to each participant, the price (if any) to be paid by the participant (subject to Section 6(b)), the date or dates upon which Restricted Share Awards will vest and the period or periods within which such Restricted Share Awards may be subject to forfeiture, and the other terms and conditions of such Awards in addition to those set forth in Section 6(b). The Committee may condition the grant of Restricted Shares upon the attainment of specified performance goals or such other factors as the Committee may determine in its sole discretion. (b) Terms and Conditions. Restricted Shares awarded under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable. A participant who receives a Restricted Share Award shall not have any rights with respect to such Award, unless and until such participant has executed an agreement evidencing the Award in the form approved from time to time by the Committee and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such Award. (1) The purchase price (if any) for Restricted Shares shall be determined by the Committee at the time of grant. (2) Awards of Restricted Shares must be accepted by executing a Restricted Share Award agreement and paying any price required under Section 6(b)(1). (3) Each participant receiving a Restricted Share Award shall be issued a stock certificate in respect of such Restricted Shares. Such certificate shall be registered in the name of such participant, and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Award. -8- 9 (4) The Committee shall require that the stock certificates evidencing such Restricted Shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Shares Award the participant shall have delivered to the Company a stock power, endorsed in blank, relating to the Shares covered by such Award. (5) Subject to the provisions of this Plan and the Restricted Share Award agreement, during a period set by the committee commencing with the date of such Award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge, assign or otherwise encumber the Restricted Shares awarded under the Plan. Subject to these limitations, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on service, performance or such other factors and criteria as the Committee may determine, in its sole discretion. (6) Except as provided in this Section 6(b)(6), Section 6(b)(5) and Section 6(b)(7) the participant shall have, with respect to the Restricted Shares awarded, all of the rights of a shareholder of the Company, including the right to vote the Shares, and the right to receive any dividends. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 14(f), in additional Restricted Shares to the extent Shares are available under Section 3, or otherwise reinvested. Unless the Committee or Board determines otherwise, share dividends issued with respect to Restricted Shares shall be treated as additional Restricted Shares that are subject to the same restrictions and other terms and conditions that apply to the Shares with respect to which such dividends are issued. (7) No Restricted Shares shall be transferable by a participant other than by will or by the laws of descent and distribution. (8) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of death, any Restricted Shares held by such participant shall thereupon vest and all restrictions thereon shall lapse, to the extent such Restricted Shares would have become vested or no longer subject to restriction within one year from the time of death had the participant continued to fulfill all of the conditions of the Restricted Share Award during such period (or on such accelerated basis as the Committee may determine at or after grant). The balance of the Restricted Shares shall be forfeited. (9) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of Disability, any Restricted Shares held by such participant shall thereupon vest and all restrictions thereon shall lapse, to the extent such Restricted Shares would have become vested or no longer subject to restriction within one year from the time of termination had the participant continued to fulfill all of the conditions of the Restricted Share -9- 10 Award during such period (or on such accelerated basis as the Committee may determine at or after grant). The balance of the Restricted Shares shall be forfeited. (10) Unless otherwise determined by the Committee at or after the time of granting any Restricted Shares, if a participant's employment by the Company or any Subsidiary or Affiliate terminates for any reason other than death or Disability, the Restricted Shares held by such participant which are unvested or subject to restriction at the time of termination shall thereupon be forfeited. (c) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide in its sole discretion for a tandem performance-based or other award designed to guarantee a minimum value, payable in cash or Shares to the recipient of a Restricted Share Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. SECTION 7. DEFERRED SHARES. (a) Grant. Deferred Shares may be awarded alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside the Plan. The Committee shall determine the individuals to whom, and the time or times at which, Deferred Shares shall be awarded, the number of Deferred Shares to be awarded to any participant, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Shares will be deferred, and the other terms and conditions of the Award in addition to those set forth in Section 7(b). The Committee may condition the grant of Deferred Shares upon the attainment of specified performance goals or such other factors as the Committee shall determine, in its sole discretion. (b) Terms and Conditions. Deferred Share Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee considers desirable: (1) The purchase price for Deferred Shares shall be determined at the time of grant by the Committee. Subject to the provisions of the Plan and the Award agreement referred to in Section 7(b)(9), Deferred Share Awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or the Elective Deferral Period referred to in Section 7(b)(8), when applicable), stock certificates shall be delivered to the participant, or his legal representative, for the shares covered by the Deferred Share Award. The Deferral period applicable to any Deferred Share Award shall not be less than six months and one day ("Minimum Deferral Period"). -10- 11 (2) Amounts equal to any dividends declared during the Deferral Period with respect to the number of Shares covered by a Deferred Share Award will be paid to the participant currently, or deferred and deemed to be reinvested in additional Deferred Shares, or otherwise reinvested, all as determined at or after the time of the Award by the Committee, in its sole discretion. (3) No Deferred Shares shall be transferable by a participant other than by will or by the laws of descent and distribution. (4) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of death, any Deferred Shares awarded to by such participant shall thereafter vest and all restrictions thereon shall lapse, to the extent such Deferred Shares would have become vested or no longer subject to restriction within one year from the time of death had the participant continued to fulfill all of the conditions of the Deferred Share Award during such period (or on such accelerated basis as the Committee may determine at or after grant). The balance of the Deferred Shares shall be forfeited. (5) If a participant's employment by the Company or any Subsidiary or Affiliate terminates by reason of Disability, any Deferred Shares awarded to such participant shall thereafter vest and all restrictions thereon shall lapse, to the extent such Deferred Shares would have become vested or no longer subject to restriction within one year from the time of termination had the participant continued to fulfill all of the conditions of the Deferred Shares Award during such period (or on such accelerated basis as the Committee may determined at or after grant), subject in all cases to the Minimum Deferral Period requirement. The balance of the Deferred Shares shall be forfeited. (6) Unless otherwise determined by the Committee at or after the time of granting any Deferred Share Award, if a participant's employment by the Company or any Subsidiary or Affiliate terminates for any reason other than death or Disability, all Deferred Shares held by such participant which are unvested or subject to restriction shall thereupon be forfeited. (7) Based on service, performance or such other factors or criteria as the Committee may determine, the Committee may, at or after grant, accelerate the vesting of all or any part of any Deferred Share Award or waive a portion of the Deferral Period for all or any part of such Award, subject in all cases to the Minimum Deferral Period requirement. (8) A participant may elect to further defer receipt of a Deferred Share Award (or an installment of an Award) for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and the terms of this Section 7 and such other terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions approved by the Committee, such election must be made at least 12 -11- 12 months prior to completion of the Deferral Period for such Deferred Share Award (or such installment). (9) Each such Award shall be confirmed by, and subject to the terms of, a Deferred Share Award agreement evidencing the Award in the form approved from time to time by the Committee. (c) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem performance-based or other Award designed to guarantee a minimum value, payable in cash or Shares to the recipient of a Deferred Share Award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. SECTION 8. SHARE PURCHASE RIGHTS. (a) Grant. Share Purchase Rights may be granted alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside the Plan. The committee shall determine the individuals to whom, and the time or times at which, grants of Share Purchase Rights will be made, the number of Shares which may be purchased pursuant to Share Purchase Rights, and the other terms and conditions of the Share Purchase Rights in addition to those set forth in Section 8(b). The Shares subject to the Share Purchase Rights may be purchased at the Fair Market Value of such Shares on the date of grant; Subject to Section 8(b) hereof, the Committee may also impose such deferral, forfeiture or other terms and conditions as it shall determine, in its sole discretion, on such Share Purchase Rights or the exercise thereof. Each Share Purchase Right Award shall be confirmed by, and be subject to the terms of, a Share Purchase Rights Agreement which shall be in form approved by the Committee. (b) Terms and Conditions. Share Purchase Rights may contain such additional terms and conditions not inconsistent with the terms of the Plan as the Committee shall deem desirable, and shall generally be exercisable for such period as shall be determined by the Committee. However, Share Purchase Rights granted to Section 16 Participants shall not become exercisable earlier than six months and one day after the grant date. Share Purchase Rights shall not be transferable by a participant other than by will or by the laws of descent and distribution. SECTION 9. SHARE APPRECIATION RIGHTS. (a) Grant. Share Appreciation Rights may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or, if the Option is a Non-Qualified Stock Option, by an amendment to the Option at any time thereafter during the term of the Option. Share Appreciation Rights may be exercised -12- 13 in whole or in part at such times under such conditions as may be specified by the Committee in the participant's Option Agreement. (b) Terms and Conditions. The following terms and conditions will apply to all Share Appreciation Rights: (1) Share Appreciation Rights shall entitle the participant, upon exercise of all or any part of the Share Appreciation Rights, to surrender to the Company unexercised that portion of the underlying Option relating to the same number of Shares as is covered by the Share Appreciation Rights (or the portion of the Share Appreciation Rights so exercised) and to receive in exchange from the Company an amount (paid as provided in Section 9(b)(5)) equal to the excess of (x) the Fair Market Value, on the date of exercise, of the Shares covered by the surrendered portion of the underlying Option over (y) the exercise price of the Shares covered by the surrendered portion of the underlying Option. The Committee may limit the amount that the participant will be entitled to receive upon surrender of a Share Appreciation Right. (2) Upon the exercise of the Share Appreciation Right and surrender of the related portion of the underlying Option, the Option, to the extent surrendered, will not thereafter be exercisable. The underlying Option may provide that such Share Appreciation Rights will be payable solely in cash. The terms of the underlying Option shall provide a method by which an alternative fair market value of the Shares on the date of exercise shall be calculated based on one of the following: (x) the closing price of the Shares on the national exchange on which they are then traded on the business day immediately preceding the day of exercise; (y) the highest closing price of the Shares on the national exchange on which they have been traded, during the 90 days immediately preceding the Change in Control; or (z) the greater of (x) and (y). (3) In addition to any further conditions upon exercise that may be imposed by the Committee, the Share Appreciation Rights shall be exercisable only to the extent that the related Option is exercisable, except that in no event will a Share Appreciation Right held by a Section 16 Participant be exercisable within the first six months after it is awarded even though the related Option is or becomes exercisable, and each Share Appreciation Right will expire no later than the date on which the related Option expires. A Share Appreciation Right may only be exercised at a time when the Fair Market Value of the Shares covered by the Share Appreciation Right exceeds the exercise price of the Shares covered by the underlying Option. No Share Appreciation Right held by a Section 16 Participant shall be exercisable by its terms within the first six months after it is granted, and a Section 16 Participant may only exercise a Share Appreciation Right during a period beginning on the third business day and ending on the twelfth business day following the release for publication of quarterly or annual summary statements of the Company's sales and earnings. -13- 14 (4) Share Appreciation Rights may be exercised by the participant's giving written notice of the exercise to the Company, stating the number of Share Appreciation Rights he has elected to excercise and surrendering the portion of the underlying Option relating to the same number of Shares as the number of Share Appreciation Rights elected to be exercised. 5) The manner in which the Company's obligation arising upon the exercise of the Share Appreciation Right will be paid will be determined by the Committee and shall be set forth in the participant's Option Agreement. The Committee may provide for payment in Shares or cash, or a fixed combination of Shares or cash, or the Committee may reserve the right to determine the manner of payment at the time the Share Appreciation Right is exercised. Shares issued upon the exercise of a Share Appreciation Right will be valued at their Fair Market Value on the date of exercise. SECTION 10. OTHER SHARE-BASED AWARDS. (a) Grant. Other Awards of Shares and other Awards that are valued, in whole or in part, by reference to, or are otherwise based on, Shares, including, without limitation, performance shares, convertible preferred shares, convertible debentures, exchangeable securities and Share Awards or options valued by reference to Book Value or subsidiary performance, may be granted alone, in addition to or in tandem with other Awards granted under the Plan or cash awards made outside of the Plan. At the time the Shares or Other Share-Based Award is granted, the Committee shall determine the individuals to whom and the time or times at which such Shares or other Share-Based Awards shall be awarded, the number of Shares to be used in computing an Award or which are to be awarded pursuant to such Awards, the consideration, if any, to be paid for such Shares or other Share-Based Awards, and all other terms and conditions of the Awards in addition to those set forth in Section 10(b). The provisions of other Share-Based Awards need not be the same with respect to each participant. (b) Terms and Conditions. Other Share-Based Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (1) Subject to the provisions of this Plan and the Award agreement referred to in Section 10(b)(5) below, Shares awarded or subject to Awards made under this Section 10 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the Shares are issued, or, if later, the date on which any applicable restriction, performance, holding or deferral period or requirement is satisfied or lapses. All Shares or Other -14- 15 Share-Based Awards granted under this Section 10 shall be subject to a minimum holding period (including any applicable restriction, performance and/or deferral periods ) of six months and one day ("Minimum Holding Period"). (2) Subject to the provisions of this Plan and the Award agreement and unless otherwise determined by the Committee at the time of grant, the recipient of an Other Share-Based Award shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of Shares covered by the Award, as determined at the time of the Award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested. (3) Subject to the Minimum Holding Period, any Other Share-Based Award and any Shares covered by any such Award shall vest or be forfeited to the extent, at the times and subject to the conditions, if any, provided in the Award agreement, as determined by the Committee, in its sole discretion. (4) In the event of the participant's Disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive, in whole or in part, any or all of the remaining limitations imposed hereunder or under any related Award agreement with respect to any part of all of any Award under this Section 10, provided that the Minimum Holding Period requirement may not be waived, except in case of a participant's death. (5) Each Award shall be confirmed by, and subject to the terms of, an agreement or other instrument evidencing the Award in the form approved from time to time by the Committee, the Company and the participant. (6) Shares (including securities convertible into Shares) issued on a bonus basis under this Section 10 shall be issued for no cash consideration. Shares (including securities convertible into Shares) purchased pursuant to a purchase right awarded under this Section 10 shall bear a price of at least 85% of the Fair Market Value of the Shares on the date of grant. The purchase price of such Shares, and of any Other Share-Based Award granted hereunder, or the formula by which such price is to be determined, shall be fixed by the Committee at the time of grant. (7) In the event that any "derivative security", as defined in Rule 16a-1(c) (or any successor thereof) promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, is awarded pursuant to this Section 10 to any Section 16 Participant, such derivative security shall not be transferrable other than by will or by the laws of descent and distribution. -15- 16 SECTION 11. CHANGE IN CONTROL PROVISION. (a) Impact of Event. At any time during the 365 days commencing with the date of either (1) a "Change in Control" as defined in Section 11(b) or (2) a "Potential Change in Control" as defined in Section 11(c), a majority of the "Continuing Directors" as defined in Section 11(e) (or one of the two Continuing Directors if only two Continuing Directors are then serving on the Board of Directors or the sole Continuing Director if only one Continuing Director is then serving on the Board of Directors) may cause the following provisions to take effect as stated and as of the date set forth in a Written Action (the "Written Action") adopted to that effect (that date, the "Accelerated Vesting Date") and if there are no Continuing Directors, the following provisions will automatically take effect: (1) Any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested; (2) Any Share Appreciation Rights shall become immediately exercisable; (3) The restrictions applicable to any Restricted Shares, Deferred Shares Awards, Share Purchase Rights Awards and Other Share Based Awards shall lapse and such shares and awards shall be deemed fully vested; and (4) The value of all outstanding Awards, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or after grant but prior to any Change in Control or Potential Change in Control, be paid to the participant in cash in exchange for the surrender of those Awards on the basis of the "Change in Control Price" as defined in Section 11(d) as of the Accelerated Vesting Date; but the provisions of Sections 11(a)(1) through (3) shall not apply with respect to Awards granted to any Section 16 Participant which have been held by such participant for less than six months and one day as of the Accelerated Vesting Date. (b) Definition of Change in Control. For purposes of Section 11(a), a "Change in Control" means the occurrence of any of the following: (i) the Board or shareholders of the Company approve a consolidation or merger that results in the shareholders of the Company immediately prior to the transaction giving rise to the consolidation or merger owning less than 50% of the total combined voting power of all classes of stock entitled to vote of the surviving entity immediately after the consummation of the transaction giving rise to the merger or consolidation; (ii) the Board or shareholders of the Company approve the sale of substantially all of the assets of the Company or the liquidation or dissolution of the Company; (iii) any person or other entity (other than the Company or a Subsidiary or any Company employee benefit plan (including any trustee of any such plan acting in its capacity as trustee)) purchases any Shares (or securities convertible into Shares) pursuant to a tender or exchange offer without the prior consent of the Board of Directors, or -16- 17 becomes the beneficial owner of securities of the Company representing 25% or more of the voting power of the Company's outstanding securities; or (iv) during any two-year period, individuals who at the beginning of such period constitute the entire Board of Directors cease to constitute a majority of the Board of Directors, unless the election or the nomination for election of each new director is approved by at least two-thirds of the directors then still in office who were directors at the beginning of that period. (c) Definition of Potential Change in Control. For purposes of Section 11(a), a "Potential Change in Control" means the happening of any one of the following: (1) The approval by the shareholders of the Company of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 11(b); or (2) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan (including any trustee of any such plan acting in its capacity as trustee)) of securities of the Company representing 15% or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of this Plan. (d) Change in Control Price. For purposes of this Section 11, "Change in Control Price," means the greater of: (a) the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Index (or, if the Shares are not then traded on the New York Stock Exchange, the highest price paid as reported for any national exchange on which the Shares are then traded) or paid or offered in any bona fide transaction related to a Change in Control or Potential Change in Control of the Company, at any time during the 60-day period immediately preceding the occurrence of the Change in Control (or, when applicable, the occurrence of the Potential Change in Control event), and (b) the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Index (or, if the Shares are not then traded on the New York Stock Exchange, the highest price paid as reported for any national exchange on which the Shares are then traded), at any time during the 60-day period immediately preceding the date on which the Continuing Directors execute a Written Action relating to that Change in Control or Potential Change in Control, in each case as determined by the Committee. (e) Definition of Continuing Director. For purposes of this Section 11, a "Continuing Director" means an individual who was a member of the Board of Directors immediately prior to the date of a Change in Control or a Potential Change in Control and is a member of the Board of Directors at the time a Written Action relating to that Change in Control or Potential Change in Control is taken. -17- 18 SECTION 12. AMENDMENTS AND TERMINATION. The Board may at any time, in its sole discretion, amend, alter or discontinue the Plan, but no such amendment, alteration or discontinuation shall be made which would impair the rights of a participant under an Award theretofore granted, without the participant's consent. The Company shall submit to the shareholders of the Company for their approval any amendments to the Plan which are required by Section 16 of the Exchange Act or the rules and regulations thereunder, or Section 162(m) of the Code, to be approved by the shareholders. The Committee may at any time, in its sole discretion, amend the terms of any Award, but no such amendment shall be made which would impair the rights of a participant under an Award theretofore granted, without the participant's consent; nor shall any such amendment be made which would make the applicable exemptions provided by Rule 16b-3 under the Exchange Act unavailable to any Section 16 Participant holding the Award without the participant's consent. Subject to the above provisions, the Board shall have all necessary authority to amend the Plan to make into account changes in applicable securities and tax laws and accounting rules, as well as other developments. SECTION 13. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant by the Company, nothing contained herein shall give any such participant any rights that are greater than those of a general creditor of the Company. SECTION 14. GENERAL PROVISIONS. (a) The Committee may require each participant acquiring Shares pursuant to an Award under the Plan to represent to and agree with the Company in writing that the participant is acquiring the Shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All Shares or other securities delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares is then listed, and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be put on any certificates for such shares to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if -18- 19 such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (c) Neither the adoption of the Plan, nor its operation, nor any document describing, implementing or referring to the Plan, or any part thereof, shall confer upon any participant under the Plan any right to continue in the employ, or as a director, of the Company or any Subsidiary or Affiliate, or shall in any way affect the right and power of the Company or any Subsidiary or Affiliate to terminate the employment, or service as a director, of any participant under the Plan at any time with or without assigning a reason therefor, to the same extent as the Company or any Subsidiary or Affiliate might have done if the Plan had not been adopted. (d) For purposes of this Plan, a transfer of a participant between the Company and its Subsidiaries and Affiliates shall not be deemed a termination of employment. (e) No later than the date as of which an amount first becomes includable in the gross income of the participant for federal income tax purposes with respect to any award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment, of, any federal, state or local taxes or other items of any kind required by law to be withheld with respect to such amount. Subject to the following sentence, unless otherwise determined by the Committee, withholding obligations may be settled with Shares, including unrestricted Shares previously owned by the participant or Shares that are part of the Award that gives rise to the withholding requirement. Notwithstanding the foregoing, any election by a Section 16 Participant to settle such tax withholding obligation with Shares that is part of such Award shall be subject to approval by the Committee, in its sole discretion. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and its Subsidiaries and Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (f) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Shares (or in Deferred Shares or other types of Awards) at the time of any dividend payment shall only be permissible if sufficient Shares are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options, Share Purchase Rights and other Plan Awards). (g) The Plan, all Awards made and actions taken thereunder and any agreements relating thereto shall be governed by and construed in accordance with the laws of the State of Ohio. (h) All agreements entered into with participants pursuant to the Plan shall be subject to the Plan. (i) The provisions of Awards need not be the same with respect to each participant. -19- 20 SECTION 15. SHAREHOLDER APPROVAL; EFFECTIVE DATE OF PLAN. The Plan was adopted by the Board on August 5, 1997 and by the shareholders on August ___, 1997. SECTION 16. TERM OF PLAN. No Award shall be granted pursuant to the Plan on or after June 30, 2007, but Awards granted prior to such date may extend beyond that date. -20- EX-10.2 6 EXHIBIT 10.2 1 EXHIBIT 10.2 L E A S E - - - - - BETWEEN D. M. Draime AND ALPHABET, INC. (Greenwood) DATE: 10/1/93 -------- 2 L E A S E - - - - - TABLE OF CONTENTS ----------------- Page ---- ARTICLE I DEMISED PREMISES .......................... 1 ARTICLE II TERM OF LEASE ............................. 1 ARTICLE III RENT ...................................... 2 ARTICLE IV RENT TO BE NET TO LANDLORD ................ 2 ARTICLE V TAXES AND UTILITY EXPENSES ................ 2 ARTICLE VI USE OF PREMISES ........................... 4 ARTICLE VII ALTERATIONS ............................... 5 ARTICLE VIII MAINTENANCE OF DEMISED PREMISES ........... 6 ARTICLE IX REQUIREMENTS OF PUBLIC AUTHORITY .......... 6 ARTICLE X TENANT'S TAXES ............................ 7 ARTICLE XI MECHANIC'S LEAN ........................... 7 ARTICLE XII DESTRUCTION OF DEMISED PREMISES ........... 8 ARTICLE XIII TRADE FIXTURES IN DEMISED PREMISES ........ 9 ARTICLE XIV ACCESS TO DEMISED PREMISES ................10 ARTICLE XV SURRENDER OF DEMISED PREMISES .............11 ARTICLE XVI INDEMNITY AND INSURANCE BY TENANT .........11 ARTICLE XVII ASSIGNMENT AND SUBLETTING .................14 ARTICLE XVIII EMINENT DOMAIN ............................14 ARTICLE XIX DEFAULT BY TENANT .........................15 ARTICLE XX WAIVER OF TENANT'S DEFAULT ................17 ARTICLE XXI DEFAULT BY LANDLORD .......................18 ARTICLE XXII SUBORDINATION .............................18 ARTICLE XXIII ESTOPPEL CERTIFICATE BY TENANT ............19 ARTICLE XXIV OPTION TO PURCHASE ........................19 i 3 ARTICLE XXV TERM "LANDLORD" .......................... 20 ARTICLE XXVI HOLDING OVER ............................. 20 ARTICLE XXVII QUIET ENJOYMENT .......................... 21 ARTICLE XXVIII WAIVER OF SUBROGATION .................... 21 ARTICLE XXIX TITLES OF ARTICLES ....................... 22 ARTICLE XXX NOTICES .................................. 22 ARTICLE XXXI DEFINITION OF TERMS ...................... 22 ARTICLE XXII INVALIDITY OF PARTICULAR PROVISIONS ...... 22 ARTICLE XXXIII PROVISIONS BINDING ....................... 23 ARTICLE XXXIV RELATIONSHIP OF PARTIES .................. 23 ARTICLE XXXV SHORT-FORM LEASE ......................... 23 ARTICLE XXXVI COMPLETE AGREEMENT ....................... 23 ii 4 L E A S E - - - - - THIS LEASE ("Lease", made at , 9400 E. Market St., Warren, Ohio, this 1st day of October, 1993, by and between D.M. Draime, having an office at 9400 East Market Street, Warren, Ohio 44484, hereinafter referred to as "Landlord", and Alphabet, Inc., an Ohio corporation, having an office at 8700 E. Market Street, Warren, Ohio 44484, Attention: President, hereinafter referred to as "Tenant". W I T N E S S E T H: - - - - - - - - - - ARTICLE I --------- DEMISED PREMISES ---------------- Landlord, for and in consideration of the payment of the rent and the performance by Tenant of the covenants and agreements as hereinafter set forth, does hereby demise, let and lease unto Tenant and Tenant does hereby accept from Landlord the property located at 104 Stoneridge Court, in the City of Greenwood, County of Greenwood, State of South Carolina and outlined in "red" on the site plan marked EXHIBIT "A" attached hereto and made a part hereof and described on EXHIBIT "B" attached hereto and made a part hereof together with the buildings and improvements constructed thereon (collectively, the "Demised Premises") . The building (the "Building") which is part of the Demised Premises contains approximately Fifty-Six Thousand (56,006) square feet of space. ARTICLE II ---------- TERM OF LEASE ------------- To have and to hold the Demised Premises unto Tenant for a term of eleven (11) years commencing on October 1, 1993 ("Commencement Date"), and ending on September 30, 2004. The term "Lease Year" as used herein shall mean each twelve (12) month period beginning on the Commencement Date and each anniversary thereof. 1 5 ARTICLE III ----------- RENT ---- Tenant covenants and agrees to pay Landlord rent for the Demised Premises, without deduction or set-off and without demand from the Commencement Date through the one hundred thirty second (132nd) month of the term of this Lease, the annual amount of One Hundred Fifty Seven Thousand Two Hundred Dollars ($157,200) payable in equal monthly installments of Thirteen Thousand One Hundred Dollars ($13,100) each on the first (1st) day of every month in advance. ARTICLE IV ---------- RENT TO BE NET TO LANDLORD -------------------------- It is the intention of the parties that the rent payable hereunder shall be net to Landlord so that this Lease shall yield to Landlord the net annual rent specified herein during the term of this Lease, and that all costs, expenses and obligations of every kind and nature whatsoever relating to the Demised Premises shall be paid by Tenant. ARTICLE V --------- TAXES AND UTILITY EXPENSES -------------------------- 1. Tenant shall, during the term of this Lease, as additional rent, pay and discharge punctually, as and when the same shall become due and payable, all taxes, special and general assessments, water, rents, rates, and charges, sewer rents and other governmental impositions and charges of every kind and nature whatsoever, extraordinary as well as ordinary ("Taxes") , and each and every installment thereof which shall or may during the term of this Lease by charged, levied, laid, assessed, imposed, become due and payable, or liens upon or for or with respect to the Demised Premises or any part thereof, or any buildings, appurtenances or equipment owned by Tenant thereon or therein or any part thereof, together with all interest and penalties thereon, under or by virtue of all present or future laws, ordinances, requirements, orders, directives, rules or regulations of the Federal, State, County, Town and City Governments and of all other governmental authorities whatsoever and all sewer rents and charges for water, steam, heat, gas, hot water, electricity, light and power, and other service or services, furnished to the Demised Premises or the occupants thereof during the term of this Lease ("Utility Expenses"). 