-----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, LlPhfZkQRzL+iNNXT/WvPt00T83B65viOvfMNJ3njbX75VgLojTW4C1DwAXTY4XG vTLpJ0V2AFvizgaif+5SWA== 0001029869-98-000312.txt : 19980224 0001029869-98-000312.hdr.sgml : 19980224 ACCESSION NUMBER: 0001029869-98-000312 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980223 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENRAD INC CENTRAL INDEX KEY: 0000040972 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 041360950 STATE OF INCORPORATION: MA FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08045 FILM NUMBER: 98547571 BUSINESS ADDRESS: STREET 1: 7 TECHNOLOGY PARK DR CITY: WESTFORD STATE: MA ZIP: 01886-0033 BUSINESS PHONE: 9785897000 MAIL ADDRESS: STREET 1: 7 TECHNOLOGY PARK DRIVE CITY: WESTFORD STATE: MA ZIP: 01886-0033 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL RADIO CO DATE OF NAME CHANGE: 19760210 10-K 1 ANNUAL REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 3, 1998 Commission File No. 1-8045 GenRad, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-1360950 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7 Technology Park Drive, Westford, Massachusetts 01886-0033 - ------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (978) 589-7000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $1 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of shares of Common Stock held by non-affiliates of the registrant as of February 13, 1998 was $816,176,306. 27,376,983 shares of the Common Stock of GenRad, Inc., $1 par value, were outstanding on February 13, 1998. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Proxy Statement of GenRad, Inc. for the Annual Meeting of Shareholders to be held on May 14,1998 (the "1998 Proxy Statement"), which will be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year ended January 3, 1998, are incorporated by reference into Part III. 2. Portions of the Annual Report to Stockholders for the year ended January 3, 1998 (the "1997 Annual Report"), are incorporated by reference into Part II and Part IV. Exhibit Index on page 6 ================================================================================ PART I Item 1. Business GenRad, Inc. (the "Company" or "GenRad") commenced operations as a corporation in June 1915. The Company is a leading worldwide supplier of integrated test, measurement and diagnostic solutions for the manufacture and maintenance of electronic products. The Company offers products and services in two core business areas: Electronic Manufacturing Systems and Advanced Diagnostic Solutions. The following table sets forth for the fiscal years ended January 3, 1998 ("fiscal 1997"), December 28, 1996 ("fiscal 1996") and December 30, 1995 ("fiscal 1995") the percentage of net revenues represented by its two core businesses. 1997 1996 1995 ---- ---- ---- (1) Electronic Manufacturing Systems 80% 77% 79% (2) Advanced Diagnostic Solutions 20% 23% 21% (1) ELECTRONIC MANUFACTURING SYSTEMS GenRad's electronic manufacturing systems is comprised of the following products, each of which is developed and manufactured at the Company's Westford, Massachusetts facility. Board Test The board test product line consists of the GR228X product family and is used to test printed-circuit boards. Printed-circuit boards are used in virtually all electronic products during their manufacturing process. These products sell for prices ranging from $50,000 to over $900,000. GENEVA(TM) Test and Measurement Systems GenRad's Extended VXI Architecture ("GENEVA") is a combined hardware and software test and measurement system that uses the industry standard VXIbus for instrument control. GenRad's extension adds a scanner bus above the instruments to solve the signal interconnect problems not addressed by VXI. The Company has a patent for this VXIScan (TM) architectural extension. The GENEVA architecture is capable of addressing the needs of a wide range of test and measurement system applications, especially in the communication industry. These systems sell for prices ranging from $100,000 to $500,000. GR Vision(TM) Systems GR Vision Systems are automatic optical inspection solutions that monitor the performance of electronic printed-circuit board placement equipment. GR Vision Systems point users to the root cause of problems that occur during the assembly of electronic products. System prices range from $125,000 to $170,000. Mitron This product group was formed as a result of the acquisition of Mitron Corporation on June 20, 1996. Mitron provides productivity and quality software for computer-assisted PCB manufacturing. Mitron's software accelerates product introductions, optimizes throughput, and improves process management from design to manufacturing. Software packages range in price from $12,000 to $1,000,000. Viper Electrical Viper Electrical Process Inspection Systems are designed to integrate manufacturing processes to provide immediate, closed-loop feedback concerning process faults to help meet production goals in a timely and cost-effective manner. Viper Electrical accomplishes this with virtually no programming costs, while providing reliable, comprehensive inspection coverage and consistency between systems. Additionally, Viper Electrical's PDU and Vacuum configurations are designed for ease of in-line integration. System prices range from $30,000 to $70,000. Integrated Customer Services This product group was formed as a result of the acquisition of Test Technology Associates, Inc. on