2 6 2. In the event the Demised Premises are part of a larger tax parcel and are not a separate tax parcel, Tenant shall pay to Landlord, as additional rent, its proportionate share of all real estate taxes and assessments which become due and payable during the term of this Lease prorated on a daily basis for any partial year. Such payment shall be made by Tenant delivering to Landlord , contemporaneously with the monthly installments of rent payable by Tenant, an amount equal to one-twelfth (1/12th) of Tenant's proportionate share of the real estate taxes and assessments as shown on the most recent tax duplicate. If, upon the determination of the amount of the real estate taxes and assessments, the total amount of funds deposited by Tenant are not sufficient to pay Tenant's proportionate share of the real estate taxes and assessments then due, then Tenant agrees to remit to Landlord the shortage promptly upon receipt of a statement therefor from Landlord. In the event Tenant has deposited funds from Landlord for the payment of the real estate taxes and assessments for such year in excess of the amount required, then the overage shall be credited to the next month's deposit to be made by Tenant hereunder. Tenant's proportionate share shall be determined on an equitable basis taking into consideration, without limitation, the square footage of the Demised Premises, including the Building, and the square footage of the total tax parcel and all buildings thereon. 3. Tenant shall be deemed to have complied with the covenants of this Article if payment of such Taxes shall have been made either within any period allowed by law or by the governmental authority imposing the same during which payment is permitted without penalty or interest or before the same shall become a lien upon the Demised Premises, and Tenant shall produce and exhibit to Landlord satisfactory evidence of such payment, if Landlord shall demand the same in writing. 4. Tenant or its designees shall have the right to contest or review all such Taxes by legal proceedings, or in such other manner as it may deem suitable (which, if instituted, Tenant or its designees shall conduct promptly as its own cost and expense, and free of any expense to Landlord, and, if necessary, in the name of and with the cooperation of Landlord and Landlord shall execute all documents necessary to accomplish the foregoing) . Notwithstanding the foregoing, Tenant shall promptly pay all such Taxes if at any time the Demised Premises or any part thereof shall then be immediately subject to forfeiture, or if Landlord shall be subject to any criminal liability, arising out of the nonpayment thereof. 5. The legal proceedings referred to in the preceding paragraph 4 shall include appropriate certiorari proceedings and appeals from orders therein and appeals from any judgments, decrees or order. In the event of any reduction, cancellation or discharge, Tenant shall pay the amount finally levied or assessed against the Demised Premises or adjudicated to be due and payable on any such contested Taxes. 3 7 6. Landlord covenants and agrees that if there shall be any refunds or rebates on account of the Taxes paid by Tenant under the provisions of this Lease, such refund or rebate shall belong to Tenant. Any such refunds received by Landlord shall be deemed trust funds and as such are to be received by Landlord in trust and paid to Tenant forthwith. Landlord will, upon the request of Tenant, sign any receipts which may be necessary to secure the payment of any such refund or rebate, and will pay over to Tenant such refund or rebate as received by Landlord. Landlord further covenants and agrees on request of Tenant at any time, and from time to time, but without cost Landlord, to make application individually (if legally required) for separate tax assessments for such portions of the Demised Premises as Tenant shall at any time, and from time to time, designate. Landlord hereby agrees upon request of Tenant to execute such instruments and to give Tenant such assistance in connection with such applications as shall be required by Tenant. 7. Nothing herein or in this Lease otherwise contained shall require or be construed to require Tenant to pay any inheritance, estate, succession, transfer, gift, franchise, income or profit taxes, that are or may be imposed upon Landlord, its successors or assigns. ARTICLE VI ---------- USE OF PREMISES --------------- 1. Tenant covenants and agrees that the Demised Premises during the term hereof shall be occupied and used for manufacturing, assembly and related operations and for no other purpose whatsoever without the written consent of Landlord. 2. Tenant covenants and agrees to use, maintain and occupy the Demised Premises in a careful, safe and proper manner and will not permit waste therein, nor shall Tenant vacate or abandon the Demised Premises during the term of this Lease, and shall not permit the Demised Premises to remain unoccupied, except during any period of reconstruction or repairs or during any period required to make alternations as provided by the terms of this Lease. Tenant will keep the Demised Premises and appurtenances and the adjoining areas and sidewalks in a clean, safe and healthy condition and further agrees to clean the snow and ice from driveways and parking lots on the Demised Premises and from the sidewalks contiguous to the Demised Premises. Tenant will not permit the Demised Premises to be used in any way which will injure the reputation of the same. 3. Tenant covenants and agrees not to use or occupy or suffer or permit the Demised Premises or any part thereof to be used or occupied for any purpose contrary to law or to the rules or regulations of any public authority. If Tenant shall install any electrical equipment that overloads the lines in the Demised Premises, 4 8 Tenant shall, at its own expense, make whatever changes are necessary to comply with the requirements of the insurance underwriters and governmental authorities having jurisdiction thereof. 4. Tenant agrees to indemnify Landlord for all costs and expenses including attorneys' fees, due, in whole or in part, to Tenant's activities involving the use, shipment, storage, or discharge of hazardous wastes, hazardous substances, solid wastes, wastewater, or process water, that may result in any requirements, liabilities or claims to remedy or clean-up such wastes, whether based upon a statue, regulation, order of a governmental agency, or a private claim. These requirements, liabilities or claims include, but are not limited to, those arising out of the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, the Safe Drinking Water Act, and the state counterparts of such statutes. This indemnification applies to, but is not limited to, claims or liabilities regarding air pollution, water pollution, land pollution, groundwater pollution, solid and hazardous waster management, and toxic or hazardous substances control. ARTICLE VII ----------- ALTERATIONS ----------- 1. Tenant covenants and agrees not to make or permit to be made any alterations, improvements and additions to the Demised Premises or any part thereof except by and with the written consent of Landlord first had. If the reasonably estimated cost of such alterations exceeds Ten Thousand Dollars ($10,000.00), Tenant shall have prepared a set of plans and specifications which shall be submitted to Landlord for approval, and Landlord agrees that approval of said alterations as shown on said plans and specifications shall not be unreasonably withheld. 2. All alterations, improvements and additions to the Demised Premises permitted to be made by Tenant shall be made in accordance with all applicable laws and, except for removable trade fixtures, shall at once when made or installed be deemed to have attached to the freehold and to have become the property of Landlord and shall remain for the benefit of Landlord at the end of the term or other expiration of this Lease in as good order and condition as they were when installed, reasonable wear and tear excepted; provided, however, if prior to the termination of this Lease, or within fifteen (15) days thereafter Landlord so directs by written notice to Tenant, Tenant shall promptly remove the additions, improvements, fixtures and installations which were placed on the Demised Premises by Tenant and which are designated in said notice and repair any damage occasioned by such removal and in default thereof Landlord may effect said removals and repairs at Tenant's expense. 5 9 3. In the event of the making of such alterations, improvements and additions as herein provided Tenant further agrees to indemnify and save harmless Landlord from all costs, expenses, liens, claims or damages arising out of, or resulting from the undertaking or making of said alterations, additions or improvements. ARTICLE VIII ------------ MAINTENANCE OF DEMISED PREMISES ------------------------------- 1. Landlord shall not be liable for any repairs or replacements of any kind or nature whatsoever with respect to the Demised premises or to any appurtenances thereof, such non-liability to extend, but not by way of limitation, to the structural portion of the exterior or interior of any building comprised in the Demised Premises, the roofs thereon, the fixtures, pipes and appliances thereof, the parking and landscaped area surrounding said buildings and the driveways and all utility lines serving the Demised Premises. 2. Tenant covenants and agrees to keep and maintain the Demised Premises in good order, condition and repair, and to promptly make all repairs or replacements becoming necessary during the term of this Lease including, but without limitation, repairs or replacements of roof, structural portions of any buildings on the Demised Premises, windows, doors, glass (which shall be replaced with glass of the same size and quality) , electrical, plumbing and sewage lines and fixtures within the Demised Premises, and all heating, air conditioning and ventilating equipment and ducts and vents attached thereto, including any of such equipment which may, with Landlord's consent, be mounted on the roof of the Demised Premises, interior walls, floor covering and ceilings and all elevators, docks, conveyors, fire extinguishers and building appliances of each kind, driveways, sidewalks, parking and landscaped areas. 3. On default of Tenant in making any repairs or replacements required to be made by Tenant hereunder or in maintaining the Demised Premises, Landlord may, but shall not be required to make such repairs or replacements or to maintain the Demised Premises for Tenant's account, and the expense thereof shall constitute and be collectible as additional rent, payable by Tenant on demand, or, at Landlord's election, together with the next installment of rent due hereunder. ARTICLE IX ---------- REQUIREMENTS OF PUBLIC AUTHORITY -------------------------------- 1. During the term of this Lease, Tenant shall, at its own cost and expense, promptly observe and comply with all present and future laws, ordinances, requirements, orders, directives, rules and regulations of the Federal, State, County, Town, Village and City 6 10 Governments and of all other governmental authorities affecting the Demised Premises or appurtenances thereto or any part thereof whether the same are in force at the commencement of the term of this Lease or may in the future be passed, enacted or directed, and Tenant shall pay all costs, expenses, liabilities, losses, damages, fines, penalties, claims and demands that may in any manner arise out of or be imposed because of the failure of Tenant to comply with the covenants of this Article IX. 2. Tenant shall have the right to contest by appropriate legal proceedings diligently conducted in good faith, in the name of the Tenant, or Landlord (if legally required), or both (if legally required) , without cost or expense to Landlord, the validity or application of any law, ordinance, rule, regulation or requirement of the nature referred to in paragraph 1 of this Article and, if by the terms of any such law, ordinance, order, rule, regulation or requirement, compliance therewith may legally be delayed pending the prosecution of any such proceeding, Tenant may delay compliance therewith until the final determination of such proceedings. 3. Landlord agrees to execute and deliver any appropriate papers or other instruments which may be necessary or proper to permit Tenant so to contest the validity or application of any such law, ordinance, order, rule, regulation or requirement and to fully cooperate with Tenant in such contest. Article X --------- TENANT'S TAXES -------------- Tenant covenants and agrees to pay promptly when due all taxes assessed against Tenant's fixtures, furnishings, equipment and stock- in-trade placed in or on the Demised Premises during the term of this Lease. ARTICLE XI ---------- MECHANICS' LIEN --------------- 1. If, because of any act or omission of Tenant, any mechanic's lien or other lien, charge or order for the payment of money shall be filed against any portion of the Demised Premises, Tenant shall, at its own cost and expense, cause the same to be discharged of record or bonded within ninety (90) days after written notice from Landlord to Tenant of the filing thereof unless Tenant shall contest the validity of such lien by appropriate legal proceedings diligently conducted in good faith and without expense to Landlord; and Tenant shall indemnify and save harmless Landlord against and from all cost, liabilities, suits, penalties, claims and demands on account thereof. 7 11 2. If Tenant shall fail to cause such liens to be discharged of record or bonded within the aforesaid ninety (90) day period or satisfy such liens within sixty (60) days after any judgment in favor of such lien holders from which no further appeal might be taken, then Landlord shall have the right to cause the same to be discharged. All amounts paid by Landlord to cause such liens to be discharged shall constitute additional base rent payable by Tenant to Landlord. ARTICLE XII ----------- DESTRUCTION OF DEMISED PREMISES ------------------------------- 1. In the event of damage to or destruction of the Demised Premises from any cause whatsoever, Tenant shall immediately proceed with the reconstruction, repair or rehabilitation of the damaged portion of the Demised Premises and shall complete the repair, rehabilitation or reconstruction thereof so that the Demised Premises is an architecturally whole unit, the same as nearly as possible to its condition immediately prior to such damage and destruction. Such repair, rehabilitation or reconstruction shall be made in accordance with the terms hereof within a reasonable time thereafter, it being specifically understood that there shall be no abatement of rent during any period of time while the Demised Premises or a portion thereof are not usable by Tenant. 2. If during the last year of the term of this Lease, sixty percent (60%) or more of the Demised Premises, exclusive of excavations and foundations, are destroyed by fire or other casualty insured against, Tenant shall have the right and option to terminate this Lease in lieu of rebuilding; provided,however, that Tenant exercises this option within sixty (60) days after the occurrence of the fire or other casualty insured against; in such an event Tenant shall assign to Landlord all its rights to the proceeds from any and all insurance covering the Demised Premises and relating to such fire or other casualty insured against; and in addition thereto shall pay to Landlord any deficiency by reason of Tenant's failure to insure the Demised Premises as required by Article XVI herein. During the period in which Tenant shall have the option to terminate this Lease in lieu of rebuilding as above provided, Tenant shall carry all insurance required to be carried under the terms of Article XVI with carriers approved by Landlord, which approval shall not be unreasonably withheld. Tenant will give notice to the Landlord the amount, carrier and type of insurance, and in the event that Landlord determines that the amount is insufficient, Landlord shall so notify Tenant within ninety (90) days after notice has been received as aforesaid; in such event this dispute shall be promptly arbitrated by a member of the American Institute of Real Estate Appraisers (MAI) appointed by the then acting Secretary of the Greenwood Real Estate Board of Realtors of similar entity. 8 12 3. Landlord at any time during the term of this Lease shall have the right at Landlord's option to carry for its own account and at its expense "Replacement Insurance," "Depreciation Insurance," or "Additional Coverage Insurance" over and above the fire and extended coverage insurance required to be carried by Tenant hereunder, provided that Landlord shall first advise Tenant of the same, and the proceeds from any such insurance carried by Landlord shall at all times be and become the property of Landlord. Tenant shall fully cooperate with Landlord so that landlord will be able to carry such "Replacement Insurance," "Depreciation Insurance" or "Additional Coverage Insurance." ARTICLE XIII ------------ TRADE FIXTURES IN DEMAND PREMISES --------------------------------- 1. Removable trade fixtures shall not be deemed to become a part of the Demised Premises unless so affixed to the realty as to damage the same in removal. Tenant may, at the expiration of the term hereof, remove all of its trade fixtures which can be moved without costly injury to, or undue defacement of the Demised Premises, provided all rents stipulated herein are paid in full and Tenant is not otherwise in default hereunder, and provided further that any and all damage to the Demised Premises resulting from or caused by such removal, shall be promptly repaired at Tenant's expense. 2. It is specifically understood and agreed that the following items now located in and about the Demised Premises and any replacements thereof to be made during the term of this Lease are a part of the Demised Premises and are not the trade fixtures or equipment of the Tenant: (a) All light and electrical fixtures and wiring of every nature whatsoever, all conduit, light switches, fuse boxes, electrical receptacles of every nature, all bus ducts and all fittings and plug-in devices used in connection therewith. (b) All heating and ventilating and air conditioning equipment of every nature. (c) All plumbing and sewer fixtures whether regular or special. (d) All fences and gates of every nature whatsoever. (e) All partitions whether temporary or permanent. 9 13 3. All personal property belonging to Tenant or to any other person, located in or about any building of the Demised Premises , shall be there at the sole risk of Tenant or such other person, and neither Landlord nor Landlord's agents shall be liable for the theft or misappropriation thereof, nor for any damage or injury thereto, or for damage or injury to Tenant or said other persons or to other property, caused by water, snow, frost, steam, heat or cold, dampness, falling plaster, sewers or sewage, gas, odors, noise, the bursting or leaking of pipes, plumbing, electrical wiring and equipment and fixtures of all kinds, or for any act, neglect or omission of any occupant of any building on the Demised Premises or of any other person or caused in any other manner whatsoever. Tenant agrees to protect, indemnify and save harmless Landlord from all losses, costs or damages sustained by reason of any act or other occurrence causing injury to any person or property whomsoever or whatsoever due to the use of the Demised Premises or any part thereof by Tenant. ARTICLE XIV ----------- ACCESS TO DEMISED PREMISES -------------------------- 1. Tenant covenants and agrees to permit Landlord and Landlord's agents to inspect and examine the Demised Premises at any reasonable time to permit Landlord to make such repairs, decorations, alterations, improvements or additions in and to the Demised Premises, that Landlord may deem desirable or necessary for the preservation of the Demised Premises or which Tenant has failed so to do, and for other reasonable purpose without the same being construed as an eviction of Tenant in whole or in part, and the rent shall in no wise abate while such decorations, repairs, alterations, improvements or additions are being made by reason of loss or interruption of the business of Tenant because of the prosecution of such work. 2. Landlord and its agents shall also have the right to enter upon the Demised Premises for a period commencing three hundred sixty (360) days prior to the termination of this Lease for the purpose of exhibiting the same to prospective tenants or purchasers. During said period Landlord may place signs in our upon the Demised Premises to indicate the same are for rent or sale, which signs shall not be removed, obliterated or hidden by Tenant. 3. If, during the last month of the term of this Lease, Tenant shall have removed all or substantially all of Tenant's property therefrom, Landlord may immediately enter and alter, renovate or redecorate the Demised Premises without elimination or abatement of rent or other compensation and such action shall have no effect on this Lease. Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever for the care, supervision or repair of the Demised Premises except in this Lease otherwise provided. 10 14 ARTICLE XV ---------- SURRENDER OF DEMISED PREMISES ----------------------------- 1. Tenant covenants and agrees to deliver up and surrender to Landlord possession of the Demised Premises upon expiration of this Lease, or its earlier termination as herein provided, broom clean and in as good condition and repair as the same shall be at the commencement of the term of this Lease, or may have been put by Landlord during the continuance thereof, ordinary wear and tear and damage by fire or the elements not caused by the negligence or act of Tenant or its agents, employees or invitees excepted, it being understood and agreed that acceptance of delivery of the Demised Premises shall be deemed conclusive evidence that the Demised Premises were in good order and condition at the commencement of the term of this Lease. 2. Prior to Tenant's vacating or delivery up the Demised Premises to Landlord, Tenant shall, at Tenant's cost and expense, remove all property of Tenant and all alterations, additions and improvements as to which Landlord shall have made the election provided for in Article VII hereof, and shall repair any damage to the Demised Premises caused by such removal and restore the Demised Premises to the condition in which they were prior to the installation of the articles so removed. Any property not so removed and as to which Landlord shall have not made said election, shall be deemed to have been abandoned by Tenant and may be retained or disposed of by Landlord, as Landlord shall desire. Tenant's obligation to observe or perform this covenant shall survive the expiration of termination of the term of this Lease. ARTICLE XVI ----------- INDEMNITY AND INSURANCE BY TENANT --------------------------------- 1. Tenant covenants and agrees it will protect and save harmless and keep Landlord forever harmless and indemnified against and from any penalty, damages, charges or costs imposed or resulting from any violation of any law, order of governmental agency or ordinance, whether occasioned by the neglect of Tenant or those holding under Tenant, and that Tenant will at all times protect, indemnify and save and keep harmless Landlord against and from all claims, losses, costs, damages or expenses arising out of or from any accident or other occurrence on or about the Demised Premises causing injury to any person or property whomsoever or whatsoever, and will protect, indemnify, save and keep harmless Landlord against and from any and all claims and against and from any and all losses, costs, damages or expenses arising out of any failure of Tenant in any respect to comply with or perform all the requirements and provisions of this Lease. 11 15 2. Tenant agrees that, at its own cost and expense, it will procure and continue in force, in the names of Landlord, Landlord's mortgagee(s) and Tenant as their interests may appear, general liability insurance coverage against injuries to persons occurring in, upon or about the Demised Premises, including all damage from signs, glass, awnings, fixtures or other appurtenances now or hereafter erected on the Demised Premises during the term of this Lease, such insurance at all times to be in an amount of not less that One Million Dollars ($1,000,000) each occurrence and Two Million Dollars ($2,000,000) general aggregate. Such insurance shall be written with a company or companies authorized to engage in the business of general liability insurance in the State of South Carolina, and there shall be delivered to Landlord customary insurance certification evidencing such paid-up insurance and copies of the policies. Such insurance shall further provide that the same may not be canceled, terminated or modified unless the insurer gives Landlord and Landlord's mortgagee(s) at least thirty (30) days's prior written notice thereof. 3. Tenant shall carry and pay for, for the account of Landlord during the entire term of this Lease, the following types of insurance: (a) Insurance in an amount not less than eighty percent (80%) of the replacement value of the buildings and other improvements now or at any time hereafter situated on the Demised Premises (with carriers approved by Landlord, which approval shall not be unreasonably withheld) , against loss or damage by fire, lightning, such perils as are now or hereafter may be comprehended within the term "extended coverage" and -vandalism and malicious mischief, or if any building is equipped with automatic sprinklers and plumbing eligible for "Superior Fdrm" of policy as issued by the Sprinklered Risk Associations, against loss or damage by fire and such other perils as are included in such "Superior Form", together with a "Riot and Vandalism" endorsement and together with the "Agreed Amount Clause" and "Replacement Cost Endorsement," if the same are then available. Said replacement value shall be determined at the instance of Landlord not more frequently than at annual intervals by an architect, contractor, appraiser, appraisal company, one of the insurers selected by Landlord, or by agreement of the parties; provided the method is approved by the insurers, and shall exclude such values as are not insured by the standard fire insurance policy, viz, excavation, underground foundations and piping and architects' fees, and the amount of the insurance shall be adjusted accordingly. (b) Rent insurance (unless the risks covered by such insurance is included in Tenant's business interruption insurance satisfactory to Landlord) , to the extent obtainable from insurers of recognized responsibility, against loss or damage resulting from the same risks as are covered by the insurance mentioned in paragraph 3(a) of this Article in an amount equal to one (1) 12 16 year's requirement of the basic rent, the estimated amounts payable by Tenant for Taxes and Utility Expenses as provided in Article V, and insurance premiums as provided in this paragraph and paragraph 2 of this Article. (c) All such policies of insurance shall be in the name of Landlord and Tenant with a loss payable clause in favor of any holder of any mortgage on the Demised Premises. It shall be the duty of Tenant to insure in its own name all improvements and betterments as shall be installed at Tenant's expense which remain the property of Tenant. (d) All insurance proceeds shall be paid to and held by Landlord, as Trustee, and shall be disbursed by such Trustee to Tenant from time to time as work progresses for Tenant's use in rehabilitating or reconstructing or repairing any destroyed portion of the Demised Premises, provided Tenant is not in default in the payment of rent and there exists no other uncured default or defaults on the part of Tenant; that plans, specifications, names of contractors, copies of contracts, necessary permits and indemnifications against liens, costs, damages and expenses of all kinds are submitted to and approved by both Landlord and such Trustee, which approval shall not be unreasonably withheld, and it is thereupon evident that the destroyed portion of the Demised Premises can be rehabilitated or reconstructed or repaired for the amount of the insurance moneys collected or to be collected from the insurance companies insuring against the casualty involved in such a manner as to place the Demised Premises in at least as good condition as the property was before the occurrence of the casualty. In the event that such insurance moneys are inadequate for the purposes aforesaid, then Tenant shall deposit or shall cause to be deposited with the Trustee sufficient funds to make up the difference between the insurance moneys available or to be available and the actual cost of rehabilitation, repair or reconstruction, plus any amount required to cure any default in the Lease. Landlord and Tenant shall cooperate fully in order that there shall be no unreasonable delays in commencement of any of such work. In the event that Tenant is in default in the payment of rent or in the performance or observance of any other terms, conditions or covenants contained in this Lease, Landlord, at its option, may immediately apply any such insurance moneys to correct such defaults and Tenant hereby waives any rights that it may have to said insurance moneys for the purposes hereinabove set forth. If the rehabilitation, reconstruction or repair of the Demised Premises is completed in accordance with the terms hereof for an amount of money less than the insurance moneys available and provided that Tenant is not in default hereunder, Tenant shall have the right to receive the excess of any such insurance moneys. Any fees charged by the said Trustee pursuant to the provisions of this paragraph 3 of this Article shall be borne solely by Tenant. 13 17 4. All insurance certifications referred to in this Section XVI are to be provided by Tenant, and shall be for a period of not less than one (1) year, it being understood and agreed that thirty (30) days prior to the expiration of any policy of insurance Tenant will deliver to Landlord a renewal or new policy to take the place of the policy expiring, with the further agreement that, should Tenant fail to furnish policies as is provided in this Lease, and at the times herein provided, Landlord may obtain such insurance and the premiums on such insurance shall be deemed additional rent to be paid by Tenant unto Landlord upon demand. ARTICLE XVII ------------ ASSIGNMENT AND SUBLETTING ------------------------- 1. Tenant covenants and agrees not to assign this Lease or to sublet the whole or any part of the Demised Premises, or to permit any other persons to occupy same without the written consent of Landlord first had, reference elsewhere herein to assignees notwithstanding. No consent of Landlord to a particular assignment or subletting shall be deemed a consent to further assignments or subletting. Any assignment or subletting, even with the consent of Landlord, shall not relieve Tenant from liability for payment of rent or other sums herein provided or from the obligation to keep and be bound by the terms, conditions and covenants of this Lease. The acceptance of rent from any other person shall not be deemed to be a waiver of any of the provisions of this Lease and shall not constitute consent to the assignment of this Lease or subletting of the Demised Premises. 2. If Tenant is a corporation, then any transfer of this Lease from Tenant by merger, consolidation or liquidation, or any change in ownership or power to vote of a majority of Tenant's outstanding voting stock shall constitute an assignment for the purpose of this Lease and shall require the written consent of Landlord first having been obtained. 3. An assignment for the benefit of creditor or by operation of law shall not be effective to transfer any rights to any assignee, without the written consent of Landlord first having been obtained. ARTICLE XVIII ------------- EMINENT DOMAIN -------------- 1. In the event the Demised Premises or any part thereof shall be taken or condemned either permanently or temporarily for any public or quasi public use or purpose by any competent authority in appropriation proceedings or by any right of eminent domain, the entire compensation award therefor, both leasehold and reversion, shall belong to Landlord without any deduction therefrom for any 14 18 present or future estate of Tenant and Tenant hereby assigns to Landlord all its right, title and interest to any such award. Tenant shall, however, be entitled to claim, prove and receive in such condemnation proceedings such award as may be allowed for fixtures and other equipment installed by it, but only if such award shall be in addition to the award for the land and the building (or portion thereof) containing the Demised Premises. 2. If the entire Demised Premises shall be taken as aforesaid, then this Lease shall terminate and shall become null and void from the time possession thereof is required for public use and from that date the parties hereto shall be release from further obligation hereunder; but in the event a portion only of the Demised Premises shall be so taken or condemned, then Landlord, at its own expense, shall repair or restore, to the extent reasonably possible, the portion not affected by the taking and thereafter the rental to be paid by Tenant shall be equitably and proportionately adjusted. 3. Any such appropriation or condemnation proceedings shall not operate as or be deemed an eviction of Tenant or a breach of Landlord's covenant for quiet enjoyment. ARTICLE XIX ----------- DEFAULT BY TENANT ----------------- 1. All rights and remedies of Landlord herein enumerated shall be cumulative, and none shall exclude any other right or remedies allowed by law. Tenant covenants and agrees that if: (a) Tenant shall fail, neglect or refuse to pay any installment of rent at the time and in the amount as herein provided, or to pay any other monies agreed by it to be paid promptly when and as the same shall become due and payable under the terms hereof, and if any such default shall continue for a period of more than fifteen (15) days; or (b) Any voluntary or involuntary petition or similar pleading under any section or sections of any bankruptcy act shall be filed by or against Tenant, or any voluntary or involuntary proceeding in any court or tribunal shall be instituted to declare Tenant insolvent or unable to pay Tenant's debts, and the same shall not be dismissed or discharged within thirty (30) days thereafter; or (c) Tenant makes any assignments of its property for the benefit of creditors or should the Demised Premises be taken under a levy of execution or attachment in any action against Tenant and such levy, attachment or assignment is not dismissed or discharged within thirty (30) days; or 15 19 (d) Tenant shall abandon or vacate the Demised Premises or shall fail, neglect or refuse to keep and perform any of the other covenants, conditions, stipulations or agreements herein contained, covenanted and agreed to be kept and performed by it, and in the event any such default shall continue for a period of more than fifteen (15) days after notice thereof given in writing to Tenant by Landlord; provided, however, that if the cause for giving such notice involves the making of repairs or other matters reasonably requiring a longer period of time than the period of such notice, Tenant shall be deemed to have complied with such notice so long as it has commenced to comply with said notice or has taken and continues to diligently pursue all proper steps or proceeding under the circumstances to prevent the seizure, destruction, alteration or other interference with the Demised Premises by reason of non-compliance with the requirements of any law or ordinance or with the rules, regulations, or direction of any governmental authority as the case may be; then Tenant does hereby authorize and fully empower Landlord or Landlord's agent to cancel or annul this Lease at once and to re-enter and take possession of the Demised Premises immediately, and by force if necessary, without any previous notice of intention to re-enter , and to remove all persons and their property therefrom, and to use such force and assists in effecting and perfecting such removal of Tenant as may be necessary and advisable to recover at once first and exclusive possession of the Demised Premises whether in possession of Tenant or of third persons or otherwise, without being deemed guilty of any manner of trespass and without prejudice to any remedies which might otherwise be used by Landlord, in which event this Lease shall terminate and Tenant shall indemnify Landlord against all loss of rent which LAndlord may incur by reason of such termination during the residue of the term therein specified. 