January 16, 1996 and Testware, Inc. on November 8, 1996. ICS provides programming services, fixturing and on-site training and support to owners of in-circuit and functional testers throughout the United States and Europe. Fixtures are custom designed and range in price between $7,500 to $90,000, including programming services. (2) ADVANCED DIAGNOSTIC SOLUTIONS ("ADS") ADS, headquartered in Manchester, England, is a leading supplier of diagnostic information solutions, specializing in complex electrical and electronic systems for automotive, aerospace, agriculture and related industries. ADS also provides worldwide service support for all of its products. Pricing of products, including software, varies based on customer specifications. PRINCIPAL MARKETS GenRad's principal customers are manufacturers in the following industries: transportation, contract manufacturing, computer/peripherals and communications. Sales to Ford amounted to 10% of consolidated revenues in fiscal 1997. 2 SALES, SERVICE AND DISTRIBUTION GenRad sells and services its products primarily through its own sales and service organizations consisting of sales offices and service centers located in the United States, Mexico, the United Kingdom, Germany, France, Switzerland, Italy, Singapore and Malaysia. Sales and service elsewhere is provided through independent representatives to whom GenRad provides technical and administrative assistance. SUPPLIERS Materials and components used by GenRad in manufacturing its products are purchased from various single sources, primarily domestic companies. GenRad's purchasing strategy is to develop supportive supplier partnerships to leverage core competencies by driving material through a preferred supplier base committed to excellence through continuous improvement. The Company has also developed alternative sources of supply for most materials and components; however, certain microcomputers, microprocessors, general-purpose digital computers and custom semiconductor devices are only available from a limited number of suppliers. FOREIGN OPERATIONS GenRad's operations abroad consist of selling, marketing, distributing and servicing products and providing other types of customer support services such as software development and manufacturing of diagnostic systems. GenRad is subject to the usual risks of international trade, including unfavorable economic conditions, political instability, restrictive trade policies, controls on funds transfers and foreign currency fluctuations. During fiscal 1997, sales in foreign countries were $123,729,000, or 52% of GenRad's total sales, compared with $101,136,000, or 55%, during fiscal 1996, and $92,109,000, or 58%, during fiscal 1995. Additional information regarding GenRad's foreign operations is contained in the Consolidated Financial Statements incorporated in Item 8 of this report. BACKLOG Backlog at the end of fiscal 1997 was approximately $24,937,000 as compared to approximately $24,662,000 at the end of fiscal 1996. Most orders are filled within three months of receipt. The Company believes that a substantial portion of the fiscal 1997 backlog will be recognized as revenue during the first quarter of its 1998 fiscal year. Although orders are subject to cancellation by purchasers, GenRad's experience has been that losses resulting from cancellations are not material. COMPETITIVE CONDITIONS Competition, from both U.S. and foreign competitors, is strong and active. Some of these competitors are substantially larger companies with greater resources. For example, the Company competes with Hewlett-Packard and Teradyne in its Electronic Manufacturing Systems business and with Hewlett-Packard and Siemens in its ADS business. Typically, GenRad meets competition by carefully selecting its markets and by developing its products to meet the needs of each group of customers. Primary competitive factors are product performance, customer- specific applications engineering, customer support services and pricing. The electronic manufacturing systems market is subject to rapid change, and success is dependent on the development of new technologies and products. A key competitive advantage for GenRad is the Company's broad and integrated product family and its extensive software capabilities. RESEARCH AND DEVELOPMENT GenRad's expenditures for the development of new products and services, and the improvement of existing products and services, were $19,902,000 in fiscal 1997, $16,491,000 in fiscal 1996 and $15,717,000 in fiscal 1995. The expenditures were primarily for staffing and related expenses for the development and redesign of electronic manufacturing systems and advanced diagnostic solutions and software products. PATENTS AND TRADEMARKS GenRad seeks patents in the United States and appropriate foreign countries for significant technological inventions. GenRad also owns patents, copyrights, trademarks and proprietary information, some of which are considered to be valuable assets. In the opinion of management, no individual patent, copyright, trademark or proprietary information is material to the business as a whole. ENVIRONMENT GenRad's manufacturing facilities are subject to numerous laws and regulations designed to protect the environment. GenRad does not anticipate that compliance with such laws or regulations presently in effect will adversely affect its capital expenditures, earnings or competitive position. GenRad does not expect to make any material expenditures for environmental control facilities in the current fiscal year. 3 EMPLOYEES GenRad had 1,388 employees, including contract employees, on January 3, 1998 and 1,239 employees on December 28, 1996. None of GenRad's employees are covered by collective bargaining agreements, and GenRad believes relations with its employees are good. EXECUTIVE OFFICERS OF GENRAD