2. Any and all property which may be removed from the Demised Premises by Landlord in accordance with the terms of this Lease may be handled, removed, stored or otherwise disposed of by Landlord at the risk and expense of Tenant; Landlord in no event shall be responsible for the preservation or safekeeping thereof, except for its own negligence. Tenant shall pay to Landlord, upon demand in writing, any and all expenses incurred with such removal, and all storage charges against such property so long as the same shall be in Landlord's possession or under the Landlord's control. If any property shall remain in the Demised Premises or in the possession of Landlord and shall not be retaken by Tenant within a period of thirty (30) days from and after the time when the Demised Premises are either abandoned by Tenant or repossessed by Landlord under the terms of this Lease, said property shall conclusively be deemed to have been forever abandoned by Tenant, and Landlord, after giving Tenant fifteen (15) days' written notice (all other notices required by statute or otherwise being hereby expressly waived) , shall have the right to sell 16 20 any and all of said property at public or private sale and to apply the proceeds of said sale first to the payment of all costs and expenses of conducting the sale or caring for or storing said property, secondly toward the payment of any indebtedness which may be or may become due from Tenant to Landlord, and thirdly to pay to Tenant on demand in writing, any surplus remaining after all indebtedness of Tenant to Landlord has been fully paid. 3. Landlord may, however, at its option, at any time after such default or violation of condition or covenant, re-enter and take possession of the Demised Premises without such re-entry working as a forfeiture of the rents to be paid and the covenants, agreements and conditions to be kept and performed by Tenant for the full term of this Lease. In such event, Landlord shall have the right, but not the obligation, to divide or subdivide the Demised Premises in any manner Landlord may determine and to lease or let the same or portions thereof for such periods of time and at such rentals and for such use and upon such covenants and conditions as Landlord may elect, applying the net rentals from such letting first to the payment of Landlord's expenses (including attorney's fees) incurred in dispossessing Tenant and reletting the Demised Premises and the cost and expense of making such improvements in the Demised Premises as may be necessary in order to enable Landlord to relet the same, and to the payment of any brokerage commissions or other necessary expenses of Landlord in connection with such reletting. The balance, if any, shall be applied by Landlord from time to time on account of the payments due or payable by Tenant hereunder, with the right reserved to Landlord to bring such action or proceedings from the recovery of any deficits remaining unpaid as Landlord may deem favorable from time to time, without being obligated to await the end of the term hereof for the final determination of Tenant's account. Any balance remaining, however, after full payment and liquidation of Landlord's account as aforesaid shall be paid to Tenant with the right reserved to Landlord at any time to give notice in writing to Tenant of Landlord's election to cancel and terminate this Lease and the giving of such notice and the simultaneous payment by Landlord to Tenant of any credit balance in Tenant's favor that may at the time be owing to Tenant shall constitute a final and effective cancellation and termination of this Lease and the obligations hereunder on the part of either party to the other. ARTICLE XX ---------- WAIVER OF TENANTS DEFAULT ------------------------- No waiver of any covenant or any condition or of any breach of any covenant or condition of this Lease shall be taken to constitute a waiver of any subsequent breach of such covenant or condition nor to justify or authorize the nonobservance of any other occasion of the same or of any other covenant or condition hereof, nor shall the 17 21 acceptance of rent by Landlord at any time when Tenant is in default under any covenant or condition hereof be construed as a waiver of such default or of Landlord's right to terminate this Lease on account of such default, nor shall any waiver or indulgence granted by Landlord to Tenant be taken as an estoppel against Landlord, it being expressly understood that if at any time Tenant shall be in default in any of its covenants or conditions hereunder an acceptance by Landlord of rental during the continuance of such default or the failure on the part of Landlord promptly to avail itself of such rights or remedies as Landlord may have, shall not be construed as a waiver or such default, but Landlord may at any time thereafter, if such default continues, terminate this Lease or assert any other rights or remedies available to it on account of such default in the manner hereinbefore provided. ARTICLE XXI ----------- DEFAULT BY LANDLORD ------------------- Notwithstanding anything herein stated to the contrary, if Landlord shall fail to perform any covenant, term or condition of this Lease upon Landlord's part to be performed and, as a consequence of such default Tenant or any person claiming through Tenant suffers any loss, injury or damage, it is specifically understood and agreed that Landlord (its successors, assigns and partner, if any) shall not have any personal liability therefor, Tenant hereby agreeing to look solely to the equity of Landlord (its successors, assigns and partners, if any) in the Demised Premises for the satisfaction of each and every remedy of Tenant or any person claiming through Tenant in the event of such failure by Landlord. ARTICLE XXII ------------ SUBORDINATION ------------- Landlord reserves the right and privilege to subject and subordinate this Lease to all ground or underlying leases and all mortgages, which may now or hereafter affect the Demised Premises, and to any and all advanced to be made thereunder and all renewals, modifications, consolidations, replacements and extensions thereof. Tenant covenants and agrees to execute promptly any certificate that Landlord may request in confirmation of such subordination and Tenant hereby constitutes and appoints Landlord as Tenant's attorney-in-fact to execute any such certificate for or on behalf of Tenant. 18 22 ARTICLE XXIII ------------- ESTOPPEL CERTIFICATE BY TENANT ------------------------------ Tenant agrees at any time and from time to time, upon not less than ten (10) days' prior written request by Landlord, to execute and acknowledge and deliver to Landlord a written statement certifying that this Lease is unmodified and in full force and effect (or, if there had been modifications, that the same is in full force and effect as modified and stating the modifications) , and the dates to which the rent and other charges have been paid in advance, if any, it being intended that any such statement delivered pursuant to this Article may be relied upon by any prospective purchaser of the fee' or mortgagee or assignee of any mortgage upon the fee of the Demised Premises. ARTICLE XXIV ------------ OPTION TO PURCHASE ------------------ Landlord hereby grants Tenant the right, privilege and option ("Option") to purchase the Demised Premises, on the terms and conditions hereinafter set forth. (a) The Option shall be exercisable by written notice from Tenant to Landlord at least six (6) months prior to the expiration of the term of this Lease. The Option shall be deemed to have been timely exercised if the notice thereof is postmarked no later than midnight of the last day on which the Option is exercisable. (b) The purchase price for the Demised Premises shall be the greater of (i) the fair market value of the Demised Premises or (ii) the original purchase price expended by Landlord for the Demised Premises which is One Million Forty Five Thousand Dollars ($1,045,000). The fair market value shall be as determined by an appraisal of the Demised Premises prepared by an MAI appraiser mutually agreeable to Landlord and Tenant. If the parties cannot agree on an appraiser, each party shall select and MAI appraiser and those two appraiser shall select a third MAI appraiser. The average of the appraisal amounts determined by each of the appraisers shall be the fair market value for the Demised Premises. The fees of the appraisers shall be shared equally between the parties. (c) The purchase price shall be paid in cash upon closing or upon such other terms and conditions as may be agreed upon by Landlord and Tenant. 19 23 (d) If the Option is exercised, closing of the transaction shall take place as near as practicable to the expiration date of this Lease on a date specified in writing by Tenant to Landlord at least fifteen (15) days prior to the closing. The term "closing" shall mean the date upon which the funds shall be disbursed to Landlord and the deed to the property being purchased shall be recorded. (e) In the event of sale hereunder, transfer shall be in fee simple by warranty deed conveying the Demised Premises to Tenant, free and clear of all liens and encumbrances whatsoever, except easements, conditions, reservations of record, in any; zoning ordinances, if any; liens or conditions created by or through Tenant; and real estate taxes and assessments, both general and special, not yet due and payable. All costs and expenses relating to the transfer of the Demised Premises, including, without limitation, transfer and conveyance fees, title evidence and recording fees, shall be borne by Tenant. ARTICLE XXV ----------- TERM "LANDLORD" --------------- The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner (or ground lessor, as the case may be) for the time being of the Demised Premises. If the Demised Premises or underlying lease, if any, be sold or transferred, the seller thereof shall be automatically and entirely released of all covenants and obligations under this Lease from and after the date of such conveyance or transfer, provided that purchaser at such sale has assumed and agreed to carry out all covenants and obligations contained in this Lease to be performed on the part of Landlord hereunder, it being agreed that the covenants and obligations contained in this Lease shall be binding upon Landlord, its successor and assigns, only during their respective successive periods of ownership. ARTICLE XXVI ------------ HOLDING OVER ------------ If Tenant shall remain in possession of all or any part of the Demised Premises after the expiration of the term of this Lease or any renewal thereof, with the consent of Landlord, then Tenant shall be deemed a tenant of the Premises from month-to-month at one and one-half times the most recent payable by Tenant hereunder and subject to all of the terms and provisions hereof, except only as to the term of this Lease. 20 24 ARTICLE XXVII ------------- QUIET ENJOYMENT --------------- Landlord covenants and agrees that if Tenant pays the rental and other charges herein provided and shall perform all of the covenants and agreements herein stipulated to be performed on Tenant's part, Tenant shall, at all times during said term, have the peaceable and quiet enjoyment and possession of the Demised Premises without any manner of hindrance from Landlord or any persons lawfully claiming through Landlord, except as to such portion of the Demised Premises as shall be taken under the power of eminent domain or condemnation. ARTICLE XXVIII -------------- WAIVER OF SUBROGATION --------------------- Neither party nor its representatives, agents or employees shall be liable to the other party or to anyone claiming through the other party or to any insurance company (by way of subrogation or otherwise) insuring the other party for any business interruption or for any loss or damage to any building, structure or other tangible property, or injury to or death of person occurring on or about the Demised Premises, or in any manner growing out of or connected with Tenant's use or occupation of the Demised Premises, or the use or occupation of the Demised Premises by Tenant's licenses, concessionaires or tenants, even though such business interruption, loss, damage, injury or death might have been occasioned by the negligence of such party, its agents or employees; provided, however, that (i) such business interruption, loss, damage, injury or death is or could be covered by a fire and extended coverage insurance policy (with vandalism and malicious mischief endorsement attached) , by a contents insurance policy or by a sprinkler leakage or water damage policy in South Carolina regardless of whether such insurance policies are actually carried, or (ii) to the extent of recovery under any other insurance carried covering such business interruption, loss, damage, injury or death. Each insurance policy carried by the parties hereto shall contain a clause to the effect that the foregoing waiver shall not effect the right of the insured party to recover under such policy. However, if by reason of the foregoing waiver either party shall be unable to obtain any such insurance, such waiver shall be deemed not to have been made by such party. If by reason of the foregoing waiver, either party shall be unable to obtain any such insurance without the payment of an additional premium therefor, then, unless the party claiming the benefit of such waiver shall agree to pay such party for the cost of such additional premium within thirty (30) days after notice setting forth such requirement and the amount of the additional premium, such waiver shall be of no force and effect as between such party and such claiming party. 21 25 ARTICLE XXIX ------------ TITLES OF ARTICLES ------------------ The titles of the Articles throughout this Lease are for convenience and reference only, and the words contained therein shall in no way be held to explain, modify, amplify, or aid in the interpretation, construction or meaning of the provisions of this instrument. ARTICLE XXX ----------- NOTICES ------- Any bill, statement, notice, communication or payment which Landlord or Tenant may desire, or be required to give to the other party shall be in writing and shall be sent to the other party by registered or certified mail to the address specified on page 1 hereof as to Landlord and to the Demised Premises as to Tenant, or to such other address as either party shall have designated to the other by like notice, and the time of the rendition of such shall be when same is deposited in an official United States Post Office, postage prepaid. ARTICLE XXXI ------------ DEFINITION OF TERMS ------------------- As used in this Lease and when required by the context, each number (singular or plural) shall include all numbers, and each gender shall include all genders; and unless the context otherwise requires, the word "person" shall include individuals, corporations, firms, associations, partnerships and any other type of entity. ARTICLE XXXII ------------- INVALIDITY OF PARTICULAR PROVISIONS ----------------------------------- If any term or provision of this Lease or the application thereof to any person or circumstance shall to any extend be invalid or unenforceable, the other terms of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affect thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 22 26 ARTICLE XXXIII -------------- PROVISIONS BINDING ------------------ Except as herein otherwise expressly provided, the terms and provisions hereof shall be binding upon and shall inure to the benefit of the heirs, executors, administrators, successors, and permitted assigns, respectively, of Landlord and Tenant. Each term and provision of this Lease to be performed by Tenant shall be construed to be both a covenant and a condition. The reference contained to successors and assigns of Tenant is not intended to constitute a consent to assignment by Tenant, but has reference only to those instances in which Landlord may have given written consent to a particular assignment as required by Article XVII hereof. ARTICLE XXXIV ------------- RELATIONSHIP OF PARTIES ----------------------- Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent or of partnership or of joint venture or of any association whatsoever between Landlord and Tenant, it being expressly understood and agreed that neither the computation of rent and other charges nor any other provisions contained in this Lease nor any act or acts of the parties hereto shall be deemed to create any relationship between Landlord and Tenant other than the relationship of landlord and tenant. ARTICLE XXXV ------------ SHORT-FORM LEASE ---------------- The parties will, at any time, at the request of either one, promptly execute duplicate originals of an instrument, in recordable form, which will constitute a short form of lease, setting forth a description of the Demised Premises, the term of the Lease, and any other portions thereof, excepting the rental provisions, as either party may request. ARTICLE XXXVI ------------- COMPLETE AGREEMENT ------------------ This writing contains the entire agreement between the parties hereto, and no agent, representative, salesman or officer of Landlord hereto has authority to make or has made any statement, agreement or representation oral or written, in connection herewith, modifying, adding or changing the terms and conditions herein set forth. No dealings between the parties or custom shall be permitted to contradict various additions to or modify the terms hereof. No modification of this Lease shall be binding unless such modification shall be in writing and signed by the parties hereto. 23 27 IN TESTIMONY WHEREOF, Landlord and Tenant have caused this Lease to be signed upon the day and year first above written. SIGNED IN THE PRESENCE OF: LANDLORD D.M. DRAIME /s/ Kelly J. Perez - ------------------------------ By: /s/ D.M. Draime /s/ Joy Judge -------------------------------- - ------------------------------ - ------------------------------ - ------------------------------ TENANT: ALPHABET, INC. /s/ Kelly J. Perez By: /s/ ? ? - ------------------------------- -------------------------------- /s/ Joy Judge Its: Vice Chairman - ------------------------------- ---------------------------- /s/ Kelly J. Perez - ------------------------------- And: /s/ ? ? /s/ Joy Judge ------------------------------ - ------------------------------- Its: Vice President --------------------------- 24 28 STATE OF OHIO ) ) SS: COUNTY OF TRUMBULL ) Personally appeared before me, a Notary Public in and for said County and State, by D. M. Draime, who acknowledged that he did sign and seal the foregoing instrument; that the same is his free act and deed. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at November, this 29th day of 1993. /s/ Jan I. Hoff ------------------------------- Notary Public My commission expires: __________ JAN I. HOFF PUBLIC State of Ohio My Commission April 3, 1995 29 STATE OF OHIO ) ) SS: COUNTY OF TRUMBULL) Personally appeared before me a Notary Public in and for said County and State, Alphabet, Inc. C. J. Abruzzo and William T. Hull, its Vice Chairman and Vice President, respectively, who acknowledged that they did sign and seal the foregoing instrument for and on behalf of the Corporation, being thereunto duly authorized by its Board of Directors; that the same is their free act and deed individually and as such officers and the free act and deed of the Corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at November, this 29 day of 1993. /s/ Jan I. Hoff ------------------------------- Notary Public My commission expires: __________ JAN I. HOFF PUBLIC State of Ohio My Commission April 3, 1995 26 EX-10.3 7 EXHIBIT 10.3 1 INDUSTRIAL DEVELOPMENT ASSOCIATES LEASE SUMMARY FORM Date: June 11, 1985 TENANT: MCR, INC. ------------------------------------------------------------------------- UNIT LEASED: Building I 1400 Dogwood, Square Feet: 50,998 ----------------------------- -------------------------- LEASE DATE: October 28, 1978 ------------------------------ EFFECTIVE DATE: March 31, 1979 ADJUSTMENT DATE: October 28, 2003 ------------------------- ----------------------- SECURITY DEPOSIT: $7,863.00 ----------------------- TENANT IMPROVEMENTS BY LANDLORD: COST: --------------- ------------------------ ORIGINAL TERM: 25 years RENEWALS: 3 addl. terms at 5 years each ----------------------- -------------------------------- BASIC RENT: 1st Yr. 1983=$11,360/month 2nd Yr. 1984= $11,701/month 3rd Yr. 1985=$12,500/month --------------------------------- ----------------- --------------------- 4th Yr. 3% CPI (far utilities) 5th Yr. 3% CPI ------------------------------------ ---------------------
RENEWAL RENT BASE: 1st: , 2nd: ----------------------- ADDITIONAL RENT: UTILITIES: Landlord pays utilities -------------------------------------- OPERATING PASS THRU: Insurance and taxes ---------------------------------- C.P.I.: 3% annual ----------------------------------------- OTHER: Pro rata share of common area ------------------------------------------ PARKING: Included ----------------------------------------------- FIRST RIGHT OF REFUSAL: --------------------------------- OTHER: Renewal notice 180 days prior to term. (10/28/03 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- COMMENTS: Original Rent $7,863.00 $1.85 sq.ft. ---------------------------------------------------------------------- 1985 approx. $2.85 sq.ft./Landlord pays utilities - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- RENEWAL DATE: October 28, 2003 EXERCISED: ------------------- ------------------------- LEASE EXPIRATION DATE: October 28, 2028 ----------------------------------------- (Including renewals) 2 TABLE OF CONTENTS Page ARTICLE I Premises and Construction ------------------------- Section 1.1. Premises .................................................. 1 Section 1.2. Construction of Improvements .............................. 1 Section 1.3. Work to Be Performed by Landlord for Tenant at Tenant's Expense .......................................... 2 ARTICLE II Lease Term ---------- Section 2.1. Term ...................................................... 3 Section 2.2. Renewal Option ............................................ 4 ARTICLE III Rent ---- Section 3.1. Annual Rent ............................................... 5 Section 3.2. Impositions ............................................... 5 Section 3.3. Utilities ................................................. 6 Section 3.4. Expenses .................................................. 6 Section 3.5. Security Deposit .......................................... 7 ARTICLE IV Occupancy --------- Section 4.1. Quiet Enjoyment ........................................... 7 Section 4.2. Use of Premises ........................................... 8 Section 4.3. Compliance with Law ....................................... 8 Section 4.4. Covenants ................................................. 8 -i- 3 Page ARTICLE V Transfers --------- Section 5.1. Subletting ................................................. 9 ARTICLE VI Parking ------- Section 6.1. Parking .................................................... 9 ARTICLE VII Maintenance, Alterations ------------------------ and Additional Space --------------------- Section 7.1. Maintenance and Repair .................................... 10 Section 7.2. Common Area Maintenance. . . ............................. 11 Section 7.3. Alterations by Tenant ..................................... 11 ARTICLE VIII Surrender of Leased Premises ---------------------------- Section 8.1. Surrender ................................................. 12 Section 8.2. Tenant Equipment Excepted ................................. 12 ARTICLE IX Mechanic's Liens ---------------- Section 9.1. Mechanic's Liens .......................................... 13 ARTICLE X Insurance and Indemnity ----------------------- Section 10.1. Casualty Insurance ........................................ 13 Section 10.2. Indemnity ................................................. 14 Section 10.3. Public Liability Insurance ................................ 15 Section 10.4. Revision of Insurance Coverage .................................................. 15 -ii- 4 Page ARTICLE XI Eminent Domain -------------- Section 11.1. Total Taking ............................................ 16 Section 11.2. Partial Taking .......................................... 16 Section 11.3. Damages ................................................. 17 Section 11.4. Rent .................................................... 17 ARTICLE XII Damage and Destruction ---------------------- Section 12.1. Restoration of Damaged or Destroyed Leased Premises ................................................ 17 Section 12.2. No Abatement ............................................ 18 ARTICLE XIII Default by Tenant ----------------- Section 13.1. Tenant's Default ........................................ 18 Section 13.2. Remedies Not Exclusive; No Waiver ............................................... 21 Section 13.3. Cure by Landlord ........................................ 22 ARTICLE XIV Bankruptcy ---------- Section 14.1. Effect of Bankruptcy or Other Proceedings ....................................... 22 -iii- 5 Page ARTICLE XV Miscellaneous ------------- Section 15.1. Recording .................................................. 23 Section 15.2. Estoppel Certificates ...................................... 23 Section 15.3. Right to Enter ............................................. 24 Section 15.4. Conditions and Termination ................................. 24 Section 15.5. Laws of North Carolina ..................................... 25 Section 15.6. Severability ............................................... 25 Section 15.7. Headings ................................................... 25 Section 15.8. Notices .................................................... 25 Section 15.9. Force Majeure .............................................. 25 Section 15.10. Successors ................................................. 26 Section 15.11. Subordination .............................................. 26 Section 15.12. Assignment of Landlord's Interest ................................................... 26 Section 15.13. Transfer by Landlord ....................................... 26 Section 15.14. Time of Essence ............................................ 27 -iv- 6 CAROLINA CENTRAL INDUSTRIAL CENTER LEASE THIS AGREEMENT OF LEASE is made as of this 24th day of October, 1978, by and between INDUSTRIAL DEVELOPMENT ASSOCIATES, a Maryland limited partnership, having a place of business c/o MSC Corporation at 21 West Road, Towson, Maryland 21204 ("Landlord"), as landlord, and ALPHABET, INC. , a Ohio corporation having a place of business at P. O. Box 308, Orwell, Ohio 44076 ("Tenant"), as tenant. Article I --------- Premises and Construction ------------------------- 1.1. PREMISES. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the premises described in Exhibit A to this Lease consisting of approximately 50,998 square feet of space (the "Leased Premises") in the building constructed or to be constructed (the "Building") on the property described in Exhibit B to this Lease (the "Property") located at the Carolina Central Industrial Center, Mebane, Alamance County, North Carolina, together with necessary access, parking and utility easements to serve the Leased Premises, upon the terms and conditions stated in this Lease. 1.2. CONSTRUCTION OF IMPROVEMENTS. Landlord intends to construct or has constructed on the Property the Building described in the plans and specifications referred to in Exhibit C to this Lease (the "Landlord's Plans"). Landlord expects to complete construction of the Building and the Leased Premises on or before March 31, 1979 in a manner ready for Tenant to install Tenant's own improvements. 7 1.3. WORK TO BE PERFORMED BY LANDLORD FOR TENANT AT TENANT'S EXPENSE. Landlord, at Tenant's cost and expense shall perform and complete such work on the interior of the Leased Premises as set forth in the plans and specifications for Tenant's improvements ("Tenant's Plans") attached as Exhibit D to this Lease. Tenant's Plans shall include, but shall not be limited to, all necessary partitions, interior walls, interior doors, acoustical ceilings, lights, switches, wiring, exterior and interior wall finishes, finished floors, sinks, toilets, and installation of all fixtures and equipment necessary for the completion of first-class office and manufacturing facilities suitable for Tenant's needs. Upon submission of a bill therefor from Landlord, Tenant shall pay Landlord the costs of all work performed by Landlord pursuant to this Section 1.3. During the period Landlord is performing work on the Leased Premises pursuant to Section 1.2 and this Section 1.3, Tenant shall have the right to enter upon the Leased Premises to install its fixtures, equipment, and other property so long as Tenant does not interfere with Landlord in the performance of Landlord's work. Upon completion of construction as set forth in Section 1.2 and in this Section 1.3, Landlord shall deliver to Tenant (a) a certificate of completion by the architect who supervised the construction, which shall state that all work performed by Landlord has been completed in accordance with Landlord's Plans and Tenant's Plans and (b) a certificate of occupancy or any equivalent permit or certificate which may be required by any governmental authority prior to the commencement of business on the Leased Premises. -2- 8 Landlord shall notify Tenant in writing as soon as the Leased Premises are substantially completed in accordance with Landlord's Plans and Tenant's Plans and ready for Tenant to take occupancy. Taking of possession by Tenant shall be deemed to establish that the Building on the Property is completed in accordance with Landlord's Plans and Tenant's Plans and that the Leased Premises are in good and satisfactory condition as of and when possession is taken, except for punch list items for the Leased Premises specified by the parties at the time Tenant takes possession and for faulty materials or workmanship warranted by Landlord. Landlord hereby warrants the materials and workmanship for the work performed by Landlord for a period of one year commencing on the date Tenant takes possession of the Leased Premises to install Tenant's improvements, provided that Tenant gives Landlord written notice of any defect promptly as it appears and within such one-year period. ARTICLE II ---------- Lease Term ---------- 2.1. TERM. The term of this Lease shall begin on the Commencement Date and shall end on the last day of the month in which the twenty-fifth (25th) annual anniversary of the Commencement Date shall occur, unless sooner terminated as provided in this Lease (such term as it may be extended pursuant to this Lease is called the "Term"). "Commencement Date" shall be the date that Landlord gives notice to Tenant pursuant to Section 1.3 that Tenant may take possession of the Leased Premises. If the Commencement Date falls on the first day of a calendar month, the twenty five year Term shall begin to run (25) from that date. If that date falls on other than the first -3- 9 day of a month, the Term shall commence on the first day of the month next following. Upon the request of Landlord, Tenant shall execute a written agreement, in recordable form if requested, acknowledging the Commencement Date of the Term. 2.2. RENEWAL OPTION. Provided that this Lease shall be in good standing and in full force and effect and shall not theretofore have been terminated and that Tenant shall not be in default under any of the terms or conditions of this Lease, Tenant shall have the option to renew this Lease for three (3) additional terms of five (5) years each by notifying Landlord of Tenant's election not less than one hundred eighty (180) days before the expiration of the initial twenty- five (25) year term of this Lease or the immediately preceding renewal term, as the case may be. Each such renewal shall be on the same terms and conditions set forth in this Lease, except (a) that the annual rent payable during the first renewal term of this Lease shall be the sum of Ninety-four thousand three hundred forty-six Dollars ($94,346.00 ) multiplied by a fraction the numerator of which shall be the 1978 Revised Consumer Price Index for Urban Wage Earners and Clerical Workers (1967=100) issued by the Bureau of Labor Statistics of the United States Department of Labor (or the most nearly comparable successor index) (the "Index") as of the last day of the initial twenty-five (25) year term and the denominator of which shall be the Index as of the date of this Lease, and (b) that the annual rent payable during the second renewal term of this Lease shall be the amount of annual rent calculated in subsection 2.2(a) multiplied by a fraction the numerator of which shall be the Index as of the last day of the first renewal term and the denominator of which shall be the Index as of the first day of the first renewal term. Rent shall be payable in monthly -4- 10 installments of one-twelfth (1/12th) of the annual rent, in advance, on the first day of each and every month during such extended Term. The annual rent shall not be adjusted, however, below Ninety-four thousand three hundred forty-six -- Dollars ($94,346.00) for either renewal period. ARTICLE III ----------- Rent ---- 3.1. ANNUAL RENT. Beginning on the Commencement Date, or on the first day of the month next following if the Commencement Date falls on other than the first day of a month, Tenant shall pay to Landlord annual rent of Ninety-four thousand three hundred forty-six - Dollars ($94,346.00), payable to Landlord in equal monthly installments at the rate of Seven thousand eight hundred sixty-three Dollars ($7,663.00), without demand or set-off, in legal tender, and in advance on the first day of each and every month in each year during the Term. If the Commencement Date shall fall on a day other than the first day of a calendar month, then Tenant shall pay to Landlord for the month in which the Commencement Date shall occur an additional rental of an amount calculated by prorating the monthly rent payment. Tenant shall make all rental payments to Landlord c/o , attention: Richard Bechtold or at such other address designated by Landlord. 3.2. IMPOSITIONS. If the annual real estate or other taxes and special assessments imposed on or with respect to the land and improvements on the assessed unit of which the Leased Premises are a part (including, without limitation, front foot or benefit assessments for sewerage, water, or paving and any rent or occupancy tax which may be imposed) (collectively the "Impositions") for any tax year -5- 11 during the term of this Lease shall exceed the amount of such taxes and assessments for the first full tax assessment year commencing after the sixth (6th) calendar month after the Commencement Date, then Tenant shall pay Landlord, upon receipt of a bill therefor from Landlord, as part of additional rent for the Leased Premises, the amount of such excess. Tenant shall not be obligated to pay any installment of any special assessment levied or assessed during the Term but not due until after termination of this Lease. Impositions shall be based on a square foot proportional basis as to any assessed unit of which the Leased Premises are a part. Unless otherwise required by Landlord, Tenant shall pay its share of Impositions directly to the Landlord. Upon the request of Tenant, the Landlord shall deliver copies of Imposition bills and notices to Tenant following their receipt by Landlord. 