Name Age Office ---- --- ------ James F. Lyons 63 President, Chief Executive Officer and Director Kevin R. Cloutier 35 Vice President, General Manager, Electronic Manufacturing Systems Paul Geere 43 Vice President, Managing Director, Advanced Diagnostic Solutions Lori B. Hannay 41 Vice President, Worldwide Human Resources Sarah H. Lucas 38 Vice President, Chief Strategic Officer Paul Pronsky, Jr. 56 Vice President, Chief Financial Officer and Secretary Michael W. Schraeder 41 Vice President, Worldwide Sales and Service Walter A. Shephard 43 Treasurer and Clerk
All officers are elected by the Board of Directors (the "Directors"). Elected officers hold office until the first meeting of the Directors following the Annual Meeting of Shareholders (the "Annual Meeting") and thereafter until a successor is chosen and qualified. There are no family relationships among the officers and/or directors. James F. Lyons joined the Company as President, Chief Executive Officer and a Director in July 1993. From January 1992 until July 1993, Mr. Lyons served as President and Chief Executive Officer of Harry Gray Associates, a global investment and management consulting organization specializing in acquisitions and leveraged buyouts. Kevin R. Cloutier was elected Vice President, General Manager, Electronic Manufacturing Systems in November 1996. Mr. Cloutier was employed by the Company for 14 years. From September 1995 to November 1996, he served as General Manager of GenRad's Board Test Division. From December 1994 to September 1995, Mr. Cloutier held the position of Southern Regional Sales Manager. From April 1993 to November 1994, Mr. Cloutier served as Executive Sales Engineer. From January 1992 to March 1993, Mr. Cloutier held the position of Senior Account Manager. Mr. Cloutier resigned from the Company on February 23, 1998. Paul Geere was elected Vice President, Managing Director, Advanced Diagnostic Solutions in May 1996. From September 1995 to May 1996, Mr. Geere was Managing Director of GenRad's Advanced Diagnostic Solutions division in Manchester, England. From January 1995 to September 1995, Mr. Geere held the position of GenRad's Director of Consultative Selling. From November 1989 to January 1995, Mr. Geere worked in Management Consultancy for Coopers & Lybrand in its London office. Lori B. Hannay was elected Vice President, Worldwide Human Resources in August 1997. From November 1996 to August 1997, Ms. Hannay was GenRad's Vice President, Human Resources. From November 1994 to November 1996, Ms. Hannay served as the Company's Director of Compensation and Benefits. From July 1990 to November 1994, Ms. Hannay was Corporate Secretary and Vice President of Human Resources for First Inter-Bancorp. Sarah H. Lucas was elected Vice President, Chief Strategic Officer in October 1995. From January 1994 to October 1995, Ms. Lucas was GenRad's Vice President, Strategic Planning and Analysis. From July 1990 to January 1994, Ms. Lucas served as an Associate Consultant within McKinsey & Company, a management consulting firm. Paul Pronsky, Jr. was elected Vice President, Chief Financial Officer and Secretary in December 1996. From April 1992 to November 1996, Mr. Pronsky was a Partner in NorthEast Ventures, a business consulting and venture investment management organization. Michael W. Schraeder was elected Vice President, Worldwide Sales and Service in November 1996. Mr. Schraeder has been employed in various sales positions with the Company for 18 years. From March 1995 to November 1996, Mr. Schraeder served as Vice President, Sales and Service for the Americas. From April 1992 to February 1995, Mr. Schraeder held the position of Eastern Regional Sales Manager. Walter A. Shephard was elected Treasurer and Clerk in February 1991. In August 1997, Mr. Shephard was given the additional responsibility of Vice President, Investor Relations. Mr. Shephard has been employed by the Company for 14 years. Item 2. Properties On July 26, 1996, the Company entered into a 15-year lease for two adjoining properties located in Westford, Massachusetts. These leased facilities include 130,000 square feet of prime office space used for the Company's corporate headquarters, research and development and general business offices and 100,000 square feet used for manufacturing for the EMS business unit. 4 In October 1996, the Company's European subsidiary entered into a 15-year lease commitment at the Orion Business Park located in Manchester, England. The facility, encompassing 75,000 square feet, is used for administrative office space as well as for manufacturing for the ADS business unit. In addition, GenRad engages in research, design, manufacturing or marketing operations in leased facilities in eight states in the United States and in seven foreign countries. In the opinion of management, all of GenRad's properties are well maintained and the current facilities are adequate for its present needs. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II Item 5. Market for Registrants' Common Stock and Related Shareholder Matters The information set forth in Exhibit 13, under the captions "Supplementary Information" and "Investors' Reference Guide", which is the same as the information set forth on pages 38 and 39 of GenRad's 1997 Annual Report, is incorporated by reference. During fiscal 1996, the Company completed the acquisition of two companies which involved the issuance of shares of its Common Stock. On June 20, 1996 the Company acquired by merger all of the outstanding shares of stock of Mitron Corporation in exchange for 1,196,000 shares of the Company's Common Stock which were issued to the stockholders of Mitron Corporation. On November 8, 1996 the Company acquired by merger all of the outstanding shares of stock of Testware, Inc. in exchange for 80,000 shares of the Company's Common Stock which were issued to the stockholders of Testware, Inc. The issuance of the Company's Common Stock in both transactions was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D thereunder. The Company relied in part on representations of the stockholders of the acquired companies in determining that such exemptions were available. Neither transaction involved any underwriters. Item 6. Selected Financial Data The information set forth in Exhibit 13, under the caption "Selected Financial Data, Five Year Summary", which is the same as the information set forth under that caption on page 1 of GenRad's 1997 Annual Report, is incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information set forth in the Consolidated Financial Statements in Exhibit 13, which is the same information set forth in Consolidated Financial Statements on pages 14 through 19 of GenRad's 1997 Annual Report, is incorporated by reference. Item 8. Financial Statements and Supplementary Data The information set forth in the Consolidated Financial Statements and the Supplementary Information in Exhibit 13, which is the same information set forth in the Consolidated Financial Statements and Supplementary Information of GenRad's 1997 Annual Report, is incorporated by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The information set forth under "Executive Officers of GenRad" in Part I of this report and in Item 1 of the 1998 Proxy Statement is hereby incorporated by reference. Item 11. Executive Compensation The information set forth under "Compensation of Executives and Directors" in the 1998 Proxy Statement is hereby incorporated by reference. 5 Item 12. Security Ownership of Certain Beneficial Owners and Management The information set forth under "Certain Shareholders" and "Election of Directors" in the 1998 Proxy Statement is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions None. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) The following Consolidated Financial Statements of GenRad, Inc. and Subsidiaries, which are the same as the Consolidated Financial Statements in GenRad's 1997 Annual Report, are incorporated by reference in Exhibit 13: A. Consolidated Statement of Operations. B. Consolidated Balance Sheet. C. Consolidated Statement of Stockholders' Equity (Deficit). D. Consolidated Statement of Cash Flows. E. Notes to Consolidated Financial Statements. (a)(2) The following schedules to the Consolidated Financial Statements of GenRad, Inc. and Subsidiaries are filed as part of this report: A. Schedule II - Valuation and Qualifying Accounts All other schedules not listed above are inapplicable or are not required under Securities and Exchange Commission regulations and therefore have been omitted. (a)(3) The following Exhibits are filed as part of this report: 10 -- Lease agreement dated July 26, 1996 between GenRad, Inc. and Michelson Farm-Westford Technology Park Trust, incorporated by reference to Exhibit 10 to the Company's report on Form 10-Q for the quarter ended June 29, 1996. 10.1 -- Facility agreement dated June 26, 1997 between GenRad Limited and BankBoston, N.A. London Branch, incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-Q for the quarter ended June 28, 1997. 10.2 -- Amended and restated revolving credit agreement dated May 6, 1997 between GenRad, Inc. and BankBoston, N.A., incorporated by reference to Exhibit 10.2 to the Company's report on Form 10-Q for the quarter ended June 28, 1997. 10.3 -- Severance Agreement between GenRad, Inc. and Kevin R. Cloutier effective as of May 9, 1997, incorporated by reference to Exhibit 10.3 to the Company's report on Form 10-Q for the quarter ended September 27, 1997. 10.4 -- Severance Agreement between GenRad, Inc. and Paul Geere effective as of May 9, 1997, incorporated by reference to Exhibit 10.4 to the Company's report on Form 10-Q for the quarter ended September 27, 1997. 10.5 -- Severance Agreement between GenRad, Inc. and Lori B. Hannay effective as of May 9, 1997, incorporated by reference to Exhibit 10.5 to the Company's report on Form 10-Q for the quarter ended September 27, 1997. 10.6 -- Severance Agreement between GenRad, Inc. and Sarah H. Lucas effective as of May 9, 1997, incorporated by reference to Exhibit 10.6 to the Company's report on Form 10-Q for the quarter ended September 27, 1997. 10.7 -- Severance Agreement between GenRad, Inc. and James F. Lyons effective as of May 8, 1997, incorporated by reference to Exhibit 10.7 to the Company's report on Form 10-Q for the quarter ended September 27, 1997. 10.8 -- Severance Agreement between GenRad, Inc. and Paul Pronsky, Jr. effective as of May 9, 1997, incorporated by reference to Exhibit 10.8 to the Company's report on Form 10-Q for the quarter ended September 27, 1997. 