3.3. UTILITIES. Beginning on the date Landlord gives notice to Tenant that Tenant may take possession of the Leased Premises, Tenant shall pay when due, as part of additional rent, all charges for gas, electricity, water, sewer, telephone, and all other utilities used or consumed at the Leased Premises. Landlord shall provide that gas, electricity, and water be separately metered for the Leased Premises. Tenant shall pay all such bills directly to the billing entity, and, upon request of Landlord, shall forward to Landlord a receipt or other appropriate evidence that all such bills are paid. 3.4. EXPENSES. Unless expressly otherwise provided in this Lease, Tenant shall pay all costs, expenses and obligations of every kind relating to the Leased Premises which may arise during the Term except (a) municipal, state or federal -6- 12 income taxes or estate, succession, inheritance or gift taxes, or corporation franchise taxes assessed against Landlord, (b) costs, expenses, and obligations incurred by Landlord in connection with the sale or mortgaging of the Leased Premises, and (c) costs of maintenance and repairs for which Landlord is responsible under the terms of this Lease. 3.5. SECURITY DEPOSIT. Tenant shall pay to Landlord upon the execution of this Lease the amount of Seven thousand eight hundred sixty-three Dollars ($7,863.00) as a security deposit for the faithful performance by Tenant of all the terms and covenants of this Lease. If any amount owed by Tenant to Landlord as rent, additional rent or otherwise shall be in arrears, Landlord may apply the security deposit toward such obligation and Tenant agrees to re-establish the full amount of security deposit by paying such additional amount along with the next monthly installment of rent. Provided Tenant shall not be in default under this Lease, Landlord shall return the security deposit to Tenant upon the termination of this Lease, less all costs incurred by Landlord in correcting or satisfying any default by Tenant under this Lease or in returning the Leased Premises to the same condition as existed at the time Tenant took possession of the Leased Premises, reasonable wear and tear excepted. No right or remedy available to Landlord under this Section 3.5 shall be deemed to preclude any other right or remedy to which Landlord might otherwise be entitled by this Lease or law. ARTICLE IV ---------- Occupancy --------- 4.1. QUIET ENJOYMENT. Upon payment of the rent as required under this Lease and performance by Tenant of all of the covenants and provisions of this Lease to be performed by -7- 13 Tenant, Tenant shall have during the Lease Term peaceful and quiet use and possession of the Leased Premises without hindrance on the part of Landlord. 4.2. USE OF PREMISES. Tenant may use the Leased Premises only for the purpose of 4.3. COMPLIANCE WITH LAW. Tenant shall at all times during the Term, at its own expense, conform to and comply with all laws, regulations, orders and other governmental requirements, or requirements of the Board of Fire Underwriters, now or hereafter in force, affecting the use or occupancy of all or any part of the Leased Premises. At all times during the Term and for any period that Tenant enters the Leased Premises prior to the Commencement Date to make its installations, Tenant indemnifies Landlord against and agrees to save Landlord harmless from all expenses, liability, and penalty, imposed or incurred for or because of any violation of any law, regulation, order or other governmental requirement occasioned by the neglect or omission, or willful act of Tenant, its customers, employees, visitors, or invitees, independent contractors, or any person on the Leased Premises by permission or holding under Tenant unless such violation results solely from an act or omission on the part of Landlord or an agent or employee of Landlord. Following notice to Landlord, Tenant, by appropriate proceedings conducted with due diligence at Tenant's expense in Tenant's name, may contest in good faith the validity or enforcement of any applicable governmental requirement provided that Landlord is not subjected to any fine or penalty. 4.4 COVENANTS. At all times during the Term, Tenant shall comply with, perform, and be bound by, all the terms, provisions, conditions, restrictions, and covenants set -8- 14 forth in the covenants with respect to the Carolina Central Industrial Center recorded, or intended to be recorded, among the land records of Alamance County, North Carolina (the "Covenants") substantially in the form attached as Exhibit E to this Lease. For the purposes of this Lease, the word "Developer" as used in the Covenants shall be deemed to mean the Landlord, and the words "Owner" and "lot owner" as used in the Covenants shall be deemed to mean the Tenant provided, however, that Tenant shall not be deemed an owner for purposes of the Article of the Covenants entitled "Duration and Modification of Restrictions"; and, provided further, that no amendment or revocation of the Covenants shall serve to reduce or revoke Tenant's obligation to Landlord to perform and be bound by the Covenants as set forth in Exhibit E without Landlord's written agreement to the contrary delivered to Tenant. ARTICLE V --------- Transfers --------- 5.1. SUBLETTING. Tenant shall not have the right to sublet the Leased Premises, or any portion thereof, or to assign Tenant's interest in this Lease, or any portion thereof, without the prior consent of Landlord. Subletting or assignment shall not relieve Tenant of its obligations to Landlord under this Lease. ARTICLE VI Parking ------- 6.1. PARKING. Subject to such reasonable rules, regulations, or conditions as Landlord may impose, Tenant shall be entitled to the non-exclusive use in common with others of automobile parking areas, driveways, access roads, footways, and loading facilities as may be constructed by -9- 15 Landlord for the common use by other tenants of the Building. ARTICLE VII Maintenance and Alterations --------------------------- 7.1. MAINTENANCE AND REPAIR. Except as provided in this Section 7.1 and except as provided in Section 1.2, Tenant at its sole cost and expense, at all times during the Term, shall maintain and keep in an orderly condition and in a good state of repair the Leased Premises and every part thereof, including, but not by way of limitation, all interior walls, windows, roof, plumbing and sewerage facilities, air-conditioning system, heating system, electrical facilities and equipment, exterior lighting, and all other fixtures, equipment and appliances of every kind and nature, reasonable use and wear thereof excepted, provided, however, that if any part of the Building of which the Leased Premises are a part is leased by Landlord to one or more entities other than Tenant, Landlord, provided Landlord is given written notice of the necessity therefor, shall perform all such maintenance and repair with respect to such Building except those items which relate solely to the interior of the Leased Premises and other interior parts of the Building leased to other tenants. Landlord shall charge the cost therefor to Tenant and to such other tenants, and shall apportion such cost according to a square foot proportional basis as each area so leased to Tenant or other tenants bears to the total area of the Building. Tenant shall pay such charge as additional rent upon receipt of a bill therefor from Landlord. The cost of maintenance and repair shall include all costs allocable to such maintenance and repair in accordance with generally accepted accounting principles . Landlord shall maintain all exterior walls, foundations, and structural parts of the Building of which the -10- 16 Leased Premises are a part. Tenant waives all right to make repairs at the expense of Landlord as provided by any provision of law now or hereafter in effect. Except as expressly provided in this Lease, Landlord shall not be called upon or obligated to make or pay for any repairs, replacements, restorations, improvements, alterations, or additions whatsoever in or about the Leased Premises. 7.2 COMMON AREA MAINTENANCE. For each year during the Term and all renewal periods, Tenant shall pay as additional rent upon receipt of a bill therefor from Landlord, a common area maintenance charge representing Tenant's proportionate share of the cost to Landlord of operating, maintaining, repairing and replacing the parking areas and exterior grounds in and around the Property of which the Leased Premises are a part. Such charge shall be for repair of the parking areas and for keeping them clear of snow, debris, and other rubbish and for maintenance of all exterior grounds, grass, landscaping and related areas. Tenant's proportionate share shall be the amount determined by multiplying the total annual expense to the Landlord for so maintaining the parking areas and exterior grounds by a fraction, the numerator of which is _________, representing the number of square feet of the Leased Premises, and the denominator of which shall be the floor area of the other buildings on the Property of which the Leased Premises are a part. The cost of maintenance shall include all costs and expenses of operating, maintaining, repairing and replacing such areas allocable thereto in accordance with generally accepted accounting principles. 7.3. ALTERATIONS BY TENANT. Tenant, without the prior written consent of Landlord, shall not make any interior alterations, structural alterations, changes to the exterior -11- 17 appearance of the Leased Premises, additions, or other improvements to the Leased Premises, except for maintenance and repair required of Tenant. ARTICLE VIII Surrender of Leased Premises ---------------------------- 8.1. SURRENDER. Upon termination of the Term, or any earlier termination of this Lease, Tenant shall surrender to Landlord the Leased Premises, including all alterations, improvements and other additions, in good order and repair, reasonable wear and tear excepted. 8.2. TENANT EQUIPMENT EXCEPTED. If Tenant is not in default under this Lease, Tenant shall be entitled to (or, at Landlord's request, must) remove from the Leased Premises at the end of the Term Tenant's office, trade and manufacturing fixtures, furniture, equipment and signs, which Tenant has installed on the Leased Premises prior to or during the Term at the cost of Tenant and which are not an integral part or necessary to the operation of the Leased Premises as are plumbing, heating, ventilating, air-conditioning, and other similar equipment. Tenant shall at its own cost and expense repair any and all damage to the Leased Premises resulting from or caused by such removal, and shall restore the Leased Premises to good order and condition, reasonable wear and tear excepted. Tenant shall have thirty (30) days after termination of this Lease for any reason whatsoever to effect such removal, repair and restoration, except that no such fixtures or equipment placed on or in the Leased Premises by Tenant, and which remain the property of Tenant, may be removed at a time when Tenant is in default in payment of rent or any other money payable hereunder, or in the performance of any other covenant under this Lease. -12- 18 EXHIBIT 10.3 LEASE BETWEEN INDUSTRIAL DEVELOPMENT ASSOCIATES AND ALPHABET, INC. Carolina Central Industrial Center Mebane, North Carolina 19 ARTICLE IX Mechanic's Liens ---------------- 9.1. MECHANIC'S LIENS. Prior to approving any construction on the Leased Premises by Tenant, Landlord shall have the right to require Tenant, or Tenant's contractor for such construction, to furnish a bond in an amount equal to the estimated cost of such construction with corporate surety approved by Landlord for (a) completion of such construction and (b) indemnifying Landlord and Tenant, as their interests may appear, against liens for labor and materials, which bond shall be furnished before any work is begun or any materials delivered. Landlord shall also have the right at any time before, during or after such construction to require Tenant to furnish such other assurances against mechanic's liens as may be reasonable including, but not limited to, releases of liens signed by all contractors, subcontractors and suppliers, and affidavits executed by Tenant, Tenant's contractor or architect, that all labor and materials theretofore furnished have been paid. ARTICLE X Insurance and Indemnity ----------------------- 10.1. CASUALTY INSURANCE. Beginning on the date of this Lease and continuing during the entire Term, Landlord, at its expense, shall keep the Building on the Leased Premises insured against loss or damage by fire, vandalism and other casualty to the extent now or hereafter covered under standard extended coverage, provided, however, that if the premiums for such insurance for any year during the Term exceed the amount of such premiums for the first full calendar year commencing after the Commencement Date, Tenant shall pay Landlord as additional rent upon receipt of a bill therefor from Landlord -13- 20 the amount of such excess. Such payment by Tenant shall be based on a square foot proportional basis as to the total area of any Building of which the Leased Premises are a part. Tenant shall at all times during the Term maintain at its own cost and expense such casualty insurance against loss, damage, or destruction to all signs, trade fixtures, improvements, equipment, furniture and other installations and property installed by Tenant on the Leased Premises, and shall, upon Landlord's request, provide Landlord with certificates of insurance evidencing that such policies are in force or copies of such policies. 10.2. INDEMNITY. At all times after Tenant takes possession of the Leased Premises and for any period that Tenant enters the Leased Premises prior to the Commencement Date to make its installations, Tenant shall protect, indemnify, and save the Landlord harmless of, from and against any and all actions liabilities, damages, costs, expenses, fees, demands or claims of any nature whatsoever arising from (a) any work or thing done in or about the Leased Premises, and the improvements now or hereafter constructed thereon, or any part thereof, by Tenant or its agents or employees or independent contractors hired by Tenant, (b) injury to or death of persons or damage to property on the Leased Premises or the improvements now or hereafter constructed thereon, and (c) any negligent act or omission on the part of the Tenant, or its employees or invitees or independent contractors arising out of the occupancy or use of the Leased Premises and the improvements now or hereafter constructed thereon, except that Tenant shall not be required to save and hold Landlord harmless or to indemnify Landlord if the injury or loss is due to the negligence of the Landlord or its agents or employees. -14- 21 10.3. PUBLIC LIABILITY INSURANCE. During all periods of construction or reconstruction work performed by Tenant on the Leased Premises, Tenant, at its own expense, shall keep in force, by advance payments of premiums, workmen's compensation and builder's risk insurance reasonably acceptable to Landlord. Beginning on the date of commencement of Tenant's entry upon the Leased Premises and continuing during the entire Term, Tenant, at Tenant's expense, shall keep in force, by advance payments of premiums, public liability insurance in an amount of not less than three million dollars ($3,000,000.00) for personal injury or death and not less than two hundred thousand dollars ($200,000.00) for damage to property, insuring against any liability that may accrue on account of any occurrences in or about the Leased Premises or in consequence of Tenant's occupancy of the Leased Premises. Such insurance shall protect and indemnify not only against any and all such liability, but also against all loss, expense and damage of any and every sort and kind, including costs of investigation and attorney's fees and other costs of defense. All such insurance shall be with insurers approved by Landlord, and all policies shall name Landlord and Tenant as beneficiary as their respective interests may appear. Such policies shall provide that notwithstanding any act or negligence of Tenant which might otherwise result in a forfeiture, such policies shall not be cancelled without at least ten (10) days' prior written notice to each insured. Tenant shall furnish Landlord with a copy of all such policies or a certificate that such policies are in effect. 10.4. REVISION OF INSURANCE COVERAGE. As of January 1, and January 1 of each fifth (5th) year thereafter, -15- 22 the parties shall review whether the insurance minimums stated in Section 10.3 provide for sound and prudent coverage in relation to liability risks as of each such date. As of each date, the parties shall mutually agree on appropriate liability insurance minimums. If within fifteen (15) days following each date the parties are unable to agree on liability insurance minimums, the Landlord may procure the required insurance and charge the cost thereof to Tenant as additional rent. Within thirty (30) days following establishment of any required adjustment, Tenant shall forward to Landlord certificates of insurance indicating that insurance in no less than the required adjustment amounts is in full force and effect. ARTICLE XI Eminent Domain -------------- 11.1. TOTAL TAKING. If the entire Leased Premises be taken under the power of eminent domain or by purchase in lieu thereof (herein together called "Eminent Domain"), this Lease shall terminate as of the date possession is taken. 11.2. PARTIAL TAKING. If any portion of the Leased Premises shall be taken under the power of Eminent Domain, and the portion not so taken would not, in the reasonable judgment of Tenant which shall be communicated in writing to Landlord stating the reasons therefor within sixty (60) days following the date on which Tenant receives notice of the condemning authority's intention to take such property, be adequate for the continued operation of Tenant's business, either unrestored or restored, or if Landlord deems such restoration to be impractical, this Lease shall be deemed to have terminated as of the date of taking of possession. If this Lease is not terminated pursuant to this Section 11.2, Landlord, im- -16- 23 mediately following the taking, to the extent of condemnation proceeds made available to Landlord, shall proceed to restore such part of the Leased Premises as is not taken to as near the former condition of the original Leased Premises, less all signs, trade fixtures, improvements, furniture, and other installations and property installed by Tenant, as the circumstances will permit, and Tenant shall continue to pay rent in full and to utilize the Leased Premises for the operation of its business. 11.3. DAMAGES. All damages awarded for any such taking under the power of Eminent Domain shall be paid to the Landlord, except for Tenant's fixtures and equipment used in operation of the Leased Premises. 11.4. RENT. If this Lease is terminated as provided in this Article XI, all rent shall be paid up to the date that possession is taken by the condemning authority, and Landlord shall make a proportional refund to Tenant of any rent or other amounts paid by Tenant which are applicable to any period after that date and not yet earned. ARTICLE XII Damage and Destruction. ----------------------- 12.1. RESTORATION OF DAMAGED OR DESTROYED LEASED PREMISES. If the Leased Premises, or any other portion of the Building, shall, through no fault of Tenant or Tenant's agents, servants, employees, customers, contractors, visitors or licensees, be damaged by fire, the elements, unavoidable accident or other casualty, but the Leased Premises are not thereby rendered untenantable, or are thereby rendered only partially untenantable, Landlord shall promptly at its own expense cause such damage to be repaired to the extent of insurance proceeds made available to Landlord. If by reason of such occurrence -17- 24 the Leased Premises shall be rendered wholly untenantable, Landlord shall promptly at its own expense cause such damage to be repaired, unless within sixty (60) days after such occurrence Landlord shall give Tenant written notice that it has elected not to reconstruct the destroyed premises in which event, this Lease and the tenancy hereby created shall cease as of the date of such occurrence, the rental to be adjusted as of such date. Any repair or reconstructions performed by Landlord pursuant to this Section shall not include any and all signs, trade fixtures, improvements, equipment, furniture, or other installations and property installed by Tenant. Such items shall be restored or replaced by Tenant at Tenant's sole cost and expense. All of the above notwithstanding, if Landlord, in its absolute discretion, shall desire, within a reasonable time after the occurrence of any such accident or casualty, (even though the Leased Premises may not have been affected by the same) to demolish the Building, then, upon written notice from Landlord to Tenant, this Lease shall terminate on a date to be specified in such notice, and all rent payable hereunder shall be adjusted as of the time of the occurrence of any such accident or casualty. 12.2. NO ABATEMENT. Tenant shall not be entitled to any abatement or diminution of rent during any period because of any casualty damage. Tenant at all times shall maintain business interruption insurance with respect to the business operated on the Leased Premises and rent abatement insurance in such amounts as the Landlord shall reasonably request. ARTICLE XIII Default by Tenant ----------------- 13.1. TENANT'S DEFAULT. If Tenant (a) shall fail to pay any rent or other sum of money due hereunder within -18- 25 ten (10) days after receipt of written notice that such payment has not been made when due, (b) shall fail to perform any other of the terms, conditions, or covenants of this Lease to be observed or performed by Tenant for more than thirty (30) days after written notice of such default as shall have been mailed to Tenant, unless such default is of a nature that it cannot practically be cured within such thirty (30) day period and Tenant is proceeding with due diligence to cure such default, or (c) shall abandon the Leased Premises, then at Landlord's option and without limiting Landlord in the exercise of any other right or remedy Landlord may have in law or equity on account of such default, and without any further demand or notice, Landlord may (i) Re-enter the Leased Premises with or without process of law, take possession of all Improvements, additions, alterations, equipment and fixtures thereon, eject all parties in possession thereof therefrom, and, without terminating this Lease, at any time and from time to time relet the Leased Premises or any part or parts thereof for the account of Tenant or otherwise, receive and collect the rents therefor, applying the rents first to the payment of such expenses as Landlord may have paid, assumed or incurred in recovering possession of the Leased Premises, including costs, expenses and attorney's fees, and for placing the Leased Premises in good order and condition or preparing or altering the same for reletting, and all other expenses, commission and charges paid, assumed or incurred by Landlord in or in connection with reletting the Leased Premises, and then -19- 26 to the fulfillment of the covenants of Tenant. Any such reletting may be for the remainder of the Term of this Lease or for a longer or shorter period. Landlord may execute any lease made pursuant to the terms hereof either in Landlord's name or in the name of Tenant, as Landlord may see fit, and the subtenant therein shall be under no obligation whatsoever for the application by Landlord of any rent collected by Landlord from such subtenant to any and all sums, due and owing or which may become due and owing under the provisions of this Lease. Nor shall Tenant have any right or authority to collect any rent from subtenant. In any case and whether or not the Leased Premises or any part thereof be relet, Tenant shall pay to Landlord all sums required to be paid by Tenant up to the time of re-entry by Landlord. Thereafter Tenant, if required by Landlord, shall pay to Landlord, until the end of the Term of this Lease, the equivalent of the amount of all rent and other charges required to be paid by Tenant under the terms of this Lease, less the proceeds of such reletting during the Term of this Lease, if any, after payment of the expenses of Landlord. Such rent shall be due and payable on the several rent days herein specified, and Landlord need not wait until the termination of this Lease to recover any rent by legal action or otherwise. Re-entry by Landlord shall not constitute an election to terminate this Lease unless Landlord gives Tenant -20- 27 notice of Landlord's election to terminate. (ii) Declare this Lease at an end, reenter the Leased Premises with or without process of law, eject all parties in possession thereof therefrom and repossess and enjoy the Leased Premises together with all Improvements thereto, and Landlord shall thereupon be entitled to recover from Tenant the worth, at the time of such termination, of the amount of rent and charges equivalent to rent reserved in this Lease for the balance of the Term. For the purpose of this sub-paragraph (ii), all Impositions and contributions to expenses and other items paid by Tenant shall be projected over the term of the Lease at an average increase of such items as may have occurred since the date of this Lease to the date of default. 13.2. REMEDIES NOT EXCLUSIVE; NO WAIVER. The remedies of Landlord set forth in this Lease are cumulative and are in addition to and not exclusive of any other remedy of Landlord herein given or which may be permitted by law, and if any breach or threatened breach by Tenant of this Lease occurs, Landlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right and remedy allowed by law or in equity or by statute or otherwise in addition to rights set forth in this Lease. Tenant shall permit any re-entry as provided for in this Article XIII without hindrance to Landlord, and Landlord shall not be liable in damages or guilty of trespass because of such re-entry. The failure of Landlord to insist, in any one or more instances, upon a strict performance of any of the covenants of this Lease or to exer- -21- 28 addition to any other remedies provided Landlord in the event of Tenant's default as set forth in this Lease or under any applicable law, shall have the option, to be exercised by written notice given to Tenant, to declare this Lease terminated at any time after the expiration of twenty (20) days following the commencement of such proceeding or the assertion of such lien, unless the proceeding is dismissed or the lien discharged and unless all payments of rent and other payments required by this Lease to be made by Tenant to Landlord are paid promptly during such period of twenty (20) days. Landlord shall under no circumstances be required to permit a receiver or any person claiming through or under Tenant to retain possession of the Leased Premises. Landlord need not lease the Leased Premises to such receiver or person, and Landlord shall be entitled to immediate possession of the Leased Premises. Any repossession or termination hereunder shall not operate in any way to prejudice or affect the right of Landlord for recovery of rent or other charges theretofore accrued, thereafter accruing or to any other damages, nor shall any such termination or repossession ever be construed as a waiver of or an election not to claim future damages on account of such breach, but all such damages, including all future rentals, shall be fully recoverable by Landlord. ARTICLE XV Miscellaneous ------------- 15.1. RECORDING. Landlord reserves the right at any time to require this Lease, or a short form thereof, to be recorded at Landlord's expense among the Land Records of Alamance County, North Carolina. 15.2. ESTOPPEL CERTIFICATES. Each party agrees at reasonable intervals and from time to time upon not less than five (5) days' prior written notice by the other to execute, -23- 29 acknowledge and deliver a statement in writing certifying (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, that the Lease is in full force and effect as modified and stating the modifications), (ii) the dates to which the rent and other charges have been paid in advance, if any, and (iii) stating whether or not to the best knowledge of the signer of such certificate the signing party is in default in performance of any covenant, agreement or condition contained in this Lease and, if so, specifying each such default of which the signer may have knowledge. Each party acknowledges that any such statement delivered under this Lease may be relied upon by third parties not a party to this Lease. 15.3. RIGHT TO ENTER. Landlord and its agents shall have the right to enter the Leased Premises at reasonable hours, and at any time if any emergency exists, to examine the Leased Premises, or to make such repairs and alterations as shall be reasonably necessary for the safety and preservation of the Leased Premises, or during the last twelve (12) months of the Term to show both the interior and exterior of the Leased Premises to prospective tenants or purchasers and to place "For Rent" or "For Sale" signs thereon. 15.4. CONDITIONS AND TERMINATION. At Landlord's option this Lease shall become void and all parties shall be relieved of all obligations imposed hereunder (a) if, by December 31, 1978, Landlord has not yet obtained (i) water and sewer connection permits, (ii) building permits, and (iii) all other governmental approvals necessary to permit the construction of the Building on the Leased Premises or (b) if Landlord has not completed construction of the Building by December 31, 1979. If this Lease terminates pursuant to this Section -24- 30 15.4, Landlord shall refund to Tenant the amount of all security deposits made by Tenant to Landlord under this Lease. 15.5. LAWS OF NORTH CAROLINA. This Lease shall be construed and applied in accordance with the laws of the State of North Carolina. 15.6. SEVERABILITY. Any provision or provisions of this Lease which shall prove to be invalid, void, or illegal shall in no way affect or impair or invalidate any other provision, and the remaining provision shall remain in full force and effect. 15.7. HEADINGS. The headings of the various Articles and Sections of this Lease are inserted for reference only and shall not to any extent have the effect of modifying, amending or changing the express terms and provisions of this Lease. 15.8. NOTICES. Any notice, request, demand, approval, or consent to be given under this Lease shall be in writing and shall be deemed to have been received when mailed by United States, registered or certified mail, postage prepaid, addressed to the other party at the addresses set forth in the first paragraph of this Lease. Either party may at any time change its address by mailing a notice, as specified in this Section 15.8, that such change is desired and setting forth the new address. 15.9. FORCE MAJEURE. In no event shall Landlord be liable for, nor shall Tenant have the right to terminate this Lease for, delays in the prosecution of Landlord's share of construction beyond Landlord's control ("Force Majeure") , including (but not limited to) delays caused directly or indirectly by strikes, lockouts, the unavailability of labor or materials, Acts of God, acts of any Federal, State, or local governmental agency or authority, war, insurrection, rebellion, riot, civil disorder, fire, explosion, windstorm, -25- 31 hail, snow, extreme cold, rain, flood, damage from aircraft, vehicles, or smoke, or by any other casualty of a substantial enough nature to cause delay. 15.10. SUCCESSORS. This Lease shall be binding upon and inure to the benefit, as the case may require, of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 15.11. SUBORDINATION. This Lease shall be subject to and subordinate at all times to the Covenants (whether recorded before or after the date of this Lease) and to the lien of any mortgages or deeds of trust now or hereafter made by Landlord on the Leased Premises and to all advances made or hereafter to be made thereunder. Although this subordination provision shall be self-operative and no further instrument of subordination shall be required, Tenant will, nevertheless, execute and deliver such further instruments confirming such subordination or status of this Lease as may be required by the Landlord for financing or refinancing the Leased Premises. 15.12. ASSIGNMENT OF LANDLORD'S INTEREST. If Landlord should ever assign this Lease or the rents hereunder to a creditor as security for a debt, Tenant shall, after notice of such assignment and upon demand by Landlord or the assignee, pay all suns thereafter becoming due Landlord hereunder to the assignee and give all notices required to be given Landlord hereunder both to Landlord and the assignee. 15.13. TRANSFER BY LANDLORD. If Landlord sells, leases or in any manner transfers title to the Leased Premises, including foreclosure sale by judicial proceeding or otherwise the Landlord shall be relieved of all covenants and obligations arising hereunder, provided the Landlord is not then in default hereunder and that such transferee shall agree to assume all -26- 32 covenants and obligations of the Landlord hereunder. Tenant agrees that it will attorn to such transferee, provided such transferee has assumed Landlord's covenants and obligations hereunder, and Tenant shall continue to perform all of the terms, covenants, and conditions, and obligations of this Lease. If Tenant obtains a money judgment against Landlord, any of its partners or its successors or assigns under any provisions of, or with respect to this Lease or on account of any matter, condition or circumstance arising out of the relationship of the parties under this Lease, or of Tenant's occupancy of the Property, Tenant shall be entitled to have execution upon such judgment only upon Landlord's estate in the Leased Premises, and not out of any other assets of Landlord, any of its partners, or its successors or assigns; and Landlord shall be entitled to have any such judgment so qualified as to constitute a lien only on the fee simple estate subject to any liens antedating any such judgment except that this limitation shall not apply to the extent that any such judgment against Landlord is covered by insurance. 15.14. TIME OF ESSENCE. Time is of the essence in this Lease. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed as of the day and year first above written. ATTEST: LANDLORD INDUSTRIAL DEVELOPMENT ASSOCIATES MSC Corporation, General Partner /s/ Mary L. Farrell - ------------------------------ By /s/ Michael J. Batza Mary L. Farrell -------------------------------- Michael J. Batza, Jr., Vice President ATTEST: TENANT ALPHABET, INC. /s/ Charles L. Thompson - ------------------------------ By /s/ David M. Draime Charles L. Thompson -------------------------------- David M. Draime -27- 33 STATE OF MARYLAND, COUNTY OF BALTIMORE, to wit: I HEREBY CERTIFY that on this day of 197 before me, the subscriber, a notary public of the State of Maryland, personally appeared Michael J. Batza, Jr., Vice President of MSC Corporation, a Maryland corporation and general partner of Industrial Development Associates, a Maryland limited partnership, and on behalf of such limited partnership executed the foregoing instrument and acknowledged such execution of such instrument as the act and deed of such limited partnership. IN WITNESS WHEREOF, I have affixed my official seal. -------------------------------------- [Seal] Notary Public My Commission Expires: STATE OF OHIO, COUNTY OF , to wit: I HEREBY CERTIFY that on this 24th day of October, 1978 before me, the subscriber, a notary public of the State of Ohio, personally appeared David M. Draime, President of Alphabet Inc., and on behalf of such corporation executed the foregoing instrument and acknowledged such execution of such instrument as the act and deed of such corporation. IN WITNESS WHEREOF, I have affixed my official seal. -------------------------------------- [Seal] Notary Public My Commission Expires: 11-14-82 -28- 34 Exhibit A to Lease between Industrial Development Associates and Alphabet, Inc. Description of Leased Premises The description of Leased Premises shall consist of final plans and specifications known as the CMS, Inc. Manufacturing Plant, as prepared by Alley, Williams, Carmen & King, Inc., engineers ard architects, dated 19 May 1978. Sheets 1-A, 1-B, 2, 3, 4, 5, 6, 7, 8, and 9 inclusive. 35 Exhibit B to Lease between Industrial Development Associates and Alphabet, Inc. Property On Which The Building Is Located Shall consist of site plan and survey as it appears on Sheet 2 of Final Plans and Specifications for the CMS, Inc. Manufacturing Plant, dated 19, May 1978, as prepared by Alley, Williams, Carmen & King. 36 Exhibit C to Lease between Industrial Development Associates and Alphabet, Inc. Landlord's Plans 37 Exhibit E to Carolina Central Industrial Center Lease CAROLINA CENTRAL INDUSTRIAL CENTER Declaration of Covenants and Restrictions This Declaration is made this day of 1978 by INDUSTRIAL DEVELOPMENT ASSOCIATES, a Maryland limited partnership ("Developer"). RECITALS -------- A. Developer is the owner of a parcel of land located in Alamance County, North Carolina (the "Property") described in Exhibit A to this Declaration, as may be amended. B. Developer has caused the Property to be subdivided for use as an industrial center and desires to subject Property to certain covenants, agreements, and restrictions (the "Restrictions") as hereinafter set forth. THEREFORE, Developer hereby declares that the Property shall be subject to the Restrictions as set forth in this Declaration. ARTICLE I The Property ------------ The Property subject hereto is situated in Alamance County, North Carolina and is more particularly described in Exhibit A attached hereto and made part hereof. Additional lands may be annexed to the Property, and thereby subject to the Restrictions, as set forth herein. 38 ARTICLE II Definition of Terms ------------------- Wherever used in this Declaration, the following terms shall have the following meanings: "Occupant" shall mean and refer to persons or entities in actual possession of any parcel on the Property. "Owner" shall mean and refer to the owner of any parcel on the Property. "Restrictions" shall mean and refer to the covenants and restrictions contained herein or as the same may be modified in accordance with the provisions of Article III hereof. "Person" shall mean artificial persons as well as natural persons and includes the plural. "Property" shall mean and refer to that certain property described in Exhibit A attached hereto and made part hereof and, from and after any annexation, such additional property as may be annexed in the manner described herein. "Street" shall mean any street, highway or other thoroughfare within the Property and shown on any recorded subdivision plat, whether designated thereon as street, boulevard, place, drive, road, terrace, way, lane, circle or otherwise. "Structure" shall mean and refer to any thing or device the placement of which upon the Property might affect the physical appearance thereof, including, by way of illustration and not limitation, buildings, sheds, covered patios, fountains, swimming, wading or other pools, trees, shrubbery, paving, curbing, landscaping or fences or walls more than three (3) feet in height or any sign or signboard. "Structure" shall also mean any excavation or fill, the volume of which exceeds ten (10) cubic yards; or any excavation, fill, ditch, diversion dam or other thing or device which affects or alters the natural flow of surface waters upon or across the Property or which affects or alters the 39 flow of any water in any natural or artificial stream, wash or drainage channel upon or across the Property. ARTICLE III Duration and Modification of Restrictions ----------------------------------------- 1. DURATION. These Restrictions shall continue from the date of this Declaration until January 1, 2010, subject to modification pursuant to Article III, Section 2, and thereafter shall be automatically extended for successive periods of ten years, unless and until terminated pursuant to Article III, Section 2 below. 2. MODIFICATION OR TERMINATION. These Restrictions may at any time after the date hereof be modified in any particular, or terminated in their entirety, by the recording among the Land Records of Alamance County, North Carolina, of an agreement of modification or termination executed jointly by the Developer (so long as the Developer or its successor pursuant to Article IX exists) and the Owners (excluding mortgagees, holders of security devices who are not in possession, lessees and tenants) of a majority of the acreage in the Property, provided that no such modification shall affect any plans, specifications, or use theretofore approved by the Developer pursuant to these Restrictions or any improvements theretofore or thereafter made pursuant to such approval. 3. ANNEXATION. Developer may, from time to time, annex additional lands to the Property, and thereby subject the same to the Restrictions, by the execution and filing for recordation among the Land Records of Alamance County of an instrument expressly stating an intention so to annex and describing such additional lands (and the interests and estates therein) to be so annexed. ARTICLE IV Use of Property; Restrictions ----------------------------- 1. NO RESIDENCES. No building or other Structure on the Property shall be used, temporarily or permanently, as a residence . 2. BUILDING HEIGHT LIMITATION. All buildings shall be limited to a height of fifty (50) feet above finished grade elevation; except that this height limitation may be exceeded, with written approval of the Developer. 3. PARKING. All present and future vehicle parking, including trucks, trailers, employee and visitor parking, shall 40 be provided on the Property and shall comply with all provisions of the applicable governmental requirements. All parking areas are to be paved to provide dustfree all-weather surfaces with macadam, concrete or any approved material other than gravel. No parking area will be permitted within building set back lines (fifty (50) feet on primary roads and thirty (30) feet on secondary roads) except that lots bounded by more than one road may have parking areas within the set-back lines along roads other than the one on which the building fronts if, in the judgment of the Developer, the parking area is set back a reasonable distance and is properly screened from both front and side roads. Off-street parking spaces will be provided in accordance with the following: a) one space - size 10' x 20' for automobiles per 1,000 sq. ft. of warehouse space b) one space - size 10' x 20' for automobiles per 600 sq. ft. of manufacturing space c) one space - size 10' x 20' for automobiles per 250 sq. ft. of office space 4. LOADING. No loading docks shall be permitted on t f the front of any building, and, exceot where a lot is bounded by three or more roads, no loading docks shall be permitted on the side of any building facing a road. 5. STORAGE. No material, supplies, or products shall be stored or permitted to remain on the Property outside a permanent structure without the prior written consent of Developer. Approval of outside storage will be granted only where storage is screened from view by a masonry wall, or other appropriate screen, six (6) feet in height or rising two (2) feet above the stored material, whichever is higher. 6. MATERIALS. Without the Developer's prior written consent, the use of concrete block or cinder block for outside facing of exterior walls will not be permitted nor will any frame structures be permitted. 7. SIGNS. A scale drawing in color of any sign, billboard, trademark or advertising device to be used on any lot or the exterior of any building or Structure will be submitted to Developer in triplicate for the written approval by Developer. Normally the Occupant's trade mark and/or trade name may be displayed on the building in the manner in which they are generally used by the Occupant. 8. OPEN AREA. Not more than fifty per cent (50%) of any lot area shall be covered by Structures. -4- 41 9. COLOR. No building or Structure shall be painted, repainted, stuccoed or be surfaced with any material unless and until Developer approves the color and/or material in writing. 10. GROUND COVER. All set-back areas facing roads between the front building line and the curb, with the exception of driveways, sidewalks, and other walk ways shall be used exclusively for the planting and growing of trees, shrubs, lawns and other ground covering or material as approved by Developer. If developed lots are not properly maintained, Developer may undertake such maintenance as may be necessary, at the expense of the Owner. 11. NUISANCE. Owners shall not cause or make (or permit to be caused or made) any excessive noise, odors, harmful sewage or vibration that could be deemed objectionable to other occupants and that would conflict with the purposes or restrictions of the Property, and shall not create or maintain a nuisance. Each Owner must provide for trash disposal from his building. No use will be made of any lot or any portion thereof or any building or Structure thereon at any time, nor shall any materials or products be manufactured, processed or stored thereon or therein, which shall, cause an undue fire hazard to adjoining properties, or which shall constitute a nuisance or cause the emission of noxious odors or gases or smoke, or cause noises or other conditions which might injure the character of the lot in question or neighboring properties or which shall constitute a violation of any law of the United States, the State of North Carolina, or Alamance County, or any regulation or ordinance promulgated thereunder. 12. UNUSED AREA. All unused land area that is planned for future building expansion or other purposes shall be maintained and kept free of unsightly plant growth, stored material, rubbish and debris. ARTICLE V Setbacks -------- No Structure, or any part thereof or projection therefrom, shall be erected nearer than fifty (50) feet from any primary road on the Property (a primary road being a public right-of-way sixty (60) feet or more in width granted, or intended to be granted, such intention to be evidenced by prior written notice to each Owner, to Alamance County), nor nearer -5- 42 than thirty (30) feet from any secondary road on the Property (a secondary road being a public right-of-way less than sixty (60) feet in width granted, or intended to be granted, such intention to be evidenced by prior written notice to each Owner, to Alamance County), nor nearer than thirty (30) feet from any side or rear boundary line of the parcel on which the Structure is erected. ARTICLE VI Plans and Specifications ------------------------ 1. No Structure, building, fence, wall, sign, advertising device, roadway, loading facility, outside storage facility, parking area, site grading, planting, landscaping, facility for industrial waste or sewage disposal, nor any other improvement shall be commenced, erected or constructed, nor shall any addition thereto or change or alteration therein be made (except to the interior of a building), nor shall any change in the use of any premises be made, until the plans and specifications therefor, showing the nature, kind, shape, heights, materials, color scheme, lighting and location on the lot of the proposed improvements, grading, landscaping or alterations and the proposed use or change in the use of the premises, shall have been submitted to and approved in writing by the Developer and a copy of such plans and specifications as finally approved lodged permanently with the Developer. The Developer shall have the right to refuse to approve any plans or specifications or proposed use of the premises for any reason which the Developer, in its sole discretion, may deem in the best interests of the Property and the Owners, occupants or lessees or prospective owners or lessees of other properties therein. 2. No parking will be permitted on the Streets on the Property and each Owner, unless otherwise agreed to by Developer, shall provide on his property necessary and adequate parking facilities and private driveways as approved by the Developer under paragraph 1 of this Article VI. 3. Construction and alteration of all improvements on the Property shall be in accordance with the requirements of all applicable Building, Zoning, and other Codes and Regulations. ARTICLE VII Maintenance ----------- 1. Each Owner shall at all times keep his premises, buildings, improvements and appurtenances in a safe, clean, neat and -6- 43 sanitary condition and shall comply with all laws, ordinances and regulations pertaining to health and safety. Each Owner shall provide for the removal of trash and rubbish from his premises. 2. During construction it shall be the responsibility of each Owner to insure that construction sites are kept free of unsightly accumulations of rubbish and scrap materials, and the construction materials, trailers, shacks and the like are kept in a neat and orderly manner. 3. The Developer agrees to maintain all undeveloped land owned by it within the Property in a manner compatible with the provisions of this Article VII. ARTICLE VIII Covenants Run with Land; Enforceability --------------------------------------- 1. The foregoing covenants and restrictions shall run with, burden, and bind the Property and shall bind and inure to the benefit of, and be enforceable by, Developer and Owner and the respective heirs, successors and assigns of each. The Developer reserves the right, however, from time to time hereafter to delineate, plat, grant or reserve within the Center such public streets, roads, sidewalks, ways and appurtenances thereto, and such easements for drainage and public utilities, as it may deem necessary or desirable for the development of the Property (and from time to time to change the location of the same) free and clear of these restrictions and covenants, and to dedicate the same to public use or to grant the same to Alamance County and/or to appropriate public utility corporations. 2. Such covenants and restrictions shall be jointly and severally enforceable by the Developer and its succesors and assigns and by the Owner, and its successors and assigns, provided however that only the Developer or its assignees, under Article IX hereof, shall have the right to exercise the discretionary powers herein reserved to the Developer. 3. If any violation or breach of any of these Restrictions shall exist on the Property, and the Owner shall not have taken reasonable steps toward the removal or termination of the same within fifteen (15) days after written notice thereof, the Developer shall have the right, through their agents and employees, to enter upon the Property, with respect to any operation being conducted thereon, and summarily abate, remove and extinguish any thing or condition that may be or exist thereon contrary to the provisions hereof. The Developer, or any such agent, shall not thereby be deemed to have trespassed -7- 44 upon the Property and shall be subject to no liability to the Owner or Occupant of the Property for such entry, abatement or removal. The cost of any abatement or removal of violations authorized under this Section shall be a binding, personal obligation of the Owner as well as a lien (enforceable in the same manner as a mortgage) upon the Property. The lien provided in this Section shall not be valid as against a bona fide purchaser (or bona fide mortgagee) of the property in question unless a suit to enforce such lien shall have been filed in a court of record in Alamance County prior to the recordation among the Land Records of Alamance County of the deed (or mortgage) conveying the property in question to such purchaser (or subjecting the same to such mortgage). 4. Violation of any of these Restrictions may be enjoined, abated, restrained or otherwise remedied by appropriate legal or equitable proceedings. Proceedings to restrain violation of these Restrictions may be brought at any time that such violation appears reasonably likely to occur in the future. In the event of proceedings brought by any party or parties to enforce or restrain violation of any of these Restrictions, or to determine the rights or duties of any person hereunder, the prevailing party in such proceedings may recover a reasonable attorneys' fee to be fixed by the court, in addition to court costs and any other relief awarded by the court in such proceedings. 5. The failure of any person entitled to enforce any of these Restrictions, to enforce the same shall in no event be deemed a waiver of the right of any such person to enforce these Restrictions thereafter. 6. Waiver or attempted waiver of any provision of these Restrictions shall not be deemed a waiver thereof with regard to any subsequent violation with respect to such provision or any other provision of these Restrictions. ARTICLE IX Nominees and Successors of Developer ------------------------------------ The Developer may from time to time delegate any or all of its rights' powers, discretion and duties hereunder to such agent or agents as it may nominate. It may also permanently assign any or all of its powers and duties (including discretionary powers and duties), obligations, rights, title, easements and estates reserved to it by this Declaration to any one or more corporations, associations, or persons that will accept -8- 45 the same. Any such assignment shall be in writing recorded among the Land Records of Alamance County and the assignee shall join therein for the purpose of evidencing its acceptance of the same, and such assignee shall thereupon have the same rights, title, powers, obligations, discretion and duties as are herein reserved to the Developer, and the Developer shall thereupon be released therefrom. ARTICLE X Good Faith Lenders Clause ------------------------- No violation of any of these Restrictions shall defeat or render invalid the lien of any mortgage or deed of trust made in good faith and for value upon the Property; provided, however, that any mortgagee or trustee or beneficiary under any deed of trust in actual possession, or any purchaser at any trustees', mortgagees' or foreclosure sale shall be bound by and subject to these Restrictions as fully as the Owner. ARTICLE XI Owner's Covenant ---------------- The Owner covenants for himself, his heirs, successors and assigns to observe, perform and be bound by these Restrictions and to incorporate these Restrictions by reference in any deed or other conveyance of all or any portion of the Property. IN WITNESS WHEREOF, the Developer has caused this Declaration to be executed as of the day and year first above written. ATTEST: INDUSTRIAL DEVELOPMENT ASSOCIATES MSC Corporation, General Partner /s/ Mary Farrell - -------------------------------------- /s/ Michael J. Batza, Jr. Mary Farrell --------------------------------- Michael J. Batza, Jr. (Vice President) ATTEST: Alphabet, Inc., General Partner /s/ Arlene L. Burnett - -------------------------------------- By /s/ D.N. Draime Arlene L. Burnett -------------------------------- D.N. Draime (President) - 9- 46 STATE OF COUNTY OF I, a Notary Public of said County and State, do hereby certify that Michael J. Batza, Jr. the duly authorized Vice President of MSC Corporation, a Naryland corporation, such corporation being a duly authorized General Partner of INDUSTRIAL DEVELOPMENT ASSOCIATES, a Maryland limited partnership, personally appeared before me this day and acknowledged the due execution of the foregoing instrument. Witness my hand and official seal this day of______________, 1978. --------------------------- Notary Public My commission expires: STATE OF COUNTY OF I, Arlene L. Burnett a Notary Public of said County and State, do hereby certify that the duly authorized President of Alphabet Inc., an Ohio corporation, such corporation being a duly authorized General Partner of INDUSTRIAL DEVELOPMENT ASSOCIATES, a Maryland limited partnership, personally appeared before me this day and acknowledged the due execution of the foregoing instrument. Witness my hand and offical seal this 24th day of October, 1978. /s/ Arlene L. Burnett --------------------------- Notary Public My commission expires: 11/14/82 - 10 - 47 Exhibit A --------- 48 Exhibit E to Lease between Industrial Development Associates and Alphabet, Inc. Covenants 49 MEMORANDUM 0F LEASE THIS MEMORANDUM OF LEASE is made this 24th day of October, 1976 by and between INDUSTRIAL DEVELOPMENT ASSOCIATES, a Maryland limited partnership having a place of business c/o MSC Corporation at 21 West Road, Towson, Maryland 21204 ("Landlord") as Landlord and ALPHABET, INC. , an Ohio corporation having a place of business at P.O. Box 308, Orwell, Ohio 44076 ("Tenant") as Tenant. A. By lease dated October 24, 1978, (the "Lease") Landlord has leased to Tenant the premises described in Exhibit A to this Memorandum of Lease and located in the Carolina Central Industrial Center, Mebane, Alamance County, North Carolina together with necessary access, parking and utility easements to serve the premises. B. Landlord and Tenant desire to enter into this Memorandum of Lease for the purpose of recordation and giving notice of the existence of the Lease. NOW THEREFORE, in consideration of the rents received and the covenants and conditions more particularly set forth in the Lease, Landlord and Tenant do hereby covenant, promise and agree as follows: 1. Landlord, in consideration of the rent to be paid and the covenants to be performed by Tenant, does hereby demise and Lease unto Tenant and Tenant hereby rents from Landlord, a portion of the premises known as Carolina Central Industrial Center, Mebane, Alamance County, North Carolina, which portion thereof leased to Tenant is shown and described on Exhibit "A", attached hereto and made a part hereof, being part of 50 the Carolina Central Industrial Center as shown on Exhibit "B", attached hereto and made part hereof. 2. The original term of the lease shall commence on March 31, 1979, (or on such date that landlord gives tenant notice pursuant to Section 1.3 of said lease) and shall terminate on the last day of the month in which the 25th annual anniversary of the "commencement" date shall occur. 3. Tenant has three (3) consecutive five (5) year renewal options to renew such Lease. 4. This instrument is executed for the purpose of giving public notice of the fact of execution of the above described Lease and all of the terms and conditions of such Lease and Exhibits and Attachments thereto are incorporated herein by reference. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed as of the day and year first above written. ' ATTEST: LANDLORD : INDUSTRIAL DEVELOPMENT ASSOCIATES MSC Corporation, General Partner - ----------------------------------- By /s/ Michael J. Batza, Jr. (Seal) --------------------------- Michael J. Batza, Jr., Vice President ATTEST: TENANT: ALPHABET, INC. - ----------------------------------- By /s/ Richard A. Bechtold (Seal) ----------------------------- Richard A. Bechtold Vice President - 2- 51 STATE OF MARYLAND COUNTY OF HARFORD This 24th day of October, 1978, personally came before me, E. Rebecca Kincaid a notary public of said county and state, Michael J. Batza, Jr. who, being by me duly sworn, says that he is Vice President of MSC Corporation, a corporation, and general partner of Industrial Development Associates, a Maryland limited partnership, and that the seal affixed to the foregoing instrument in writing is the corporate seal of said corporation, and that said writing was signed and sealed by him in behalf of said corporation acting as a general partner of said partnership by its authority duly given. And the said Michael J. Batza, Jr. acknowledged the said writing to be the act and deed of said corporation acting as general partner of said partnership. /s/ E. Rebecca Kincaid --------------------------- Notary Public My Commission Expires: 7/1/82 STATE OF NORTH CAROLINA COUNTY OF ALAMANCE This 15th day of December, 1978, personally came before me, Janet F. Minnis, a notary public of said county and state, Richard A. Bechtold, who being by me duly sworn, says that he is Vice President of Alphabet, Inc., an Ohio corporation, and that the seal affixed to the foregoing instrument in writing is the corporate seal of said corporation, and that said writing was signed and sealed by him in behalf of said corporation by its authority duly given. And the said Richard A. Bechtold acknowledged the said writing to be the act and deed of said corporation. /s/ Janet F. Minnis --------------------------- Notary Public My Commission expires: 8-9-83 -3- 52 SCHEDULE OF EXHIBITS 1. Exhibit A - Description of the Leased Premises 2. Exhibit B - Description of the Carolina Central Industrial Center 53 Exhibit A to Memorandum of Lease between Industrial Development Associates and Alphabet, Inc. Description of Leased Premises Tenant has leased from Landlord 50,256 square feet of light manufacturing space, consisting of the entire single tenant building located on 4.278 acres of land owned by Industrial Development Associates known as Building #1 in the Carolina Central Industrial Center. 54 Exhibit B to Lease between Industrial Development Associates and Alphabet, Inc. Carolina Central Industrial Center [Street map showing location of Building Number 1 and plot lines.] 55 MEMORANDUM OF LEASE THIS MEMORANDUM OF LEASE is made this 24th day of October, 1978 by and between INDUSTRIAL DEVELOPMENT ASSOCIATES, a Maryland limited partnership having a place of business c/o MSC Corporation at 21 West Road, Towson, Maryland 21204 ("Landlord") as Landlord and ALPHABET, INC., an Ohio corporation having a place of business at P.O. Box 308, Orwell, Ohio 44076 ("Tenant") as Tenant. A. By lease dated October 24, 1978, (the "Lease") Landlord has leased to Tenant the premises described in Exhibit A to this Memorandum of Lease and located in the Carolina Central Industrial Center, Mebane, Alamance County, North Carolina together with necessary access, parking and utility easements to serve the premises. B. Landlord and Tenant desire to enter into this Memorandum of Lease for the purpose of recordation and giving notice of the existence of the Lease. NOW THEREFORE, in consideration of the rents received and the covenants and conditions more particularly set forth in the Lease, Landlord and Tenant do hereby covenant, promise and agree as follows: 1. Landlord, in consideration of the rent to be paid and the covenants to be performed by Tenant, does hereby demise and Lease unto Tenant and Tenant hereby rents from Landlord, a portion of the premises known as Carolina Central Industrial Center, Mebane, Alamance County, North Carolina, which portion thereof leased to Tenant is shown and described on Exhibit "A", attached hereto and made a part hereof, being part of the 56 Carolina Central Industrial Center as shown on Exhibit "B", attached hereto and made part hereof. 2. The original term of the Lease shall commence on March 31, 1979 (or on such date that landlord gives tenant notice pursuant to Section 1.3 of said lease) and shall terminate On the last day of the month in which the 25th annual anniversary of the "commencement" date shall occur. 3. Tenant has three (3) consecutive five (5) year renewal options to renew such Lease. 4. This instrument is executed for the purpose of giving public notice of the fact of execution of the above described Lease and all of the terms and conditions of such Lease and Exhibits and Attachments thereto are incorporated herein by reference. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed as of the day and year first above written. ATTEST : LANDLORD : INDUSTRIAL DEVELOPMENT ASSOCIATES MSC Corporation, General Partner - -------------------------------------- By /s/ Michael J. Batza (Seal) ------------------------ Michael J. Batza, Jr., Vice President ATTEST: TENANT : ALPHABET, INC - -------------------------------------- By /s/ Richard A. Bechtold (Seal) ------------------------ Richard A. Bechtold Vice President - 2- 57 STATE OF MARYLAND COUNTY OF HARFORD This 24th day of October, 1978, personally came before me, E. Rebecca Kincaid, a notary public of said county and state, Michael J. Batza, Jr. who, being by me duly sworn, says that he is Vice President of MSC Corporation, a corporation, and general partner of Industrial Development Associates, a Maryland limited partnership, and that the seal affixed to the foregoing instrument in writing is the corporate seal of said corporation, and that said writing was signed and sealed by him in behalf of said corporation acting as a general partner of said partnership by its authority duly given. And the said Michael J. Batza, Jr. acknowledged the said writing to be the act and deed of said corporation acting as general partner of said partnership. - ----------------------------------- ---------------------------- Notary Public My Commission Expires: 7/1/82 STATE OF NORTH CAROLINA COUNTY OF ALAMANCE This 15 day of December, 1978, personally came before me, Janet F. Minnis, a notary public of said county and state, Richard A. Bechtold, who being by me duly sworn, says that he is Vice President of Alphabet, Inc. an Ohio corporation, and that the seal affixed to the foregoing instrument in writing is the corporate seal of said corporation, and that said writing was signed and sealed by him in behalf of said corporation by its authority duly given. And the said Richard A. Bechtold acknowledged the said writing to be the act and deed of said corporation. - ----------------------------------- ---------------------------- Notary Public My Commission Expires: 8/9/83 58 SCHEDULE OF EXHIBITS 1. Exhibit A - Description of the Leased Premises 2. Exhibit B - Description of the Carolina Central Industrial Center 59 FIRST AMENDMENT TO LEASE BETWEEN INDUSTRIAL DEVELOPMENT ASSOCIATES AND ALPHABET, INC. This First Amendment to Lease is made this 23 day of December, 1978 by and between INDUSTRIAL DEVELOPMENT ASSOCIATES, a Maryland limited partnership ("Landlord") and ALPHABET) INC. ("Tenant") . PRELIMINARY STATEMENT --------------------- A. By lease dated October 24 , 1978 (the "Lease") Landlord leased to Tenant certain property (the "Leased Premises") located at the Carolina Central Industrial Center, Alamance County, North Carolina, as more particularly des- cribed in Exhibit A to the Lease. B. New York Life Insurance Company ("New York Life"), in connection with its agreement to provide financing to the Landlord with respect to the Carolina Central Industrial Center, has requested that Landlord and Tenant amend the Lease. NOW, THEREFORE, in consideration of the covenants herein contained and other good and valuable consideration, Landlord and Tenant agree as follows: 60 1. If New York Life, its successors or assign, whether by foreclosure or otherwise, shall succeed to the interest of the landlord under the Lease, Tenant shall not seek to hold New York Life responsible for the return to Tenant of any security deposit paid by Tenant to Landlord pursuant to Section 3.5 of the Lease unless New York Life has received such security deposit from the prior landlord or otherwise. 2. Section 4.2 of the Lease is amended as follows: "4.2. Use of Premises. Tenant may use the Leased Premises only for the purpose of light manufacturing of wiring harness for automotive and related industries. 3. Section 7.2 of the Lease is hereby amended by inserting in the fifteenth line of such section the number "50,998 which represents the number of square feet of the Leased Premises. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed as of the day and year first above written. ATTEST: LANDLORD: INDUSTRIAL DEVELOPMENT ASSOCIATES MSC Corporation, General Partner /s/ E. Rebecca Kincaid - ----------------------------------- By /s/ Michael J. Batza, Jr. (Seal) ------------------------ Michael J. Batza, Jr. Vice President ATTEST: TENANT : ALPHABET, INC /s/ Janet F. Minnis - ----------------------------------- By /s/ Richard A. Bechtold (Seal) ------------------------ ALPHABET, INC. 61 STATE OF MARYLAND COUNTY OF HARFORD This 23rd day of December 1978, personally came before me E. Rebecca Kincaid, a notary public of said county and state, Michael J. Batza, Jr., who, being by me duly sworn, says that he is Vice President of MSC Corporation, a corporation, and general partner of Industrial Development Associates, a Maryland limited partnership, and that the seal affixed to the foregoing instrument in writing is the corporate seal of said corporation, and that said writing was signed and sealed by him in behalf of said corporation acting as a general partner of said partnership by its authority duly given. And the said Michael J. Batza, Jr., acknowledged the said writing to be the act and deed of said corporation acting as general partner of said partnership. NOTARY PUBLIC E. Rebecca Kincaid ---------------------------- Notary Public My Commission Expires 7/1/82 STATE OF NORTH CAROLINA COUNTY OF ALAMANCE This 2 day of January, 1979, personally came before me, Janet T. Minnis, a notary public of said county and state, Richard A. Bechtold, who, being by me duly sworn, says that he is Vice President of Alphabet, Inc., an Ohio corporation, and that the seal affixed to the foregoing instrument in writing 62 was signed and sealed by him in behalf of said corporation by its authority duly given. And the said Richard A. Bechtold, acknowledged the said writing to be the act and deed of said corporation. Janet F. Minnis - ----------------------------------- ---------------------------- Notary Public My Commission Expires 8-9-83 63 SECOND AMENDMENT TO LEASE BETWEEN INDUSTRIAL DEVELOPMENT ASSOCIATES AND ALPHABET INC. (t/a MCR, INC.) This Second Amendment to Lease is made this 15th day of December, 1981 by and between INDUSTRIAL DEVELOPMENT ASSOCIATES, a Maryland limited partnership ("Landlord") and ALPHABET INC. ("Tenant"). By Lease dated October 24, 1978 (the "Lease"), and First Amendment dated December 23, 1978 (the "First Amendment") ' Landlord leased to Tenant certain property (the "Leased Premises") located at the Carolina Central Industrial Center, Alamance County, North Carolina, as more particularly described in Exhibit A to the Lease. Tenant and Landlord are desirous of amending the Lease and First Amendment. NOW, THEREFORE, in consideration of the covenants herein contained and other good and valuable consideration, Landlord and Tenant hereby agree as follows: 1. Section 3.1, ANNUAL RENT, of the Lease, is hereby amended so as to provide as of January 1, 1982 an annual rent increase from $94,346.00 to $132,356.00. Said rent to be paid in equal monthly installments of $11,029.67. 2. Section 3.3, UTILITIES, of the Lease, is hereby amended so as to provide beginning January 1, 1982, that Landlord shall be responsible for and pay all charges for gas, electricity, water, and sewer expenses. Tenant shall maintain the services in its name and control. Monthly, upon receipt of bills for the abovementioned services, Tenant shall forward same to Landlord. Landlord shall pay all utility bills in a prompt manner. Tenant shall retain the right, in the event of Landlord's failure to pay the utility charges, to cure the default. Tenant reserves all legal rights to pursue, in the event of said default, whatever action it may have under appropriate North Carolina law to recoup its out-of-pocket expenses and legal fees for same. Tenant will continue to pay all charges and expenses related to use of telephone services. 