6 10.9 -- Severance Agreement between GenRad, Inc. and Michael W. Schraeder effective as of May 9, 1997, incorporated by reference to Exhibit 10.9 to the Company's report on Form 10-Q for the quarter ended September 27, 1997. 10.10 -- Severance Agreement between GenRad, Inc. and Walter A. Shephard effective as of October 24, 1997, attached. 10.11 -- Severance Agreement between GenRad, Inc. and Gary H. Mueller effective as of October 24, 1997, attached. 11 -- Computation of Per Share Earnings, attached. 13 -- GenRad, Inc. portions of Annual Report to Stockholders for fiscal year ended January 3, 1998, attached. 21 -- List of Subsidiaries, attached. 23 -- Consent of Price Waterhouse LLP, attached. 27 -- Financial Data Schedule, attached. (b) None (c) See Item 14(a)(3) above. (d) See Item 14(a)(1) and (2) above. 7 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GenRad, Inc. (REGISTRANT) By: /s/ JAMES F. LYONS --------------------------- James F. Lyons President, Chief Executive Officer and Director Date: February 23, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- (1) Principal executive officer /s/ JAMES F. LYONS President, Chief Executive Officer February 23, 1998 - ----------------------------------------- and Director James F. Lyons (2) Principal financial officer: /s/ PAUL PRONSKY, JR. Vice President, Chief Financial Officer February 23, 1998 - ----------------------------------------- and Secretary Paul Pronsky, Jr. (3) Principal accounting officer: /s/ PAUL PRONSKY, JR. Vice President, Chief Financial Officer February 23, 1998 - ----------------------------------------- and Secretary Paul Pronsky, Jr. (4) A majority of the Board of Directors: /s/ WILLIAM S. ANTLE III Director February 23, 1998 - ----------------------------------------- William S. Antle III /s/ RUSSELL A. GULLOTTI Director February 23, 1998 - ----------------------------------------- Russell A. Gullotti /s/ LOWELL B. HAWKINSON Director February 23, 1998 - ----------------------------------------- Lowell B. Hawkinson /s/ JAMES F. LYONS Director February 23, 1998 - ----------------------------------------- James F. Lyons /s/ RICHARD G. ROGERS Director February 23, 1998 - ----------------------------------------- Richard G. Rogers /s/ WILLIAM G. SCHEERER Director February 23, 1998 - ----------------------------------------- William G. Scheerer /s/ ADRIANA STADECKER Director February 23, 1998 - ----------------------------------------- Adriana Stadecker /s/ ED ZSCHAU Director February 23, 1998 - ----------------------------------------- Ed Zschau 8
GENRAD, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Additions Balance Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions of Period - ----------- --------- -------- ---------- --------- Year ended January 3, 1998 Deducted from asset accounts: Allowance for doubtful accounts $ 1,431 $ 26 $ 330 $ 1,127 Inventory reserve $ 8,836 $1,406 $ 4,229 $ 6,013 Deferred tax asset valuation allowance $66,678 $ -- $13,516 $53,162 Year ended December 28, 1996 Deducted from asset accounts: Allowance for doubtful accounts $ 801 $ 963 $ 333 $ 1,431 Inventory reserve $10,238 $3,483 $ 4,885 $ 8,836 Deferred tax asset valuation allowance $76,710 $ -- $10,032 $66,678 Year ended December 30, 1995 Deducted from asset accounts: Allowance for doubtful accounts $ 1,316 $ -- $ 515 $ 801 Inventory reserve $12,659 $1,387 $ 3,808 $10,238 Deferred tax asset valuation allowance $80,170 $ -- $ 3,460 $76,710
EX-10.10 2 SEVERANCE AGREEMENT (GenRad logo) GenRad The Technology of Knowledge ---------------------------------------------------- GENRAD, INC. SEVERANCE AGREEMENT This is an AGREEMENT entered into between GenRad, Inc. (the "Company") and Walter A. Shephard ("Executive") effective as of the 24th day of October, 1997. Executive is a key executive of the Company and a vital part of its management. In consideration of Executive's continued employment with the Company, the parties agree as follows: 1. Term; Window Period. The term during which this Agreement (the "Agreement") will be in effect (the "Term of the Agreement") will begin on October 24, 1997 (the "Effective Date") and, except as provided below, will terminate on the date which is two years from the date the Company advises the Executive in writing that it is terminating this Agreement. If a Change of Control (as defined in Exhibit A) occurs during the Term of the Agreement, the Agreement will remain in effect until all obligations hereunder have been discharged. The period starting on the date of such a Change of Control and ending on the third anniversary of the Change of Control will be a "Window Period" during which special provisions of this Agreement will apply. 2. Positions and Duties. Subject to the provisions of the Agreement: 2.1 Executive will serve as Treasurer and Vice President, Investor Relations, of the Company with responsibilities consistent with these positions. 2.2 Executive will be a full-time employee of the Company and, except for reasonable work-related travel, will perform his duties at the Company's headquarters location or, if different, the location at which he now principally performs his employment duties for the Company. 2.3 Executive will devote his entire business time and attention and his best efforts to the duties and services of his positions. However, Executive may serve on boards of directors of other businesses and attend to personal investments and community and charitable service, provided that such activities are not competitive with the business of the Company and do not interfere with the performance of Executive's duties to the Company. 3. Compensation and Benefits. During the term of the Agreement, the Company will provide compensation and benefits to Executive as follows: 3.1 Base Salary. Executive's base salary as of the Effective Date will be $105,000.00 per year, payable in accordance with the applicable payroll practices of the Company. The Company will review Executive's base salary annually, and Executive will receive such increases in base salary, if any, for each succeeding year as the Board of Severance Agreement Page 2 of 10 Directors of the Company (the "Board") determines in its sole discretion. Executive's Base Salary will not be decreased during the Term of the Agreement except as part of a general reduction in which the base salaries of all corporate officers of the Company have been decreased and will not be decreased during a Window Period without Executive's prior written agreement. 3.2 Performance Bonus. Executive will be eligible for an annual performance bonus. Executive's bonus for any year ending during a Window Period will not be less than 100 percent of his bonus for the completed year immediately preceding the Change of Control. 3.3 Other Benefits. Executive will be entitled to participate in all policies and arrangements (or in any successor or supplemental plans, policies or arrangements) generally made available to officers of the Company. Such benefits shall not be reduced during the Window Period. 4. Termination of Employment; Severance Benefits. 4.1 Terminability of Employment. Either the Company or Executive may at any time terminate Executive's employment with the Company after giving 30 days' written notice to the other party. However, if Executive's employment terminates during the Term of the Agreement, the parties will be required to discharge the applicable obligations described in this Section 4 and elsewhere in this Agreement. If Executive's employment terminates at any time other than during the Term of the Agreement, Executive will have no rights under the Agreement. 4.2 Termination upon Death or Disability. If Executive ceases to be an employee of the Company as a result of death or disability, the Executive will be entitled to receive the severance benefits set forth in Section 4.4. However, nothing in this Agreement is intended to interfere with the rights of Executive and his family or beneficiaries under other applicable plans, policies or arrangements of the Company. For purposes of this Section 4.2, the Company may terminate Executive's employment for "disability" if, because of physical or mental incapacity, Executive is unable for a period of 30 consecutive days to perform each of the material duties of his position and if determined by a qualified physician chosen by the Company (and, if during a Window Period, approved by the Executive or his conservator) to be probable that such incapacity will continue for an additional 60 consecutive days. 4.3 Termination by the Company for Cause or by Executive Without Good Reason. If the Company terminates Executive's employment for Cause (as defined in this Section 4.3) or if Executive terminates his employment other than for Good Reason (as defined in Section 4.4), the Company will have no further obligation or liability to Executive hereunder other than for Base Salary earned and unpaid at the time of termination and compensation for accrued vacation, and the term of the Agreement will end when those amounts are paid. Severance Agreement Page 3 of 10 "Cause" mean (a) willful malfeasance or gross negligence in the performance by Executive of his duties, resulting in harm to the Company, (b) fraud or dishonesty by Executive with respect to the Company, or (c) Executive's conviction of a felony. 4.4 By the Company Without Cause or by Executive for Good Reason. (a) Entitlement to Severance Benefits. If, during the Term of the Agreement, the Company terminates Executive's employment without Cause, or if Executive terminates his employment for Good Reason, the Company will, subject to Section 5 below, provide severance benefits to Executive as set forth below in this Section 4.4. "Good Reason" means (i) failure by the Company to maintain Executive in the positions described in Section 2 or assignment to Executive of duties materially inconsistent with such positions, (ii) failure by the Company to provide Executive with the compensation and benefits described in Section 3, or (iii) relocation of Executive's principal place of work to a location more than 50 miles from the previous location. (b) Normal Severance Benefits. Except as provided in paragraph (c), the Company will provide severance benefits as follows: (i) The Company will pay to Executive within 30 days of the termination a lump-sum cash amount equal to one hundred percent (100%) of his annual Base Salary in effect at the time of his termination (or, if his Base Salary has been reduced within 60 days of the termination, his Base Salary in effect prior to the reduction). (ii) The Company will continue for a period of one year from the date of termination to provide Executive with the benefits set forth in Section 3.3 above. To the extent that the Company is unable to provide such benefits to Executive under its existing plans and arrangements, it will pay Executive cash amounts equal to the cost the Company would have incurred to provide these