3. Add Section 3.6, ANNUAL ADJUSTMENT. Tenant's basic annual rent as amended ($132,356.00) shall be adjusted annually by an amount equal to 3% of the previous year's rent. This adjustment is intended to compound on an annual basis. Landlord shall advise Tenant of his new monthly rent prior to year end and bill the gross adjusted amount beginning January l of each calendar year. 64 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed as of the day and year first above written. ATTEST: LANDLORD: INDUSTRIAL DEVELOPMENT ASSOCIATES ______________________________ By _________________________________(SEAL) Michael J. Batza, Jr. Meridian Inc., General Partner ATTEST : TENANT: ALPHABET INC. _______________________________ By ___________________________________(SEAL) Richard A. Bechtold STATE OF ___________, COUNTY OF __________, to wit: I HEREBY CERTIFY that on this ____ day of _____________, 198__ before me, the subscriber, a notary public of the State of ________________, personally appeared MICHAEL J. BATZA, JR., Assistant Secretary of Meridian Inc., a Maryland corporation and general partner of Industrial Development Associates, a Maryland limited partnership, and on behalf of such limited partnership executed the foregoing instrument and acknowledged such execution of such instrument as the act and deed of such limited partnership. IN WITNESS WHEREOF, l have affixed my officiaL seal. (SEAL) ----------------------------- Notary Public My Commission expires: STATE OF ____________, COUNTY OF ___________, to wit: l HEREBY CERTIFY that on this ____ day of _______________, 198__ before me, the subscriber, a notary public of the State of __________________, personally appeared RICHARD A. BECHTOLD, Vice President of Alphabet Inc., and on behalf of such corporation executed the foregoing instrument and acknowledged such execution of such instrument as the act and deed of such corporation. IN WITNESS WHEREOF, l have affixed my official seal. (SEAL) ----------------------------- Notary Public My Commission expires: -2- EX-10.4 8 EXHIBIT 10.4 1 Exhibit 10.4 LEASE AGREEMENT --------------- between HUNTERS SQUARE, INC. -------------------- and ALPHABET, INC. -------------- TABLE OF CONTENTS ----------------- ARTICLE NO. TITLE PAGE NO. 1 Parties 1 1.1 Landlord 1 1.2 Tenant 1 2 Basic Lease Provisions 1 2.1 Office Building 1 2.2 Premises 1 2.3 Term 1 2.4 Minimum Rent 1 2.5 Security Deposit 1 2.6 Permitted Use 1 2.7 Tax Charge 1 2.8 CAM Charge 1 2.9 Insurance Charge 1 2.10 Monthly Payment Total 1 2.11 Price Index 1 2.12 CPI Increase Formula 2 2.13 Floor Area 2 3 Demise 2 4 Tern 2 5 MinImum Rent 2 6 Security Deposit 2 7 Real Estate Taxes 3 8 Use 3 9 Rules and Regulations 3 10 Conduct of Business 3 11 Signs 4 12 Property in the Premises 4 13 Trade Fixtures 4 14 Alterations 4 15 Liens 5 16 Common Areas 5 17 Utilities 5 18 Maintenance 6 19 Assignment and Subletting 6 20 Insurance 7 21 Fire or Other Casualty 8 22 Eminent Domain 8 23 Subordination, Attornment and Mortgagee's Approval 9 24 Estoppel Certificate 9 25 Bankruptcy 10 26 Default 10 27 Surrender of Premises 11 28 Holding Over 12 29 Access to Premises 12 30 Quiet Enjoyment 12 31 Waiver 12 32 Notices and Payments 12 33 Relationship of Parties 13 34 Exoneration of Individuals 13 35 Administrative Fee 13 36 Interpretation of Lease Provisions 13 2 LEASE THIS LEASE AGREEMENT (the "Lease") is made this 6th day of July, 1988, by and between the parties named in Article 1, which parties, in consideration of the mutual covenants herein set forth, do hereby agree as herein specified. ARTICLE 1. PARTIES ------------------- 1.1 Landlord: 1.2 Tenant: HUNTERS SOUARE, INC. ALPHABET, INC. ------------------------------ --------------------------- ------------------------------ herein called "Landlord", herein called "Tenant", whose address is: whose address is: Post Office Box 8827 9400 East Market Street ------------------------------ --------------------------- Warren, Ohio 44484 Warren, Ohio 44484 ------------------------------ --------------------------- ARTICLE 2. BASIC LEASE PROVISIONS AND DEFINITIONS ------------------------------------------------- The following are presented for the convenience of the parties and include a summary of the basic terms of this Lease. Each reference in this Lease to one of the following provisions shall be construed to incorporate all of the terms provided for under such provisions: 2.1 Building HUNTERS SQUARE located -------- -------------- at 8700 East Market Street, in the Township ------------------------ -------------------- of Howland , County of Trumbull , and State of Ohio, as -------------- ----------------- shown on Exhibit A, attached hereto and made a part hereof. 2.2 PREMISES (Article 3) Suite No. 1 containing ------- approximately 6,240 square feet (Floor Area). --------- 2.3 TERM (Article 4) Five ( 5 ) --------------------- ---- lease years beginning July 1, 1988 ("Commencement Date") and -------------- ending June 30, 1993 , with two (2) five year options. ----------------- 2.4 RENT (Article 5) Sixty Two Thousand-Four Hundred and -------------------------------------- 00/100-Dollars ($___62,400.00) per lease year, payable in advance monthly installments of Five Thousand-Two Hundred and 00/100 Dollars ----------------------------------------- ($ 5,200.00 ) each, subject to adjustment as hereinafter provided. - ----------------- 2.6 PERMITTED USE (Article 8) Only for the: Use of general corporate offices. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- under the name of ALPHABET, INC. --------------------------------------------------------------. 2.7 TAX CHARGE (Article 7) Initial monthly payment: $___260.00 2.8 CAM CHARGE (Article 16) Initial monthly payment: $__312.00 2.9 INSURANCE CHARGE (Article 20.5) Initial monthly payment: $ 78.00. 2.10 MONTHLY PAYMENT TOTAL Initial monthly total of items set forth above in 2.4, 2.7, 2.8, and 2.9: $___5,850.00 2.11 PRICE INDEX Price Index, as used in this Lease, shall mean the Consumer Price Index, All Urban Consumers (U. S. City Average) as compiled by the Bureau of Labor Statistics, United States Department of Labor, which became effective January, 1978. If such Price Index should in the future be compiled on a different basis, appropriate adjustments will be made for purposes of computations. If the United States Department of Labor 'no longer compiles and publishes such Price Index, any comparable index published by any other branch or department of the federal government shall be used for the purpose of (1) 3 computing the adjustments herein provided for, and if no such index is compiled and published by any branch or department of the federal government, the statistics reflecting cost of living changes, as compiled by any institution, organization or individual, generally recognized as an authority by financial and insurance institutions shall be used as a basis for such adjustments. 2.12 CPI INCREASE FORMULA CPI Increase Formula, as used in this Lease, shall refer to the following determination: using the Price Index applicable on the first day of the month in which this Lease was executed as the denominator and the index number for the first month of each lease year or other period being adjusted as the numerator, multiply said resulting fraction times the payment being adjusted. 2.13 FLOOR AREA The area determined by measuring from the exterior faces of all outside walls and the centerline of common walls. ARTICLE 3. DEMISE ----------------- 3.1 Landlord hereby leases to Tenant, and the Tenant hereby rents from the Landlord, the Premises. 3.2 Tenant acknowledges and agrees that it has examined the Premises and knows the present condition thereof and accepts the Premises in its "as is" condition and that no representations as to the condition or repair of said Premises were made by Landlord or anyone on Landlord's behalf at any time prior to the execution of this Lease. ARTICLE 4. TERM --------------- 4.1 To have and to hold the Premises for the Term. In the event that the date the Tenant is granted possession of the Premises is later than the Commencement Date, the parties agree that such later date shall be the Commencement Date of the Term. 4.2 See attached page 2A. ARTICLE 5. RENT --------------- 5.1 Tenant shall pay to Landlord the Rent on or before the first day of each calendar month during the Term of this Lease. 5.2 In the event any installment of Rent or other charges accruing under this Lease shall become overdue, a "Late Charge" of five ($.05) cents for each dollar so overdue may be charged by Landlord for the purpose of defraying the expense incident to handling such delinquent payment. ARTICLE 6. SECURITY DEPOSIT. ---------------------------- RENEWAL OPTION CLAUSE - --------------------- Provided Tenant is not in default and is in full operation during the entire final year of the initial term of this Lease, Tenant, at its option, shall be entitled to renew this Lease for two ( 2 ) additional term(s) of five ( 5 ) year(s) (each) by giving a written notice of its intention to do so to the Landlord one (1) year before the end of the term of this Lease, or one (1) year before the end of the next prior renewal period, if it has been exercised. Said renewal(s) shall be upon all the terms and provisions of this Lease, except that the Minimum Rent in effect for the last year of the initial term shall be adjusted in accordance with the CPI Increase Formula as of the first day of each renewal term (but in no event shall the Minimum Rent during the renewal period be less than the Minimum Rent for the last year of the initial term). (2) 4 ARTICLE 7. REAL ESTATE TAXES. ----------------------------- 7.1 Beginning with the Commencement Date, Tenant shall pay a "Tax Charge" as its proportionate share of the "Real Estate Tax Expense" which shall include all real estate taxes and assessments both general and special imposed by federal, state or local governmental authority or any other taxing authority having jurisdiction over the Building, against the land, buildings and all other improvements within the Building, together with any and all expenses incurred by Landlord in negotiating, appealing or contesting such taxes and assessments. Real Estate Tax Expense shall include the face amount of real estate taxes but shall not include any additional charges or penalties incurred by Landlord due to late payment of real estate taxes. Tenant's Tax Charge shall be computed by multiplying the total of such Real Estate Tax Expense by a fraction whose numerator is the Floor Area of Tenant's Premises and whose denominator is the number of square feet of Gross Leasable Area within that portion of the Building included within the tax statement. Any dispute as to the areas used in determining the Real Estate Tax Expense shall be resolved by certification of Landlord's architect. 7.2 Landlord shall annually estimate and adjust Tenant's Tax Charge based on charges in the amount of the Real Estate Tax Expense. 7.3 If this Lease terminates (other than by reason of Tenant's default) during a tax year, Tenant's obligation for Real Estate Tax Expense with respect thereto shall be appropriately pro rated. ARTICLE 8. USE -------------- 8.1 Tenant agrees that the Premises shall be occupied by no other person or entity except upon and with the written consent of Landlord first had, and shall be used for the Permitted Use, and for no other purpose or use. ARTICLE 9. RULES AND REGULATIONS. --------------------------------- Landlord reserves the right from time to time to adopt and promulgate reasonable rules and regulations applicable to the Premises and the Building, including, but without limitation, the designation of certain areas for employee parking, and to amend and supplement such rules and regulations. ARTICLE 10. CONDUCT OF BUSINESS. -------------------------------- 10.1 Tenant will keep the inside and outside of all glass in the doors and windows of the Premises clean; will keep all exterior and interior store front surfaces clean; will replace promptly at its own expense with glass of like kind and quality any plate glass or window glass of the Premises which may become cracked or broken; will not, without the consent in writing of Landlord, place or maintain any merchandise or other articles in any vestibule or entry of the Premises, on the sidewalks adjacent thereto or elsewhere on the exterior thereof; will maintain the Premises, at its own expense, in a clean, orderly and sanitary condition and free of insects, rodents, vermin and other pests; will not permit accumulations of garbage, trash or rubbish and other refuse, but will remove the same at its expense; will not burn any trash or garbage whatsoever; will not use or permit the use of any objectionable advertising medium within the Building or in any manner a'udible or visible outside the Premises; will not cause or permit objectionable odors to emanate from the Premises; will not solicit business or hold demonstrations in the parking or other Common Areas nor distribute any hand bills or other (3) 5 advertising matter to, in, or upon any automobiles parked in the parking areas or in any other Common Areas; will comply with all laws and ordinances and all valid, rules and regulations of governmental authorities and all recommendations of the Fire Underwriters Rating Bureau with respect to the use or occupancy of the Premises by Tenant. No auction, fire, liquidation, bankruptcy, or going-out-of-business sales shall be conducted in the Premises without the advance written consent of Landlord nor shall Tenant conduct its business in such a fashion as to give the impression such a prohibited sale is being conducted. ARTICLE 11. SIGNS. ------------------ 11.1 Tenant agrees that it will not erect any signs without first obtaining Landlord's approval as to size, color, type and location of the permitted signs. Tenant agrees to maintain its signs in a good state of repair and save the Landlord harmless from any loss, cost or damage as a result of the erection, maintenance, existence or removal of the same and shall repair any damage which may have been caused by the erection, existence, maintenance or removal of such signs. Upon vacating the storeroom, the Tenant agrees, at its sole cost, to remove all signs and to repair all damage caused by such removal. ARTICLE 12. PROPERTY IN THE PREMISES. ------------------------------------- 12.1 All leasehold or building improvements or additions shall, when installed or completed, attach to the freehold and become and remain the property of the Landlord. All store fixtures or trade fixtures and signs shall remain the property of the Tenant subject at all times to the Landlord's claim for rent and other sums which may become due to the Landlord under this Lease. 12.2 Tenant further agrees that all personal property of every kind or description which may at any time be in the Premises shall be at the Tenant's sole risk, or at the risk of those claiming under the Tenant. Landlord shall not be responsible or liable to Tenant for any loss or damage that may be occasioned by the acts or omissions of persons occupying any space adjacent to or adjoining Tenaht's Premises, or any part thereof. Landlord shall not be responsible or liable to Tenant for any loss or damage resulting to Tenant or its property or its business from roof leaks, water, gas, steam, fire, or the bursting, stoppage or leaking water and/or sewer pipes, or from the heating or plumbing fixtures, or from electric wires, or from gas or odors, or caused in any manner whatsoever. ARTICLE 13. TRADE FIXTURES. --------------------------- 13.1 All trade fixtures and equipment installed by Tenant in the Premises shall be new or completely reconditioned. 13.2 Tenant may, at the expiration of said term, remove all the Tenant's trade fixtures which can be removed without costly injury to, or undue defacement of said Premises, provided all rents stipulated herein are paid in full and Tenant is not otherwise in default hereunder, and that any and all damage to the Premises or to Landlord's premises (resulting from or caused by such removal) shall be promptly repaired at Tenant's expense. ARTICLE 14. ALTERATIONS. ------------------------ 14.1 Tenant further covenants not to permit alterations of or upon any part of the Premises except by and with the written consent of the Landlord first had. Tenant further agrees, in the event of making such alterations as herein provided, to indemnify and save harmless the Landlord from all expense, liens, claims or damages to either persons or property or the Premises, arising out of or resulting from the undertaking or making of said alterations. 14.2 Any alterations made by Tenant shall consist of new material installed in a workmanlike manner and in compliance with all applicable laws and regulations. (4) 6 ARTICLE 15. LIENS. ------------------ 15.1 No work which Landlord permits Tenant to do or which Tenant is obligated to perform pursuant t9 this Lease, whether in the nature of erection, construction, alteration or repair, shall be deemed to be for the immediate use and benefit of Landlord so that no mechanics' or other lien or encumbrance or charge shall be allowed against the right, interest or estate of Landlord by reason of any consent given by Landlord to Tenant to improve the Premises. In the event any mechanics or other lien shall at any time be filed against the Premises by reason of work or materials performed or furnished, or alleged to be performed or furnished, to Tenant or anyone holding the Premises through or under Tenant, Tenant shall forthwith cause the same to be discharged of record by payment, deposit, bonding in an amount satisfactory to the Landlord, or by order of court of competent jurisdiction. If Tenant shall fail to cause such lien forthwith to be so discharged or bonded after being notified of the filing thereof, then, in addition to any other right or remedy of Landlord, Landlord may discharge the same by paying the amount claimed to be due or bonding or deposit procedure, and the amount so paid by Landlord including reasonable attorney's fees, with interest therein at the Default Rate, and costs and allowances, shall constitute additional Rent payable by Tenant under this Lease and shall be paid by Tenant to Landlord on demand. ARTICLE 16. COMMON AREAS ------------------------ 16.1 Landlord shall make available from time to time to service the Building such Common Areas as and to the extent Landlord shall alone from time to time deem appropriate. Common Areas shall be defined as including but not limited to any parking areas, driveways, service courts, access and egress roads, sidewalks, opened and enclosed courts and malls, landscaped and planted areas, fire corridors, meeting areas and public restrooms. Landlord shall operate, manage, equip, light, repair and maintain said Common Areas for their intended purposes in such manner as Landlord shall in its sole discretion from time to time determine, and may from time to time change the size, location, elevation, nature and/or use of any Common Areas and may make installations and/or construct or erect buildings, structures, booths therein or thereon and move or remove the same and shall have the right to retain revenue from income-producing events whether or not conducted for promotional purposes. 16.2 Tenant, its officers, employees, customers and invitees shall have the non-exclusive right in common with Landlord and all others to whom Landlord has or may hereafter grant rights, to use said Common Areas as designated by Landlord, subject to such rules and regulations as Landlord may impose. Landlord may at any time close any Common Area to make repairs or changes or to prevent the acquisition of public rights in such area or to discourage noncustomer parking. Tenant agrees to cause its employees to park in such areas as may be designated by Landlord for "Employee Parking". 16.3 Tenant shall pay to Landlord a "CAM Charge" as its proportionate share of the cost and expense to Landlord of operating, maintaining and repairing said Common Areas (hereinafter referred to as "Common Area Maintenance Costs"). The initial monthly payment shall be adjusted effective on the first day of the first month of the second lease year and on the first day of the first month of each lease year thereafter in accordance with the CPI Increase Formula. ARTICLE 17. UTILITIES. 17.1 From the date Tenant is given possession of the Premises, Tenant agrees to pay for all utility services rendered or furnished to the Premises including gas, water, electricity, sprinkler charges assessed by any governmental. authority, fire line charges, sewer rental, sewage treatment facilities and the like, together with all taxes levied or other charges on such utilities and governmental charges based on utility consumption, standby utility capacity or potential utility use. Any such charges for services supplied by Landlord, or charges for utilities which may be rebilled by the (5) 7 Landlord, shall be due and payable within ten (10) days after billings therefor are rendered to Tenant. In no event shall Landlord be liable for the quality, quantity, failure or interruption of such services to the Premises. ARTICLE 18. MAINTENANCE. ------------------------ 18.1 Landlord covenants and agrees to keep and maintain (except as hereinafter set forth), the roof and other structural and exterior portions of the Building; except, however, that Landlord shall not be responsible for the following: doors, door checks and operators and windows; reasonable wear and tear; and damage caused by any act or negligence of Tenant, its employees, agents, invitees, licensees or contractors. Other than as herein provided, Landlord shall not be responsible to make any other improvements or repairs of any kind in or upon the Premises. 18.2 Tenant covenants and agrees to keep and maintain at its own cost and expense in good order, condition and repair the Premises and every part thereof, except as hereinabove provided, including, but without limitation, the exterior and interior portions of all doors, door checks and operators, windows and plate glass, all plumbing and sewage facilities and electrical systems within the Premises, fixtures, air-conditioning and electrical equipment, and interior walls, floors and ceilings, signs and all interior building appliances and similar equipment. Tenant further agrees to replace any of said equipment when necessary at its own cost and expense. Tenant also covenants and agrees to be responsible for any damage to the Premises or to the Building, or any part thereof, including but not limited to the roof, caused by any act or negligence of Tenant, its employees, agents, invitees, licensees or contractors. ARTICLE 19. ASSIGNMENT AND SUBLETTING. -------------------------------------- 19.1 Tenant covenants and agrees not to assign this Lease or to sublet the whole or any part of the Premises, or to permit any other persons to occupy same without the written consent of the Landlord first had. Any assignment or subletting, even with the consent of Landlord, shall not relieve Tenant from liability for payment of rent or other sums herein provided or for the obligation to keep and be bound by the terms, conditions and covenants of this Lease, notwithstanding the fact that this Lease may be amended by agreement between such assignee or subtenant and Landlord. In the event any assignment or subletting, even with the consent of Landlord, results in rental income or other lease charges in an amount greater than that provided for in this Lease, then such excess shall belong to the Landlord and shall be payable to Landlord as additional rental herein reserved. The acceptance of rent from any other person shall not be deemed to be a waiver of any of the provisions of this Lease or to be a consent to the assignment of this Lease or subletting of the Premises . 19.2 An assignment for the benefit of creditors or by operation of law shall not be effective to transfer any rights to assignees without the written consent of the Landlord first having been obtained . 19.3 Provided Tenant is a corporation, then if at any time during the term of this Lease any part or all of the corporate shares of Tenant shall be transferred by sale, assignment, bequest, inheritance, operation of law or other disposition so as to result in a change in the present effective voting control of Tenant by the person or persons owning a majority of said corporate shares on the date of this Lease, Tenant shall promptly notify Landlord in writing of such change, and Landlord may terminate this Lease at any time after such change in control by giving Tenant ninety (90) days prior written notice of such termination. (6) 8 ARTICLE 20. INSURANCE. ---------------------- 20.1 Tenant covenants and agrees to provide on or before the commencement of the term and to keep in force during the entire term of this Lease: (1) comprehensive general liability insurance for the mutual benefit of Landlord and Tenant relating to the Premises and its appurtenances in an amount of not less than One Million ($1,000,000.00) Dollars in respect of personal injury or death and of not less than Five Hundred Thousand ($500,000.00) Dollars in respect of property damage, which insurance shall name Landlord as an additional insured; (2) fire and extended coverage, vandalism, malicious mischief and special extended coverage insurance in an amount adequate to cover the cost of replacement of all leasehold or building improvements in the Premises which were originally constructed or provided by or on behalf of Tenant as well as the cost of replacement of all fixtures, equipment, decorations, contents and personal property therein; and (3) plate glass insurance with respect to all plate and other glass in the Premises. Tenant agrees to deliver to Landlord at least fifteen (15) days prior to the time such insurance is first required to be carried by Tenant, and thereafter at least fifteen (15) days prior to the expiration of any such policy, either a duplicate original or a certificate and true copy of all policies procured by Tenant in compliance with its obligations hereunder, together with evidence of payment therefor. 20.2 All of the aforesaid insurance shall be written by one (1) or more responsible insurance . companies satisfactory to Landlord and shall contain endorsements that: (1) such insurance may not be canceled or amended with respect to Landlord (or its designee(s)), except upon ten (10) days written notice by registered mail to Landlord (and such designee(s)), by the insurance company; and (2) Tenant shall be solely responsible for payment of premiums for such insurance. In the event Tenant fails to furnish such insurance, the Landlord may obtain such insurance and the premiums shall be paid by Tenant to the Landlord upon demand. 20.3 Tenant will indemnify, save harmless, and defend Landlord from and against any and all claims and demands in connection with any accident, injury or damage whatsoever caused to any person or property arising directly or indirectly out of the Tenant's initial construction, alteration, renovation, remodeling and/or fixturing of the Premises (whether or not occurring prior to the Commencement Date hereof), or out of the business conducted in the Premises or occurring in, on or about the Premises or any part thereof, or arising directly or indirectly from any act or omission of Tenant or any of its contractors, subcontractors or concessionaires or subtenants or their respective licensees, servants, agents, employees, contractors or subcontractors, and from and against any and all costs, expenses and liability incurred in connection with any such claim or proceeding brought thereon. The comprehensive general liability coverage maintained by Tenant pursuant to Subsection A above shall specifically insure the contractual obligations of Tenant as set forth herein. 20.4 Each insurance policy carried by Landlord or Tenant and insuring all or any part of the Building, the Premises, including improvements, alterations and changes in and to the Premises made by either of them and Tenant's trade fixtures and contents therein, shall be written in a manner to provide that the insurance company waives all right of recovery by way of subrogation against Landlord or Tenant, as the case may be, in connection with any loss or damage to the Premises, property or businesses building and contents caused by any of the perils covered by fire and extended coverage, and business interruption insurance, or for which either party may be reimbursed as a result of insurance coverage affecting any loss suffered by it. So long as the policy or policies involved can be so written and maintained in etfect, neither Landlord nor Tenant shall be liable to the other for any such loss or damage, provided, however, that the foregoing waivers of liability given by Landlord and Tenant to each other shall apply only to the extent of any recovery made by the parties hereto under any policy of insurance now or hereafter issued. (7) 9 20.5 Landlord agrees to maintain: (1) comprehensive general liability insurance relating to the Building and its Common Areas on an occurrence basis in the minimum amount of One Million Dollars ($1,000,000.00); (2) fire and extended coverage, vandalism, malicious mischief and special extended coverage insurance to the extent of the replacement value of the buildings and improvements originally constructed by Landlord. Tenant agrees to pay to Landlord as its share of the cost of such insurance during each month, the Insurance Charge. The initial monthly payment shall be adjusted effective on the first day of the first month of the second lease year and on the first day of the first month of each lease year thereafter in accordance with the CPI Increase Formula. ARTICLE 21. FIRE OR OTHER CASUALTY. ----------------------------------- 21.1 Should the Premises (or any part thereof) be damaged or destroyed by fire or other casualty insured under the standard fire and casualty insurance policy with approved standard extended coverage endorsement applicable to the Premises, Landlord shall, except as otherwise provided herein, and to the extent it recovers proceeds from such insurance, repair and/or rebuild the same with reasonable diligence. Landlord's obligation hereunder shall be limited to the building and improvements originally provided by Landlord at the Commencement Date of the term of this Lease. Landlord shall not be obligated to repair, rebuild or replace any property belonging to Tenant or any improvements to the Premises furnished by Tenant. If there should be a substantial interference with the operation of Tenant's business in the Premises as a result of such damage or destruction which requires Tenant to temporarily close its business to the public, the Rent shall abate but only to the extent of the proceeds actually received by Landlord under its rent insurance policy. Unless this Lease is terminated by Landlord as hereinafter provided, Tenant shall, at its cost and expense, repair, restore, redecorate and refixture the Premises and restock the contents thereof in a manner and to at least a condition equal to that existing prior to such damage or destruction, except for the building and improvements to be reconstructed by Landlord as above set forth, and the proceeds of all insurance carried by Tenant on the property, decorations and improvements' as well as fixtures and contents in the Premises shall be held in trust by Tenant for such purposes. Tenant agrees to commence such work within ten (10) days after the date of such damage or destruction or the date Landlord completes any reconstruction required to be completed by it pursuant to the above, whichever date is later, and Tenant shall diligently pursue such work to its completion. Tenant further agrees that all such work required of it shall be done within a period of sixty (60) days after it is required to commence such work. 21.2 Notwithstanding anything to the contrary contained in the preceding subsection A or elsewhere in this Lease, Landlord at its option, may terminate this Lease on thirty (30) days notice to Tenant, given within ninety (90) days after the occurrence of any damage or destruction if: (1) the Premises are damaged or destroyed as a result of a risk which is not covered by Landlord's insurance, or (2) the Premises be damaged and the cost to repair the same shall be more than twenty-five (25%) percent of the cost of replacement thereof, or (3) the Premises are damaged during the last two (2) years of the term, or (4) the Building shall be damaged to the extent of twenty-five (25%) percent or more of the then monetary value thereof (whether the Premises are damaged or not). ARTICLE 22. EMINENT DOMAIN. --------------------------- 22.1 If the whole or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain, condemnation or expropriation or in the event of a conveyance in lieu thereof, then this Lease shall terminate on the date when Tenant is required to yield possession thereof. 22.2 If more than twenty (20%) percent of (a) the Floor Area of the Building, or (b) the Common Areas, shall be taken or conveyed as aforesaid, Landlord shall have the right, at its option, to be (8) 10 exercised by notice in writing delivered to Tenant, to terminate this Lease effective, at the option of Landlord, either upon the date title vests in the condemning authority, or upon the date Landlord is required to deliver possession of the part taken or conveyed. 22.3 In the event of a taking under the power of eminent domain of the Premises, Common Areas, or any other portion of the Building, whether whole or partial, all compensation awarded for such taking of the fee and leasehold estate, or consideration paid for a conveyance in lieu of condemnation, as damages or otherwise, shall belong to and be the property of Landlord, except that Tenant shall be entitled to recover from the condemning authority, but not from Landlord, such amounts as may be separately awarded to Tenant for removal expenses , business dislocation damages and moving expenses, provided no such claim shall diminish or adversely affect Landlord's award. Tenant hereby assigns to Landlord all right, title and interest of Tenant in and to any award made for leasehold damages and/or diminution in the value of Tenant's leasehold estate. ARTICLE 23. SUBORDINATION, ATTORNMENT AND ----------------------------------------- MORTGAGEE'S APPROVAL. --------------------- 23.1 The Landlord reserves the right and privilege to subject and subordinate this Lease at all times to the lien of any mortgage or mortgages now or hereafter placed upon the Landlord's interest in the said Premises and on the land and buildings of which said Premises are a part, or upon any buildings hereafter placed upon the land of which the Premises are a part (the holder of any such mortgage hereinafter referred to as mortgagee), and to any and all advances to be made under such mortgages, and all renewals, modifications, extensions, consolidations and replacements thereof. 23.2 Tenant covenants and agrees to execute and deliver, upon demand, such further instrument or instruments subordinating this Lease on the foregoing basis to the lien of any such mortgage or mortgages as shall be desired by the Landlord and any mortgagees or proposed mortgagees, and hereby irrevocably appoints Landlord the attorney-in-fact of Tenant to execute and deliver such instrument or instruments for and in the name of Tenant in the event Tenant shall fail to execute such instrument or instruments within ten (10) days after written notice to do so. 23.3 Tenant shall, in the event of the sale or assignment of Landlord 5 interest in the Building, or in the event of any proceedings brought for the foreclosure of, or in the event of the exercise of the power of sale under any mortgage covering the Building, attorn to and recognize such purchaser or mortgagee as Landlord under this Lease, and in any such events, Landlord named herein shall not thereafter be liable on this Lease. 23.4 If any mortgagee shall have given prior written notice to Tenant that it is a holder of a mortgage as described in the first paragraph of this Article and such notice includes the address to which notices to such mortgagee are to be sent, then Tenant agrees to give to such mortgagee notice simultaneously with any notice given to Landlord to correct any default of Landlord as hereinabove provided and agrees that the mortgagee shall have the right, within sixty (60) days after receipt of said notice, to correct or remedy such default before Tenant may take any action under this Lease by reason of such default . ARTICLE 24. ESTOPPEL CERTIFICATE. --------------------------------- 24.1 At any time, and from time to time, upon the written request of Landlord or any mortgagee, Tenant, within ten (10) days of the date of such written request, agrees to execute and deliver to Landlord and/or such mortgagee, a written statement: (a) ratifying this Lease; (b) confirming the Commencement and expiration dates of the term of this Lease; (c) certifying that Tenant is in occupancy of the Premises and that this Lease is in full force and effect and has not been modified, assigned, supplemented or amended, except by such writings as shall be stated; (d) certifying that all conditions and (9) 11 agreements under this Lease to be satisfied and performed have been satisfied and performed, except as shall be stated; (e) certifying that Landlord is not in default under this Lease and there are no defenses or offsets against the enforcement of this Lease by Landlord, or stating the defaults and/or defenses claimed by Tenant; (f) reciting the amount of advance rental, if any, paid by Tenant and the date to which rental has been paid; (g) reciting the amount of security deposited with Landlord, if any; and (h) any other information which Landlord or the mortgagee shall require. ARTICLE 25. BANKRUPTCY. ----------------------- 25.1 Tenant covenants and agrees that if, at any time, Tenant becomes a debtor under the Bankruptcy Code or is adjudged bankrupt or insolvent under the laws of any state, or makes a general assignment for the benefit of creditors, or if a receiver of Tenant's property in the Premises is appointed and shall not be discharged within thirty (30) days of such appointment, then Landlord may, at its option, declare this Lease terminated and shall forthwith be entitled to immediate possession of the Premises except that if any such proceedings are pursuant to the Bankruptcy Code, then Landlord shall be entitled to all the rights and remedies accorded landlords, including without limitation those set forth in said Bankruptcy Code. 25.2 If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code to the extent provided in the Assignment Clause of this Lease, any and all monies or other considerations payable or otherwise to be delivered in connection with such assignment, shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord, and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and be promptly paid or delivered to Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall, upon demand, execute and deliver to Landlord an instrument confirming such assignment. ARTICLE 26. DEFAULT. -------------------- 26.1 All rights and remedies of Landlord herein enumerated shall be cumulative, and none shall exclude any other rights or remedies allowed by law or in equity. The occurrence of any of the following shall constitute a default and breach of this Lease by Tenant: A. If Tenant shall fail, neglect or refuse to pay any installment of fixed Rent at the time and in the amount as herein provided, or to pay any other monies agreed by it to be paid promptly when and as the same shall become due and payable under the terms hereof, and if any such default should continue for a period of more than ten (10) days; or if B. Tenant shall abandon or vacate the Premises or shall fail, neglect or refuse to keep and perform any of the other covenants, conditions, stipulations or agreements herein contained, and in the event any such default shall continue for a period of more than ten (10) days after notice thereof is given in writing to Tenant by Landlord (provided, however, that if the cause for giving such notice involves the making of repairs or other matters reasonably requiring a longer period of time than the period of such notice, Tenant shall be deemed to have complied with such notice so long as it has commenced to comply with said notice within the period set forth in the notice and is diligently prosecuting compliance of said notice); or if C. Tenant shall repeatedly be late in the payment of rent or other sums or charges due Landlord under this Lease or shall repeatedly default in the keeping, observing, or performing of (10) 12 any other covenants or agreements herein contained to be kept, observed or performed by Tenant (provided notice of payment or other defaults shall have been given to Tenant, but irrespective of whether or not Tenant shall have timely cured any such payment or other defaults of which notice was given). 26.2 In the event of any such default or breach of this Lease by Tenant, Landlord shall have the right and option to declare the entire Rent due for the balance of the term hereof immediately due and payable by Tenant, and shall have any or all of the remedies hereinafter set forth, and further, in the event of such default or breach of this Lease by Tenant, the Tenant does hereby authorize and fully empower Landlord or Landlord's agent to cancel or anul this Lease at once and reenter and remove all persons and their property, and such property may be stored in a public warehouse or elsewhere at the cost of the Tenant, all without service of notice or resort to legal process and without being deemed guilty of any manner of trespass and without prejudice to any remedies which might otherwise be used by Landlord. 26.3 Any payment required to be made by Tenant under the provisions of this Lease not made by Tenant when and as due shall thereupon be deemed to be due and payable by Tenant to Landlord on demand with interest thereon from the date when the particular amount became due to the date of payment thereof to Landlord. The aforesaid interest shall be at the rate of two (2%) percent above the prime interest rate per annum announced from time to time by AmeriTrust Company National Association, Cleveland, Ohio ("Default Rate"). 26.4 The Landlord may, however, at its option, at any time after such default or violation of condition or covenant, reenter and take possession of said Premises and remove said property without such re-entry working a forfeiture of the rents to be paid and the covenants, agreements and conditions to be kept and performed by Tenant for the full term of this Lease. In such event, Landlord shall have the right, but not the obligation, to divide or subdivide the Premises in any manner Landlord may determine and to lease or let the same or portions thereof for such periods of time and at such rentals and for such use and upon such covenants and conditions as Landlord may elect, applying the net rentals from such letting first to the payment of Landlord's expenses incurred in dispossessing Tenant and the cost and expense of making such improvements, alterations and repairs in the Premises as may be necessary in order to enable Landlord to relet the same, and to the payment of any brokerage commissions or other necessary expenses of Landlord in connection with such reletting. The balance, if any, shall be applied by Landlord from time to time on account of the payments due or payable by Tenant hereunder with the right reserved to Landlord to bring such action or proceedings for the recovery of any deficits remaining unpaid as Landlord may deem favorable from time to time without obligation to await the end of the term hereof for the final determination of Tenant's account. ARTICLE 27. SURRENDER OF PREMISES. ---------------------------------- 27.1 Tenant covenants and agrees to vacate, remove from and deliver up and surrender the possession of the Premises to Landlord upon the expiration of the term or upon the expiration of any extension or renewal thereof, without any specific notice to vacate, and upon any earlier termination of this Lease, as herein provided, in as good condition and repair as the same shall be at the commencement of said term or may have been put by the Landlord during the continuance thereof, ordinary wear and tear alone excepted. Tenant shall be considered in possession of the Premises and responsible for payment of rental and all other charges hereunder until such time as it has complied with the provision of this Article and shall have delivered all keys to the Premises to Landlord. Any cost or expense incurred by Landlord in cleaning the Preipises or for damage caused by the Tenant may be charged against Tenant and/or deducted from the Security Deposit. Tenant agrees to give to Landlord written notice of its intention to terminate its tenancy and its possession rights under this Lease at the expiration of the term, such notice to be given at least six (6) months prior to the term expiration date. (11) 13 ARTICLE 28. HOLDING OVER. ------------------------- 28.1 In the event Tenant remains in possession of all or any part of the Premises (or fails to deliver the keys to Landlord as above required) after the expiration of the term of this Lease or any renewal thereof, Tenant shall be deemed to be occupying the Premises as a tenant from month to month at a monthly rental equal to twice the sum of (i) the monthly installment of Rent payable during the last month of the term or any extension or renewal that was in effect, and (ii) one-twelfth (1/12th) of all items of additional rent or other charges payable or paid during the last lease year. Such continued occupancy shall not defeat Landlord's rights to regain possession of the Premises. ARTICLE 29. ACCESS TO PREMISES. ------------------------------- 29.1 Tenant further agrees to permit the Landlord or the Landlord's agents to inspect or examine the Premises at any reasonable time, and to permit the Landlord to make such repairs or improvements to the building of which the Premises are a part that the Landlord may deem desirable or necessary for its preservation and which the Tenant has not covenanted herein to do or has failed to do. In the event of an emergency, Landlord shall have the right to enter the Premises without Tenant's permission. 29.2 Tenant further agrees that on and after ninety (90) days next preceding the expiration of the term of this Lease the Landlord or its agents shall have the right to show the Premises to potential tenants, and to place notices offering the Premises "To Let" or "For Sale" on the front of the Premises or any part thereof. ARTICLE 30. QUIET ENJOYMENT. ---------------------------- 30.1 Landlord covenants and agrees that if the Tenant shall perform all of the covenants and agreements herein stipulated to be performed on the Tenant's part, the Tenant shall, at all times during said term, have the peaceable and quiet enjoyment and possession of the Premises without any manner of hindrance from the Landlord or any persons lawfully claiming through the Landlord. ARTICLE 31. WAIVER. ------------------- 31.1 No waiver of any covenant or condition or of the breach of any covenant or condition of this Lease shall be taken to constitute a waiver of any subsequent breach of such covenant or condition, nor to justify or authorize the nonobservance on any other occasion of the same or any other covenant or condition hereof; nor shall the; acceptance of rent or other payment by the Landlord at any time when the Tenant is in default under any covenant or condition hereof be construed as a waiver of such default or of the Landlord's right to terminate this Lease on account of such default; nor shall any waiver or indulgence granted by the Landlord to the Tenant be taken as an estoppel against the Landlord. ARTICLE 32. NOTICES AND PAYMENTS. --------------------------------- 32.1 Any bill, statement, notice, communication or payment which Landlord or Tenant may desire to be required to give to the other party shall be in writing and shall be sent to the other party by registered or certified mail to the address specified in the opening paragraph of this Lease or to such other address as either party shall have designated to the other by like notice, and the time of the rendition of such shall be when same is deposited in an official United States Post Office, postage prepaid. 32.2 All payments required under this Lease are to be paid in legal tender and lawful money of the United States or the equivalent, at Landlord's above specified address. (12) 14 AMENDMENT TO LEASE ------------------ THIS AMENDMENT TO LEASE made and entered into this 30th day of June, 1996, by and between HUNTERS SQUARE INC. (hereinafter called "Landlord") , and ALPHABET INC. (hereinafter called "Tenant"), WHEREAS, Landlord and Tenant entered into a Lease Agreement (the "Lease") dated January 11, 1995, for a suite containing 15,300 square feet in the building known as Hunter Square I located at 8700 E. Market Street, Warren, Ohio; and WHEREAS, Landlord and Tenant are desirous of amending certain provisions set forth in the Lease. NOW THEREFORE, for mutual valuable considerations, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. 2.2 (Article 3) PREMISES Square footage is increased to 15,300. 2. 2.4 (Article 5) RENT is amended to provided for a revised rental of One Hundred Fifty Eight Thousand-Seven Hundred Sixty and 00/100 Dollars ($158,760.00) per lease year payable in advance monthly installments of Thirteen Thousand-Two Hundred Thirty and 00/100 Dollars $13,230.00) each. 3. 2.7 (Article 7) TAX CHARGE is amended to provide for a revised monthly Tax Charge of $1,147.50 subject to the terms of the original lease. 4. 2.8 (Article 16) CAM CHARGE is amended to provide for a revised monthly CAM Charge of $1,185.75 subject to the terms of the original lease. 5. 2.9 (Article 20.5) INSURANCE CHARGE is amended to provide for a revised monthly Insurance Charge of $191.25 subject to the terms of the original lease. 6. 2.10 Monthly Payment Total is $15,754.50. 7. The effective date of this Amendment is 6/30/96 Except as herein Specifically modified, supplemented and amended, all the terms, covenants and conditions of the Lease shall remain in full force and effect and, together with the terms and conditions of this Amendment to Lease, shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and permitted assigns, respectively, of the Landlord and the Tenant. IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to Lease to be signed upon the day and year first above written. IN WITNESS WHEREOF, and intending to be legally bound hereby, the Landlord and Tenant have caused this Lease to be signed and sealed as of the day and year first above written. Signed in the presence of: LANDLORD: HUNTERS SQUARE, INC. - ----------------------------- /s/ Carter P. Lewis, Treasurer ------------------------------ - ----------------------------- TENANT: ALPHABET, INC. - ----------------------------- --------------------------- By: /s/ David L. Thomas - ----------------------------- ----------------------- David L. Thomas 15 AMENDMENT TO LEASE ------------------ THIS AMENDMENT TO LEASE made and entered into this 20th day of November, 1990, by and between HUNTERS SQUARE, INC. an Ohio Corporation (hereinafter called "landlord"), and ALPHABET, INC. (herein after called "Tenant"). WHEREAS, Landlord and Tenant entered into a Lease Agreement (the "Lease") dated July 6, 1988, for a suite in the office building known as Suite No. 1 containing approximately 6,240 square feet in the building known as Hunters Square located at 8700 East Market Street, Howland Township, Trumbull County, Ohio; and WHEREAS Landlord and Tenant are desirous of amending certain provisions set forth in the Lease and Amendment to Lease dated June 28, 1989. NOW, THEREFORE, for mutual valuable considerations, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. Article 2.2 is modified to increase the Floor Area of the Premises to 9,940 square feet. 2. Article 2.4 is amended to provide for a revised rental of Ninety Nine Thousand-Three Hundred Ninety Six and 00/100 Dollars ($99,396.00) per lease year, payable in advance monthly installments of Eight Thousand Two Hundred Eighty Three and 00/100 Dollars ($8,283.00). 3. Article 2.7 is amended to provide for a revised monthly Tax Charge of $701.67. 4. Article 2.8 is amended to provide for a revised monthly CAM Charge of $596.07. 5. Article 2.9 is amended to provide for a revised monthly Insurance Charge of $89.84. 6. Article 2.10 is amended to provide for a monthly payment total of items set forth in Articles 2.4, 2.7, 2.8 and 2.9 of $9,670.58. 7. The effective date of this Amendment is December 1, 1990. Except as herein specifically modified, supplemented and amended, all of the terms, covenants and conditions of the Lease shall remain in full force and effect and, together with the terms and conditions of this Amendment to Lease, shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and permitted assigns, respectively, of the Landlord and the Tenant. IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to Lease to be signed upon the day and year first above written. IN WITNESS WHEREOF, and intending to be legally bound hereby, the Landlord and Tenant have caused this Lease to be signed and sealed as of the day and year first above written. Signed in the presence of: LANDLORD: HUNTERS SQUARE, INC. /s/ Carter P. Lewis - ------------------------------ ------------------------------------- Carter P. Lewis, Treasurer - ------------------------------ TENANT: ALPHABET, INC. /s/ David L. Thomas - ------------------------------ ------------------------------------- David L. Thomas, President - ------------------------------ 16 AMENDMENT TO LEASE ------------------ THIS AMENDMENT TO LEASE made and entered into this 28th day of June, 1989, by and between HUNTERS SQUARE, INC. an Ohio Corporation hereinafter called "Landlord"), and ALPHABET, INC. (hereinafter called "Tenant"). WHEREAS, Landlord and Tenant entered into a Lease Agreement (the "Lease") dated July 6, 1988, for a suite in the office building known as Suite No. 1 containing approximately 6,240 square feet in the building known as Hunters Square located at 8700 East Market Street, Howland Township, Trumbull County, Ohio; and WHEREAS, Landlord and Tenant are desirous of amending certain provisions set forth in the Lease. NOW, THEREFORE, for mutual valuable considerations, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. Article 2.2 is modified to increase the Floor Area of the Premises to 9,360 square feet. 2. Article 2.4 is amended to provide for a revised rental of Ninety Three Thousand-Six Hundred and 00/100 Dollars (93,600.00) per lease year, payable in advance monthly installments of Seven Thousand Eight Hundred and 00/100 Dollars ($7,800.00). 3. Article 2.7 is amended to provide for a revised monthly Tax Charge of $ 663.00. 4. Article 2.8 is amended to provide for a revised monthly CAM Charge of $ 507.00. 5. Article 2.9 is amended to provide for a revised monthly Insurance Charge of $ 78.00. 6. Article 2.10 is amended to provide for a monthly payment total of items set forth in Articles 2.4, 2.7, 2.8 and 2.9 of $9,048.00. Commencing 7. The effective date of this Amendment is July 1, 1989. Except as herein specifically modified, supplemented and amended, all of the terms, covenants and conditions of the Lease shall remain in full force and effect and, together with the terms and conditions of this Amendment to Lease, shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and permitted assigns, respectively, of the Landlord and the Tenant. IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to Lease to be signed upon the day and year first above written. IN WITNESS WHEREOF, and intending to be legally bound hereby, the Landlord and Tenant have caused this Lease to be signed and sealed as of the day and year first above written. Signed in the presence of: LANDLORD: HUNTERS SQUARE, INC. /s/ Carter P. Lewis - ------------------------------ ------------------------------------- Carter P. Lewis, Treasurer - ------------------------------ TENANT: ALPHABET, INC. /s/ David L. Thomas - ------------------------------ ------------------------------------- David L. Thomas, President - ------------------------------ 17 STATE OF OHIO ) SS: COUNTY OF TRUMBULL ) Personally appeared before me, the undersigned, a Notary Public in and for said County and State, Carter P. Lewis, known to me to be the Treasurer of Hunters Square, Inc., the corporation which executed the foregoing document, who acknowledged that he did sign the foregoing document for and on behalf of said corporation, being thereunto duly authorized by its Board of Directors; that the same is his free act and deed as such officer and the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at Warren, Ohio, this 28th day of June, 1989. /s/ Deanne M. Moore -------------------------------- Notary Public NOTARY SEAL DEANNE M. MOORE Notary Public State of Ohio My Commission Expires 3/27/1990 STATE OF OHIO ) SS: COUNTY OF TRUMBULL ) Personally appeared before me, the undersigned a Notary Public in and for said County and State, David Thomas, known to me to be the President of Alphabet, Inc., the corporation which executed the foregoing document, who acknowledged that he did sign and seal the foregoing document for and on behalf of said corporation, being thereunto duly authorized by its Board of Directors; that the same is his free act and deed as such officer and the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at Warren, Ohio, this 28th day of June, 1989 /s/ Deanne M. Moore -------------------------------- Notary Public NOTARY SEAL DEANNE M. MOORE Notary Public State of Ohio My Commission Expires 3/27/1990 18 AMENDMENT TO LEASE ------------------ THIS AMENDMENT TO LEASE made and entered into this 11th day of January, 1995, by and between Hunters Square, Inc. (hereinafter called "Landlord"), and Alphabet, Inc. (hereinafter called "Tenant"), WHEREAS, Landlord and Tenant entered into a Lease Agreement (the "Lease") dated July 6, 1988, in the building known as Hunters Square I, located at 8700 East Market Street, Warren, Ohio; and WHEREAS, Landlord and Tenant are desirous of amending certain provisions set forth in the Lease and Amendments to Lease dated June 28, - 1989, November 20, 1990, January 26, 1993 and September 7, 1994. NOW THEREFORE, for mutual valuable considerations, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. Amendment dated September 7, 1994, is null and void. This amendment dealt with the expansion into the suite currently occupied by psychiatric professional Group. 2. Tenant agrees to lease all remaining space in the building as it becomes available at the following minimum rental rates: Suite # Current Tenant SF Rate/SF/YR* ------- -------------- -- ----------- 3 Jim Gray 2080 $11.00 6 Automotive Events 1900 11.00 10 Psy Prof Group 3120 11.00 *Charges for Taxes, CAM and Insurance are additional per the original lease. The rate on these future expansions will be fixed at $11.00/SF minimum rent thru June 30, 2001 and not subject to the increase in 1998 as in Article 5 below. 3. 2.2 (Article 3) Premises Square footage is increased to 11,560. 4. 2.3 (Article 4) Term is amended to provide for an extension of the term to June 30, 2001, together with two (2) five year options. 5. 2.4 (Article 5) Rent is amended to provide for a revised rental of One Hundred Seventeen Thousand-Six Hundred Twenty Four and 00/100 Dollars ($117,624.00) per lease year commencing February 1, 1995, - payable in advance monthly installments of Nine Thousand-Eight Hundred - Two and 00/100 Dollars ($9,802.00). Commencing July 1, 1998 thru June 30, 2001, monthly minimum rent shall increase to One Hundred Thirty Eight Thousand-Two Hundred Four and 00/100 ($138,204.00) per lease year payable in advance monthly installments of Eleven Thousand-Five Hundred Seventeen and 00/100 Dollars ($11,517.00). 6. 2.7 (Article 7) Tax Charge is amended to provide for a revised monthly Tax Charge of $867.00 subject to the terms of the original lease. 7. 2.8 (Article 16) CAM Charge is amended to provide for a revised monthly CAM charge of $877.00 subject to the terms of the original 19 8. 2.9 (Article 20.5) Insurance Charge is amended to provide for a revised monthly Insurance Charge of $145.00 subject to the terms of the original lease. 9. 2.10 Monthly Payment Total is $11,691.00. 10. The effective date of this Amendment is January 11, 1995. Except as herein specifically modified, supplemented and amended, all the terms, covenants and conditions of the Lease shall remain in full force and effect and, together with the terms and conditions of this amendment to Lease, shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and permitted assigns, respectively, of the Landlord and the Tenant. IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to Lease to be signed upon the day and year first above written. IN WITNESS WHEREOF, and intending to be legally bound hereby, the Landlord and Tenant have caused this Lease to be signed and sealed as of the day and year first above written. Signed in the presence of: LANDLORD: HUNTERS SQUARE, INC. /s/ Carter P. Lewis Nancy A. Termine ----------------------------------- - ----------------------------- Carter P. Lewis, Treasurer Nancy A. Termine - ----------------------------- TENANT: ALPHABET, INC. /s/ David L. Thomas - ----------------------------- ----------------------------------- By: David L. Thomas - ----------------------------- President 20 STATE OF ) COUNTY OF ) Personally appeared before me, a Notary Public in and for said County and State, the above named Carter Lewis and David Thomas who acknowledged that they did sign the foregoing instrument and that the same is their free act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and official seal at Trumbull County this 7th day of September 1994 Nancy A.Myers ---------------------------- Nancy A.Myers, Notary Public State of Ohio My Commission Expires 11-14-95 STATE OF ) COUNTY OF ) Personally appeared before me, the undersigned, a Notary Public in and for said County and State, __________________________________ and _________________________________ known to me to be the ________ President and ___________________________ Secretary, respectively, of _________________________________________ the corporation which executed the foregoing document, who acknowledged that they did sign and seal the foregoing document for and on behalf of said corporation, being thereunto duly authorized by its Board of Directors; that the same is their free act and deed as such officers and the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at ___________________________________________ this ___________date of ______________________ 19___ STATE OF ) COUNTY OF ) Personally appeared before me, a Notary Public in and for said County and State, the above named _____________________________ who acknowledged that ________ did sign the foregoing instrument and that the same is _______ free act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and official seal at _____________________________ this _______ day of _____________ 19__. Nancy A.Myers ---------------------------- Nancy A.Myers, Notary Public State of Ohio My Commission Expires 11-14-95 21 AMENDMENT TO LEASE ------------------ THIS AMENDMENT TO LEASE made and entered into this 26th day of January, 1993, by and between HUNTERS SQUARE, INC. an Ohio Corporation hereinafter called "Landlord") and ALPHABET, INC. (hereinafter called "Tennant"), WHEREAS, Landlord and Tenant entered into a Lease Agreement (the "Lease") dated July 6, 1988, for a suite in the office building known as Suite No. 1, located at 8700 East Market Street, Howland Township, Trumbull County, Ohio; and WHEREAS, Landlord and Tenant are desirous of amending certain provisions set forth in the Lease and Amendments to Lease dated June 28, 1989, and November 20, 1990. NOW THEREFORE, for mutual valuable considerations, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. 2.2 (Article 3) Premises will remain the same. Tenant's suite has approximately 9,940 square feet of space. 2. 2.3 (Article 4) Term is amended to provide for a new five year term, commencing July 1, 1993 and ending June 30, 1998. 3: 2.4 (Article 5) Rent will remain the same. Ninety Nine Thousand-Three Hundred Ninety Six and 00/100 Dollars ($99,396.00) per lease year, payable in advance monthly installments of Eight Thousand Two Hundred Eighty Three and 00/100 Dollars ($8,283.00). 4. 2.7 (Article 7) Tax Charge is amended to provide for a revised monthly Tax Charge of $704.00. 5. 2.8 (Article 16) CAM Charge is amended to provide for a revised monthly CAM Charge of $737.00 6. 2.9 (Article 20.5) Insurance Charge is amended to provide for a revised monthly Insurance Charge of $124.00. 7. 2.10 (Monthly Payment Total) is Nine Thousand-Eight Hundred Forty Eight and 00/100 Month ($9,848.00). 8. The effective date of this Amendment is July 1, 1993. Except as herein specifically modified, supplemented and amended, all of the terms, covenants and conditions of the Lease shall remain in full force and effect and, together with the terms and conditions of this Amendment to Lease, shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and permitted assigns, respectively, of the Landlord and the Tenant. IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to Lease to be signed upon the day and year first above written. IN WITNESS WHEREOF, and intending to be legally bound hereby, the Landlord and Tenant have caused this Lease to be signed and sealed as of the day and year first above written! Signed in the presence of: LANDLORD: HUNTERS SQUARE, INC. /s/ William Hull /s/ Carter P. Lewis - ----------------------------------- ---------------------------------- William Hull Carter P. Lewis, Treasurer - ----------------------------------- 22 AMENDMENT TO LEASE THIS AMENDMENT TO LEASE made and entered into this 28th day of June, 1989, by and between HUNTERS SQUARE, INC. an Ohio Corporation (hereina ter called "Landlord"), and ALPHABET, INC. (hereinafter called "Tennant"). WHEREAS, Landlord and Tenant entered into a Lease Agreement (the "Lease") dated July 6, 1988, for a suite in the office building known as Suite No. 1 containing approximately 6,240 square feet in the building known as Hunters Square located at 8700 East Market Street, Howland Township, Trumbull County, Ohio; and WHEREAS, Landlord and Tenant are desirous of amending certain provisions set forth in the Lease. NOW, THEREFORE, for mutual valuable considerations, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. Article 2.2 is modified to increase the Floor Area of the Premises to 9,360 square feet. 2. Article 2.4 is amended to provide for a revised rental of Ninety Three Thousand-Six Hundred and 00/100 Dollars (93,600.00) per lease year, payable in advance monthly installments of Seven Thousand Eight Hundred and 00/100 Dollars ($7,800.00). 3. Article 2.7 is amended to provide for a revised monthly Tax Charge of $ 663.00. 4. Article 2.8 is amended to provide for a revised monthly CAN Charge of $ 507.00. 5. Article 2.9 is amended to provide for a revised monthly Insurance Charge of $ 78.00. 6. Article 2.10 is amended to provide for a monthly payment total of items set forth in Articles 2.4, 2.7, 2.8 and 2.9 of $9,048.00. Commencing 7. The effective date of this Amendment is July 1, 1989. Except as herein specifically modified, supplemented and amended, all of the terms, covenants and conditions of the Lease shall remain in full force and effect and, together with the terms and conditions of this Amendment to Lease, shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors and permitted assigns, respectively, of the Landlord and the Tenant. IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to Lease to be signed upon the day and year first above written. IN WITNESS WHEREOF, and intending to be legally bound hereby, the Landlord and Tenant have caused this Lease to be signed and sealed as of the day and year first above written. Signed in the presence of: LANDLORD: HUNTERS SQUARE, INC. /s/ Carter P. Lewis /s/ William Hull ----------------------------------- - ----------------------------- Carter P. Lewis, Treasurer William Hull - ----------------------------- TENANT: ALPHABET, INC. /s/ David L. Thomas - ----------------------------- ----------------------------------- By: David L. Thomas, President - ----------------------------- 23 STATE OF OHIO ) SS: COUNTY OF TRUMBULL ) Personally appeared before me, the undersigned, a Notary Public in and for said County and State, Carter P. Lewis, known to me to be the Treasurer of Hunters Square, Inc., the corporation which executed the foreqoing document, who acknowledged that he did sign the foregoing document for and on behalf of said corporation, being thereunto duly authorized by its Board of Directors; that the same is his free act and deed as such officer and the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at Warren, Ohio, this 28th day of June, 1989. /s/ Jan I. Jocola ------------------------------ Notary Public Jan I. Jocola Notary Public State of Ohio My Commission Expires March 14, 1991 STATE OF OHIO ) SS: COUNTY OF TRUMBULL ) Personally appeared before me, the undersigned a Notary Public in and for said County and State, David Thomas, known to me to be the President of Alphabet, Inc., the corporation which executed the foregoing document, who acknowledged that he did sign and seal the foregoing document for and on behalf of said corporation, being thereunto duly authorized by its Board of Directors; that the same is his free act and deed as such officer and the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal at Warren, Ohio, this 28th day of June, 1989. /s/ Jan I. Jocola ------------------------------ Notary Public Jan I. Jocola Notary Public State of Ohio My Commission Expires March 14, 1991 EX-10.5 9 EXHIBIT 10.5 1 EXHIBIT 10.5 CONTRACT TO PURCHASE "H" AND "C" BODY ELEMENTIZED ASSEMBLIES EFFECTIVE DATE: JANUARY 4, 1993 EXPIRATION DATE: DECEMBER 31,1993 2 JCI, Incorporated Purchase Order PEDP3250002 Page 2 l. Beginning January 4, 1993, JCI, Incorporated, will charge Packard Electric according to the attached element price list: 2. JCI, Incorporated, will invoice Packard Electric Division twice per month, on the fifteenth day of the month and the last day of the month. 3. Invoice will be by element number and will include the manifest number. Any hand-generated manifest or additions of elements to manifest by hand must be invoiced separately and referenced to the manifest. 4. OVERTIME: -------- Packard Electric will consider for payment that overtime which has been caused by material shortages, schedule increases and/or other extenuating circumstances. Overtime shall be billed as follows: Payable O.T. Rate Wage Factor --------- ---- ------ 1.5 Wage Rate x .65 2:0 Wage Rate x 1.25 Your company must be able to prove that overtime was paid to those employes listed and that they actually worked on a part number that may be caused by Packard to have required overtime. Your company must forecast weekend overtime no later than Friday, listing the number of people, estimated overtime hours, part number and reason for overtime. This information must be faxed to your buyer (Packard extension 216-373-7058) for review and approval. Any overtime required on a weekday must be forecasted that day to the buyer for review prior to the overtime being worked. *5. DOWNTIME DUE TO LACK OF OR INCORRECT SCHEDULE TRANSMISSION OR MATERIAL ---------------------------------------------------------------------- SHORTAGES CAUSED BY PACKARD ELECTRIC DIVISION: ---------------------------------------------- In the case of downtime, every effort should be made to assign productive work to employes. In the event that downtime is incurred and no productive work can be assigned, the following guidelines will be used: * Wage Rate x 1.25 x Hours Down = Amount 3 JCI, Incorporated Purchase Order PEDP3250002 Page 3 - - Hours Down should not exceed four(4) hours based on your policy of paying four(4) hours to each employe called to work. - - If material shortages will affect the next day's production, employes will be informed not to report to work. Your company must supply reason for downtime and be able to document material shortage was caused by Packard and not due to any ordering, etc., problem caused by your company. This information will be supplied weekly in writing. Fax to your buyer at (216) 373-7058. Packard Electric shall be the sole determiner of the cause of any overtime or downtime. 6. All productive material, including components, cut leads and subassemblies are to be bailed. F.O.B. the Elementized Plant. 7. JCI, Incorporated will complete RCI's on material received as required by Packard Electric Division. 8. Major engineering changes and model change such as those requiring major board changes or plant rearrangement will be negotiated when the change has been defined. Minor changes will be the responsibility of JCI, Incorporated. Determination of major or minor changes will be negotiated when the change has been defined. All changes, whether Packard Electric or Alphabet, initiated will be communicated to the buyer. 8A. Any approved rework will be done at $14.95 per hour. All rework must have prior approval by Packard Electric Purchasing or a Packard Electric issued RMA. 8B. Engineering changes and model change rearrangements will be done at $10.75 per hour. 9. The manufacturing system will be designed by Packard Electric Division. Any revisions to the system will be approved by Packard Electric Division. Responsibility for the revisions will be determined at that time. JCI, Incorporated will share improvements to Packard Electric Division as a result of these revisions. 