benefits. (iii) Notwithstanding any contrary provisions of the plans or arrangements under which they are granted, all options to purchase Company stock held by Executive will immediately become exercisable. Severance Agreement Page 4 of 10 (c) Severance Benefits Following a Change of Control. If the termination occurs during a Window Period, the Company will, instead of the benefits prescribed in paragraph (b), provide severance benefits to Executive as follows: (i) The Company will pay to Executive within 30 days of the termination a lump-sum cash amount equal to two hundred percent (200%) of the sum of (A) Executive's annual Base Salary in effect immediately prior to the termination (or, if his Base Salary has been reduced within 60 days of the termination or at any time after the Change of Control, his Base Salary in effect prior to the reduction), plus (B) an amount equal to the bonus earned by Executive for the fiscal year completed immediately prior to the termination. (ii) The Company will also pay to Executive within 30 days of the termination a pro-rata portion of his target bonus (provided for in Section 3.2 above) for the year of termination. (iii) The Company will continue for a period of three years from the date of termination to provide Executive with the benefits set forth in Section 3.3 above. To the extent the Company is unable to provide such benefits to Executive under its existing plans and arrangements, it will either arrange to provide Executive with substantially similar benefits upon comparable terms or pay Executive cash amounts equal to Executive's cost of obtaining such benefits. (iv) Notwithstanding any contrary provisions of the plans or arrangements under which they are granted, all options to purchase Company stock held by Executive will immediately become exercisable. 5. Limitations on Severance Benefits. 5.1 Except as provided in Section 5.2 below, the payments and benefits to which Executive will be entitled under Section 4 of this Agreement will be reduced to the extent necessary to prevent Executive from becoming liable for the excise tax levied on certain "excess parachute payments" under section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"). If a reduction is made under this Section 5.1, Executive will have the right to determine which payments and benefits will be reduced. Severance Agreement Page 5 of 10 5.2 The limitations of Section 5.1 will not apply if-- (i) the present value, net of all federal, state and other income and excise taxes, of all payments and benefits to which Executive is entitled hereunder without such limitations, exceeds (ii) the present value, net of all federal, state and other income and excise taxes, of all payments and benefits to which Executive would be entitled hereunder if such limitations applied. 5.3 Determinations under this Section 5 will be made by the firm of certified public accountants then serving as the Company's auditor unless Executive has reasonable objections to the use of that firm, in which case the determinations will be made by a comparable firm chosen by Executive after consultation with the Company. The determinations of such firm will be binding upon the Company and Executive. 6. Withholding. All payments required to be made by the Company to Executive under this Agreement will be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as may be required by law. 7. Fees and Expenses. In the event of Executive's termination of employment during a Window Period, the Company will pay any and all fees and expenses (including legal fees and other costs of arbitration or litigation) that may be incurred by Executive in enforcing his rights under this Agreement. If the termination of employment does not occur during a Window Period, the Company will pay that amount of such fees and expenses that bears the same ratio to the total fees and expenses as the dollar amount of payments and benefits determined to be payable to Executive bears to the total dollar amount of payments and benefits in dispute. 8. No Duty to Mitigate. Benefits payable under this Agreement as a result of termination of Executive's employment will be considered severance pay in consideration of his past service and his continued service from the Effective Date, and his entitlement thereto will neither be governed by any duty to mitigate his damages by seeking further employment nor offset by any compensation that he may receive from other employment. 9. Confidentiality and Exclusivity. Executive agrees to maintain the confidentiality of the Company's (and its related entities and projects) books, records, financial information, technical information, business plans and/or strategies, and other confidential matters unless required to make disclosure in the performance of his duties for the Company or as a result of a legal proceeding or other legally mandated cause. In the event of termination without Good Reason by Executive, other than such a termination occurring during a Window Period, Executive will not for one year following termination act as an executive officer for any company that directly competes against the Company. The parties recognize and agree that should the Company be required to Severance Agreement Page 6 of 10 pursue a claim against Executive under this Section 9, the Company will likely be required to seek injunctive relief as well as damages at law. Accordingly, Section 11, Arbitration, will not apply to any action by the Company against Executive for violation of this Section 9. Executive agrees for purposes of any disputes arising under this Section 9 to submit to the exclusive jurisdiction of the federal and state courts in the Commonwealth of Massachusetts. 