10. Packard Electric Division and JCI, Incorporated will actively pursue cost reduction. 11. This contract includes the following: A. Distribution responsibility as stated in NIA, Incorporated's Purchase Order PEDP2250029. B. Manufacturing Engineering responsibilities for maintenance, installation and debug of equipment bailed by Packard Electric Division. 4 JCI, Incorporated Purchase Order PEDP3250002 Page 4 C. Plant layout design in accordance with Packard Electric Division designed manufacturing system. Layout, installation and rearrangement of the manufacturing system. D. Methods Engineering, training of new systems and process with the direction and/or assistance of Packard Electric Division; training of new employes; manufacturing system as agreed. E. JCI, Incorporated will provide information management services as contracted with Electronic Data Systems at cost to Packard Electric Division. 12. The attached Statement of Understanding is a part of this contract. If there is a conflict between this portion of the contract and the Statement of Understanding, this portion of the contract will take precedence. 13. Production schedules will be transmitted to JCI, Incorporated via computer. 14. COMPONENT AND CUT LEAD SCHEDULES: -------------------------------- JCI, Incorporated will have an active purchase order with Packard Electric Division for components and cut leads; ordering of cut leads and components will be through the computer transactions. A. Design of the Materials System is the responsibility of Packard Electric Division. B. Operations of the Materials System at JCI, Incorporated is the responsibility of JCI, Incorporated. C. Inventory levels will be a joint decision of JCI, Incorporated and Packard Electric Division. D. Monthly audits of bailed productive material will be conducted by Packard Electric Division in accordance with Attachment 'A'. 15. MINIMUM BUYBACK CLAUSE: ---------------------- A. Packard Electric will guarantee buyback of $3,100,000 from 1/4/93 to 6/30/93. B. This will be adjusted quarterly at $1,550,000 per quarter. C. In the event that invoices to Packard Electric Division do not equal or exceed $1,550,000, Packard Electric Division will pay JCI, Incorporated the difference up to $1,550,000. D. In the event that the next quarter purchases exceed $1,550,000, JCI, Incorporated will return the excess not to exceed the amount received in the previous quarter. E. If on June 30, 1993, Packard Electric Division has paid JCI, Incorporated any amount under this clause that is in excess of $3,100,000, and total purchases has equaled or exceeded $3,100,000. JCI, Incorporated will return the amount paid under this clause. F. In the event a strike or work stoppage occurs within General Motors Corporation, this clause will not apply. This will apply for the number of working days lost. 5 ATTACHMENT 'A' July 27, 1988 Mike Bagby Alphabet, Inc. Engineering Offices PO Box 8607 Market Place Warren, OH 44484 Subject: IMPLEMENTATION OF MONTHLY PRODUCTIVE MATERIAL AUDITS Dear Mike: Beginning August 1, 1988, monthly audits of bailed PED productive material will commence. These audits will cover the entire elementized production process and include MCK, NIA, FMA, JCI, and NIAD. The inventory that you will be responsible for is the difference between PED's LRS Cum Year to Date shipments to the EWAP's; and what the EWAP's have shipped as finished goods to the BOC car assembly plants. The following series of events will occur at the beginning of every month. 1.) Purchasing & Accounting will determine the list of part numbers to be audited. 2.) This list will be given to NIAD on the Friday prior to the 1st Monday of the month. 3.) For each part to be audited, PEd Purchasing will establish the following: - The quantity shipped to each EWAP - The quantity shopped to BOC - The MIMS inventory between PED & EWAP's 4.) NIAD will be responsible for reporting the inventory, between random MIMS storage and shipment to BOC, to PED Purchasing. NIAD will report for inventory located at MCK, NIA, JCI, FMA as well as NIAD. 6 Implementation of Monthly Audits 7/27/88 Page 2 5.) PED Purchasing will calculate the amount of inventory that alphabet is responsible for, and compare it to the quantity reported by NIAD. If there is a shortfall greater than 1.5%, responsibility for this shortfall will be determined between Packard Electric and Alphabet. If it is determined that Alphabet has lost, destroyed or misused this material financial burden will lie with them at Packard Electric's normal selling price at the time of the audit. In the case of items without Packard Electric selling prices, Packard will use cost values. Examples are base dash subassemblies and cut leads. * It is Alphabet's responsibility to bring to PED's attention any mistakes involving the quantities shipped to the EWAP's. The cum ship number from the packing slips will be the basis of all the above calculations, unless brought to PED's attention within five days of material receipt. - ---------------------------- Thomas J. Krivan GENERAL SUPERVISOR PRODCTION/MATERIAL CONTROL bn/1.48 cc: G. Gati NIA M. Monus MCK E. Kratochvil JCI E. Weible FMA G. May 40E L. Wolfe 40E R. Miller 40E 7 STATEMENT OF UNDERSTANDING The following terms and conditions constitute a supplement to the standard purchase order number P3250002 between Packard Electric Division, General Motors Corporation, hereinafter called "PACKARD," and JCI, Incorporated, hereinafter called "SUPPLIER," to manufacture wiring harness assemblies. MATERIALS - --------- A. PURCHASED MATERIALS 1. Supplier will purchase all necessary material to produce these assemblies, if available, from Packard, F.O.B. Shipping Point, at the regularly established selling prices. 2. Any specified non-Packard material must be purchased from either Packard or a source approved by Packard. Supplier will have the option to develop additional sources for such non-Packard material and Packard will make every reasonable, good faith effort to approve alternate sources so requested. 3. On materials purchased from Packard: A. Terms will be net 10th and 25th Proximo. B. Release will be considered from the first two weeks; changes will only be accepted in third and subsequent weeks. 4. Packaging materials will normally be purchased from Packard-approved suppliers. All labels must be approved by Packard Electric and meet the General Motors' shipping/parts identification label standard. These are to be bar-coded labels.) 5. Canadian suppliers will submit on behalf of Packard Electric Division, duty drawback forms as required (K-32A's). B. BAILED PRODUCTIVE MATERIALS 1. Packard will bail prepared leads and/or other materials to Supplier, F.O.B. supplier. Supplier will be financially responsible for this material. 2. To insure the proper flow of bailed material to the Supplier, the following activities must be done by Supplier: a. An accurate and daily report of production b. An accurate and daily report of material receipts (or whenever a shipment is received) c. An accurate and controlled inventory kept (including store audits) d. Report any shutdown shortage three days prior to running out e. Report all "red tags" immediately and remove from inventory 8 3. On a regular basis, special inventories will be taken by Supplier and/or Package Electric. One such inventory will take place during Packard's annual inventory. All such inventories will be conducted at Supplier's expense. After the annual inventory is taken, inventory will be adjusted accordingly, along with appropriate payments being made to Packard at normal selling price for unaccountable material. There is a 1.5 percent scrap factor allowed on the dollar value of material consumed by Supplier. C. MATERIAL DISPOSITION 1. Any material to be scrapped or returned to Packard must be approved by Packard at which time a Returned Material Authorization (R.M.A.) will be issued for formal authorization. 2. Surplus or obsolete material is controlled via the Surplus Material Disposition Policy letter of 2/11/86 (attached). PRICE - ----- A. HARNESS PRICING 1. All prices, as listed on the above Packard Purchase Order will be firm for the time period indicated on the Purchase Order. These prices are subject to change as component and cable prices from Packard or approved suppliers are changed. 2. If an Engineering Change takes place, assembly prices will be renegotiated accordingly. 3. Assembly pricing will reflect price changes for Packard-sourced parts as soon as it can be determined that such sourced parts are in current use in the assemblies, typically thirty (30) days after the change is effective. 4. Cooper price changes will be reflected within thirty (30) days of price change at Packard. 5. Packard will supply material stocklists which the Supplier will update and reflect invoice prices for all material purchased direct. (Invoice prices are to be used if the component is purchased from Pioneer or Anixter.) 9 TRANSPORTATION - -------------- A. NORMAL MODE 1. Assemblies furnished by Supplier will be shipped from Supplier LTL (less than a load) on designated ship day. 2. Raw materials will be shipped LTL from Packard to Supplier. B. PREMIUM MODE If it becomes necessary for Supplier to ship material via a premium mode, Supplier will be subject to a premium transportation chargeback, if they were behind schedule through no fault of Packard. Supplier will be debited for the premium portion of transportation (i.e., credit allowed for normal transportation). If Packard ships material to Supplier via premium mode, the responsibility for premium transportation must be determined the day the shipment is made between Packard Customer Service and Supplier. The Supplier is responsible to order material with designated lead time and to carry a 20-day component inventory. SHIPPING AND INVOICING - ---------------------- All assemblies completed pursuant to purchase orders will be purchased by Packard from Supplier, F.O.B. Supplier's dock. Material shipped to Packard's customer will be on Packard's manifest form and Supplier's Bill of Lading. All shipments MUST be communicated to Packard personnel ON the day of shipment. Packard's customer will determine the normal mode of shipment. Invoices will be sent to Packard. Only one invoice should be used for all material shipped on any given day. (This may require multiple-page invoicing.) In order to process invoices in a timely manner, pilots, SP's, new parts, etc. may be invoiced separately. Each line item on the invoice MUST reference its manifest number. Do NOT show any prices on manifests. Manifests must be submitted to Packard in compliance to attached procedure. The Supplier will be required to participate in the Production Point of Use System. SCHEDULING - ---------- A. Supplier schedules are generated from Packard Customer requirements, currently two weeks ahead of actual ship schedule. B. Second-week schedules will be moved into Week One as a rule. Exception will be due to known customer adjustments. C. FAB authority shall never be exceeded. During periods of buildout, buildup, or cycle, Production Control's MAPS will be the official schedule document. D. Schedules are expected to be met each week, as they are the customer requirement. Supplier performance may enable a reduction in the current ten-day finished-goods inventory level. Page 3 10 E. Supplier will be an active participant in Packard's Production Readiness program. F. Changes in the scheduling system are being implemented to increase the Supplier self responsibilities and Supplier is expected to participate. ENGINEERING AND TECHNICAL ASSISTANCE - ------------------------------------ A. Packard will assist Supplier in establishing the following: 1. Tooling needs. 2. Quality Control procedures. 3. Product Modifications for cost reduction and manufacturing improvements are encouraged. These modifications must be approved by Packard Engineering and will be reflected in print changes. B. Supplier agrees to revise harness tooling as directed by Packard. Packard agrees to pay quoted and agreed-to costs incurred by Supplier in instituting such revisions. QUALITY CONTROL - --------------- A. Supplier will establish and maintain an effective quality control system in compliance with Packard Specifications. Packard will provide Supplier with the book entitled "Quality Control for Packard Electric Suppliers," in order to assist Supplier with such compliance. B. Supplier will perform weekly Quality Index (Q.I.) audits and report the results weekly to Quality Assurance. C. Supplier will perform monthly GMPCP audits which will be subject to semi-annual review by Packard auditors. D. Supplier will work toward self-certification by demonstrating an ability to submit defect-free samples. It is the Supplier's responsibility to pay the freight on any samples submitted to Packard for approval. E. If any substitution of parts or design are necessary or prudent, Supplier will initiate the request for "permit" with the appropriate department at Packard. Such requests will be promptly reviewed for effect on quality and cost. F. Packard will provide supplier the initial gauge for receiving inspection of non-Packard produced parts; all subsequent gauges will be the responsibility of the Supplier per the Packard Gauge Policy Letter of March 18, 1986. G. Supplier will be responsible to develop an appropriate S.P.C. program. All build fixtures will be released utilizing statistical methods, and lead prep operations must be under statistical control. H. Quality Improvement Plans must be continually monitored to insure they address the needs of our customer. Page 4 11 I. Supplier's management plan will utilize visual controls. J. Supplier's production system will incorporate a material and tool respect program. TOOLING AND EQUIPMENT - --------------------- A. Supplier is responsible for the purchase, installation, and maintenance of all equipment required for the manufacture of the assemblies. Equipment may be available from Packard Sales. For equipment available from Packard, Supplier will inspect the condition and will determine the service required to keep equipment in good condition. B. All equipment and tooling bailed to the Supplier shall be subject to the attached terms and conditions of Schedule A. FIRE PROTECTION SURVEY - ---------------------- The attached Fire Protection Survey must be completed by the Supplier and returned to the buyer. The buyer will forward to Packard Electric Chief of Plant Security, Station 11A. TERM - ---- The term of this Agreement commences upon the date said Purchase Order is signed by both parties and ends on the "Expiration Date" as set forth herein. Page 5 12 SCHEDULE A ---------- I. TOOL BAILMENT ------------- 1. TOOLING REQUIREMENTS: Supplier will obtain all tooling necessary to manufacture products purchased by Packard from Supplier pursuant to said Purchase Order. 2. OWNERSHIP: Tools subject to this Agreement are the property of Packard and are to be used to produce parts for Packard only. The tools may not be removed or disposed of without the written consent of Packard. Tools are to remain in the custody of the Supplier. 3. DESIGN AND BUILD: If Supplier is to provide tool design and build the tool, tool and tool design will be priced as listed on the attached Purchase Order. Tool and tool design will be the property of Packard. Packard must approve the tool design prior to construction. Supplier must label tooling as specified by Packard. 4. TOOL CAPACITY: Supplier will provide an ESTIMATE of tooling capacity to Packard on or before the commencement of this Agreement and an ACTUAL capacity no later than OCTOBER 1 of contract year. 5. SET-UP AND MAINTENANCE: Supplier is responsible for the porper set-up, maintenance and replacement of all tooling. 6. PERISHABLE TOOLS: Perishable tools for tools designed by Packard will be purchased from Packard, unless otherwise permitted by Packard in writing. 7. A semiannual tooling reconciliation will take place via a physical inventory by Supplier. II. EQUIPMENT - BAILMENT -------------------- 1. OWNERSHIP: Equipment bailed to Supplier is the property of Packard and is to be used exclusively for such purpose as directed in writing by Packard. Equipment may not be removed or disposed of without written consent of Packard. Packard is responsible to get bailed equipment returned in good, productive condition. Any equipment returned and deemed not to be "in good productive condition", will be repaired and the supplier will bear the full cost of all repairs. 2. MAINTENANCE: Supplier is responsible for proper maintenance of said equipment. All factory supplies (i.e., greases, coolant, lubricants, maintenance and processing supplies) will be procured and paid for by Supplier. In the event that it becomes necessary to replace any NON maintenance type item of Bailed Property, Packard will be obligated to pay for the cost of replacing such items provided, however, that if such replacement is necessitated as a result of Supplier's failure to maintain or operate such items in accordance with the instructions furnished by Packard, then Supplier will tear the full cost of replacing such items. Page 6 13 III. ADDITIONAL OBLIGATIONS WITH RESPECT TO BAILED TOOLS AND EQUIPMENT ----------------------------------------------------------------- 1. TERM: The period of bailment for each item loaned hereunder commences upon the date said item is delivered to Supplier and ends on the "Expiration Date" as set forth herein. 2. LOCATION: Supplier agrees that it will at all times keep the bailed property at its facility, unless otherwise authorized in writing by Packard, which authorization will not be unreasonably withheld. Supplier grants to Packard the right to enter Supplier's facility during regular business hours to inspect the Bailed Property and Supplier records regarding its use of Bailed Property. 3. USE: Supplier will not commingle the Bailed Property with its property or that of any third party; nor shall Supplier remove, alter, or disfigure any labels, plates or marking affixed to the Bailed Property which identify the Bailed Property as property owned by Packard. 4. STANDARD OF CARE: Supplier will exercise the same standard of care in use and maintenance of the Bailed Property as it would exercise in the use of its own tools and equipment, but in no event will Supplier exercise less than a reasonable standard of care in the use and maintenance of Bailed Property. Supplier will comply with all federal, state, and municipal laws, ordinances and regulations relating to its possession, use or maintenance. Unless otherwise authorized in writing by Packard, Supplier will not use the Bailed Property for any purpose other than for the performance of its obligations to Packard under the said Purchase Order. 5. REPOSSESSION: Packard may take possession, at its expense, of any part of Bailed Property upon ten (10) days' written notice to Supplier if such property is no longer utilized by Supplier in performing its obligations under the said Purchase Order. Supplier will, upon Packard's instructions, promptly prepare for shipment and delivery all or any part of the Bailed Property to any location designated by Packard, F.O.B. Supplier's plant. Packard will pay Supplier for its direct expenses incurred in preparing the Bailed Property for shipment in accordance with Packard's instructions. 6. INDEMNITY: By acceptance of this Purchase Order, Supplier agrees to defend, indemnify, and safe harmless General Motors Corporation, its employees, agents, and representatives from and against any and all claims, losses, damages, expenses (including reasonable counsel fees) and other liabilities of whatever nature resulting from damages or injuries, including death, to any property or persons (including employees or Supplier) caused, or alleged to be caused, in whole or in part, by any equipment furnished by Packard to Supplier in connection with this Purchase Order. 7. DAMAGES: Supplier will reimburse Packard for all Bailed Property damangaed or destroyed as a result of Supplier's negligent acts under this Purchase Order. Page 7 14 8. PROPRIETARY INFORMATION: It is understood by Supplier that Packard will from time to time, disclose manufacturing techniques and other information to Supplier which are proprietary to Packard. Also, it is understood that Supplier may disclose manufacturing techniques and other information to Packard which are proprietary to Supplier. During the term of this Agreement and for a period of two years thereafter, Supplier and Packard agree not to disclose, disseminate or otherwise make available any such techniques or information to any third party, unless such information (1) is a matter of public record; (2) has been obtained from a third party; or (3) was know to such party prior to the date of this Agreement, without first obtaining the written approval of the proprietor. Supplier and Packard further agree not to utilize any such techniques or information for any purposes other than the manufacture of products for Packard by Supplier under said Purchase Order for the term of the Agreement and a period of three (3) years thereafter. 9. TERMINATION: This bailment may be terminated at any time prior to its expiration by either party by giving notice of the intent to terminate to the other party 120 days prior to the effective date of such termination, provided that such termination shall not relieve Supplier of the responsibilities for the safe return of the loaned property nor the obligations of Supplier incurred prior to such termination including, but not limited to obligations incurred in Paragraph 8 herein above. In witness whereof, the parties have caused this Purchase Agreement to be executed by their duly authorized representatives. GENERAL MOTORS CORPORATION PACKARD ELECTRIC DIVISION BY /s/ Raymond D. Miller BY ---------------------------- ----------------------------- TITLE Buyer TITLE ------------------------- -------------------------- New Supplier Development Supplier Representative DATE 1/12/93 DATE -------------------------- --------------------------- Page 8 15 February 11, 1986 POLICY: SURPLUS MATERIAL DISPOSITION To formalize a system to control and reduce surplus material at the Warren Suppliers that is created by: a) overshipments, B) over-ordering, C) engineering changes, d) third-party orders, e) model change, and f) schedule reductions, the following will apply: A) OVERSHIPMENTS: RESPONSIBILITY - CUSTOMER SERVICE Supplier will notify Customer Service of overshipments within ten days of receipt. Customer Service will authorize return and make disposition within ten days. Packard Electric is responsible for transportation. B) OVER-ORDERS: RESPONSIBILITY - CUSTOMER SERVICE (SUPPLIER) Customer Service will provide the supplier with other users of the material, and the supplier will make the appropriate contacts for sale of over-ordered material. If Packard Electric has a need for the material, Customer Service will authorize the return to the location needing the material. A restocking fee of $50.00 will be charged. The customer (supplier) is responsible for transportation. C) ENGINEERING CHANGES: RESPONSIBILITY - PRODUCT ENGINEERING AND SALES Material that is excess due to an engineering change will be returned and charged to the change notice. The process will be: 1) Industrial Engineering will forward a coordination letter with the proposed date for the change to the supplier for his input and agreement. The supplier must consider components and cut leads in the system. Production Control will be the focal point for the cut leads inventory control. 2) Cut leads that are excess must be identified and packaged for return no later than ten days after the change is made. Production Control will RMA the leads within five days of receipt of the quantity involved. 3) Components that are excess in the supplier company will be identified and packaged no later than ten days after the change is made. Customer Service will RMA the components within five days of receipt of the quantity involed. 4) Material discovered after the ten-day period will be the responsibility of the supplier. Page 9 16 POLICY: SURPLUS MATERIAL DISPOSITION D) THIRD-PARTY ORDERS: RESPONSIBILITY - CUSTOMER SERVICE AND PRODUCTION CONTROL Non-Packard material that is ordered through Packard can incur cancellation costs if ordered then the order is changed. Ths supplier should, if a change is made in their order, be able to give supporting data for the change to Customer Service then the cancellation charge, if possible, can be properly allocated. E) MODEL CHANGE: RESPONSIBILTY - PRODUCTION CONTROL Material that will be excess due to the model change will be identified by the supplier from his APL with assistance from Production Control. This should occur no later than when pilots for the next model year are shipped. Non-carryover material identified above will be purchased in quantities form Packard Electric or Pioneer, as necessary, to minimize the buildout excess material. Purchasing must approve purchases from Pioneer if it effects the final product cost. If the supplier has controlled the excess material and after buildout, Production Control will authorize returns as necessary for restocking or claims. Again, only unopened containers will be considered. F) SCHEDULE REDUCTION (GENERAL INDUSTRY REDUCTION): RESPONSIBILITY - PRODUCTION CONTROL All reduction in schedules will be communicated expeditiously to the supplier. A cooperative effort with Production Control will be made to dispose of the material that is in excess. If the excessive material will not be used, RMA's should be issued to return full containers back to Packard and the claim should be started at this time (i.e., after the model year). Sales by the supplier to other users should be investigated also, with the help of Customer Service. G) CLAIMS: RESPONSIBILITY - CUSTOMER SERVICE AND SUPPLIER Supplier will be required to submit claims folders to Packard Customer Service for non-carryover harness part numbers within the defined time frame for model Change. Page 10 17 END OF MONTH MANIFEST PROCEDURE SUPPLIER PROCEDURE FOR SUBMITTING MANIFESTS FOR END-OF-THE MONTH SHIPMENTS Manifests must reach the Packard Electric Division Accounts Receivable Department prior to 11:00 A.M., E.S.T., on the first working day of the month following the month the shipment was made. To accomplish this, the following must happen: 1. Manifests for shipments made on the fourth and third days prior to the last day of the month must be sent to PACKARD ELECTRIC AND EXPEDITED, OVERNIGHT DELIVERY SERVICE, no later than the third day prior to the last day of the month. 2. Manifests for shipments made on the seconday day prior to the end of the month will be sent by Dex or Rapicom to the Accounts Receivable Department on (216) 373-5314, Attention: G.S. Flick ON THE LAST WORKING DAY OF THE MONTH. 3. Manifests for shipments made on the last day of the month will be sent by Dex or Rapicom to the Accounts Receivable Department on (216) 373-5314, Attention: G.S. Flick, prior to 11:00 A.M., E.S.T. ON THE FIRST WORKING DAY OF THE MONTH FOLLOWING THE MONTH THE SHIPMENT WAS MADE. 4. When shipments are made during weekends and holidays after the last normal working day of the month, refer to paragraph 3, above. ________________________________________________________________________________ EXAMPLE: - -------- Shipment Made Date to Send Manifest Method to Send - ------------- --------------------- -------------- #1 7/26/90 No Later Than 7/27/90 Overnight Delivery Service 7/27/90 No Later Than 7/27/90 Overnight Delivery Service #2 7/30/90 7/31/90 Rapicom or Dex #3 7/31/90 8/1/90 Rapicom or Dex Page 11 18 [LOGO] PACKARD ELECTRIC Division of General Motors Corporation PO Box 431 Warren Ohio 44486 BAILED PROPERTY -- Unless otherwise indicated on the Purchase Order, all supplies, materials, tools, jigs, dies, fixtures, patterns, equipment, and other items furnished by Buyer, either directly or indirectly, to Seller to perform the order, or for which Seller has been reimbursed by Buyer, shall be and remain the property of Buyer. The Seller is responsible and accountable for reasonable due care of bailed material and tools while in their possession or control. Therefore, losses due to theft, abnormal shop loss, negligent destruction or maintenance and losses attributable to poor management control will be borne by Seller. Seller shall bear the risk of loss of and damage to Buyer's property up to $250,000 over and above normal wear and tear. Where losses are attributable to gross negligence, lack of reasonable due care or poor management controls then the reasonable value of the material or equipment as determined by Packard's cost records will be assessed to the supplier. Such property shall at all times be properly housed and maintained by Seller; shall not be used by Seller for any purpose other than the performance of the order unless otherwise authorized in writing by Buyer; shall be deemed to be personalty, shall be conspicuously marked "Property of General Motors Corporation" by Seller, shall not be commingled with the property of Seller or with that of a third person; and shall not be moved from Seller's premises without Buyer's prior written approval. Upon the request of Buyer, such property shall be immediately delivered to Buyer by Seller, either (1) F.O.B. cars or trucks at Seller's plant, properly packed and marked in accordance with the requirements of the carrier selected by Buyer to transport such property, or (2) to any location designated by Buyer, in which event, Buyer shall pay to Seller the cost of delivering such property to such location. Buyer shall have the right to enter onto Seller's premises at all reasonable times to inspect such property and Seller's records with respect thereto. Periodically, the Seller will be required to confirm the amount and status of bailed material in the Seller's possession. All paperwork connected with the return of material, including applicable invoices, should show Packard Electric Purchase Order Number, if applicable, and this Bailment Number. Page 12 19 MEMORANDUM OF UNDERSTANDING REGARDING THE SALE AND PURCHASE OF MATERIAL March 13,1996 l. All inbound freight charges are to be paid by DPES. 2. Material will be shipped FOB destination. 3. Only direct material will be purchased (clips, conduit, TPAs, modules, relays, tape). 4. Returnable items and items not tied directly to the harness on a per harness basis will not be purchased (scrim, tyzalls, velcro, containers, mylars, kebobs, relay covers, fuseblock covers, labels, tags, etc). 5. Alphabet will continue to have access to the Delphi Packard IMS System (all screen transaction, and report access will remain the same). 6. DPES will notify Alphabet of any requests for change to the Daily Transactivity Report. 7. A price per element will be determined based on material content plus the negotiated mark-up. 8. The material content per element will be maintained on a stocklist. Changes in component content or component price will necessitate adjustments to the stocklist and element pricing. 9. An Element Price Change Notification (EPCN) will be initiated by Alphabet when component content or price change. Effective points for element price changes will be documented on the EPCN. Any adjustments necessary due to timing differences between date of component use and effective date of element price change will be determined by Alphabet and Delphi Packard Purchasing. 10. Delphi Packard manufactured material will be purchased directly from Delphi Packard, non-Delphi Packard material will be purchased from a Delphi Packard approved source. 11. Delphi Packard will source outside material suppliers and assist in determining material prices and payment terms. 12. Alphabet will use only Delphi Packard approved suppliers and purchase material from the designated Delphi Packard source. 13. DPES is responsible to notify Alphabet of material price changes in advance of the effective date of change. 14. Exceptions on incoming material due to packing slip errors or weigh count discrepancies will be handled through the RMA process. Exceptions will be documented and forwarded to Supervisor of Production Material Control. An RMA will be issued and a debit or credit memo will be issued from Alphabet to Delphi Packard. 15. Nonconforming material will be handled through the RMA process. The component supplier will issue an RMA. Alphabet will dispose of the material for credit per the RMA instructions. 16. Alphabet is responsible for any material damaged at the Alphabet plant. 20 17. Alphabet will be responsible to track costs associated with Plant Trial Runs (PTR). Element price will not be adjusted for short run trials. A material cost will be submitted by Alphabet to Delphi Packard Purchasing for consideration and payment. 18. Past model service material and past model obsolete material will not be purchased. 19. Delphi Packard will refund Alphabet for all excess and obsolete material that was ordered due to schedule requirements. (Whether material was purchased for DPES or an approved supplier as directed by DPES). ORES will issue an RMA for this material as soon as possible after being notified by Alphabet of part numbers and quantities in excess. DPES will make every attempt within reason to issue this RMA between 30 and 60 days from written notification by Alphabet. 20. With regards to component inventory, in the event that Alphabet's annual book to physical inventory exceeds 0.5%, DPES will reimburse Alphabet for The amount of the shortfall after notification by Alphabet. Alphabet will debit DPES within 30 days of notifying DPES. 21. with regards to sub assembly inventory, in the event that Alphabet's annual book to physical inventory exceeds 0.5%. OPES will reimburse Alphabet for the amount of the shortfall after notification by Alphabet. Alphabet will debit DPES within 30 days of notifying DPES. Alphabet will inventory sub assemblies quarterly and attempt to reconcile and make adjustments through DPES including debits or credits at this time. 22. In the event that the payment terms agreed upon by Alphabet and DPES are not being met, both parties agree to diligently work to resolve the issues that allow the agreed terms to continue. /s/ David L. Thomas 3/13/96 /s/ Raymond D. Miller 3/14/96 - -------------------------------- ---------------------------------------- Alphabet Packard Electric EX-23.2 10 EXHIBIT 23.2 1 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Cleveland, Ohio August 8, 1997 EX-27.1 11 EXHIBIT 27.1
5 STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS THEN ENDED. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 0 0 53,400 (216) 29,594 88,585 93,092 (38,527) 182,744 48,853 39,940 87 0 0 93,864 182,744 108,064 108,064 82,125 82,125 10,492 0 913 14,534 136 14,398 0 0 0 14,398 0 0
EX-27.2 12 EXHIBIT 27.2
5 STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS THEN ENDED. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 154 0 36,832 (265) 32,012 76,725 87,217 (31,049) 164,925 38,717 48,123 0 0 0 78,085 164,925 83,455 83,455 64,927 64,927 11,927 0 1,061 5,540 120 5,420 0 0 0 5,420 0 0
EX-27.3 13 EXHIBIT 27.3
5 STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND FOR THE YEAR THEN ENDED. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 357 0 47,048 (265) 30,158 82,655 91,616 36,416 178,487 42,698 51,156 87 0 0 84,546 178,487 363,748 363,748 288,142 288,142 46,694 43 4,317 24,595 524 24,071 0 0 0 24,071 0 0
EX-27.4 14 EXHIBIT 27.4
5 STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND FOR THE YEAR THEN ENDED. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 282 0 49,930 (453) 26,428 85,430 88,613 33,846 172,298 50,579 47,999 0 0 0 73,720 172,298 278,043 278,043 211,712 211,712 37,509 325 2,014 26,808 654 26,154 0 0 0 26,154 0 0
EX-27.5 15 EXHIBIT 27.5
5 STONERIDGE, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994 AND FOR THE YEAR THEN ENDED. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 1,072 0 31,145 (172) 21,933 58,612 70,119 (27,214) 119,915 27,958 28,845 0 0 0 63,112 119,915 225,531 225,531 164,974 164,974 32,542 7 2,344 25,671 (995) 26,666 0 0 0 26,666 0 0
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