10. Indemnification. To the extent permitted by law, the Company will defend, indemnify and hold Executive harmless from and against any and all losses, liabilities, damages, expenses (including attorneys' fees and costs), actions, causes of action or proceedings arising directly or indirectly from Executive's performance of this Agreement or services as an employee of the Company. Executive may retain his own counsel to defend himself in such actions, and the Company will pay for the reasonable costs and expense of such counsel. This indemnification is in addition to any right of indemnification to which Executive may be entitled under the Company's Articles of Organization and By-laws and any insurance policies that may be maintained by the Company. 11. Arbitration. Except as otherwise provided in Section 9, any dispute or controversy between the parties involving the construction or application of any terms, covenants or conditions of this Agreement, or any claim arising out of or relating to this Agreement, or any claim arising out of or relating to Executive's employment by the Company that is not resolved within ten days by the parties will be settled by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The Company and Executive agree that the arbitrator(s) will have no authority to award punitive or exemplary damages or so-called consequential or remote damages such as damages for emotional distress. Any decision of the arbitrator(s) will be final and binding upon the parties. Upon request, the arbitrator(s) shall submit written findings of fact and conclusions of law. The parties agree and understand that they hereby waive their rights to a jury trial of any dispute or controversy relating to the matters specified above in this Section 11. 12. Rights of Survivors. If Executive dies after becoming entitled to benefits under Section 4 following termination of employment but before all such benefits have been provided, (a) all unpaid cash amounts will be paid to the beneficiary that have been designated by Executive in writing (the "beneficiary"), or if none, to Executive's estate, (b) all applicable insurance coverage will be provided to Executive's family as though Executive had continued to live, and (c) any stock options that become exercisable under Section 4.4(b)(iii) or Section 4.4(iv) will be exercisable by the beneficiary, or if none, the estate. 13. Successors. This Agreement will inure to and be binding upon the Company's successors. The Company will require any successor to all or substantially all of the business and/or assets of the Company by sale, merger or consolidation (where the Severance Agreement Page 7 of 10 Company is not the surviving corporation), lease or otherwise, by agreement in form and substance satisfactory to Executive, to assume this Agreement expressly. This Agreement is not otherwise assignable by the Company. 14. Subsidiaries. For purposes of this Agreement, employment by a corporation or other entity that is controlled directly or indirectly by the Company will be deemed to be employment by the Company. Thus, references in the Agreement to "Company" include such corporations or other entities where appropriate in the context. 15. Amendment or Modification; Waiver. Except as provided in clause (1) of Exhibit A, this Agreement may not be amended unless agreed to in writing by Executive and the Company. No waiver by either party of any breach of this Agreement will be deemed a waiver of a subsequent breach. 16. Severability. In the event that any provision of this Agreement is determined to be invalid or unenforceable, the remaining provisions shall remain in full force and effect to the fullest extent permitted by law. 17. Controlling Law. This Agreement will be controlled and interpreted pursuant to Massachusetts law without regard to the conflict of laws principles thereof. 18. Superseded Agreement. This Agreement supersedes any prior or contemporaneous agreement between the parties with respect to the subject matter hereof. 19. Notices. Any notices required or permitted to be sent under this Agreement are to be delivered by hand or mailed by registered or certified mail, return receipt requested, and addressed as follows: If to the Company: GenRad, Inc. 7 Technology Park Drive Westford, MA 01886-0033 Attn: President If to Executive: Walter A. Shephard One Quarry Run Rockport, MA 01966 Severance Agreement Page 8 of 10 Either party may change its address for receiving notices by giving notice to the other party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. /s/ Walter A. Shephard ------------------------------------ Walter A. Shephard GENRAD, INC. By /s/ James F. Lyons --------------------------------- James F. Lyons Its President Severance Agreement Page 9 of 10 EXHIBIT A "Change of Control" means the occurrence of any of the following events: (1) any Person becomes the owner of 20% or more of the Company's Common Stock; provided, however, that the Board of Directors of the Company may unilaterally amend this clause (1) to increase the 20% threshold to any percentage up to, but not exceeding, 50%; or (2) individuals who, as of the Effective Date, constitute the Board of Directors of the Company (the "Continuing Directors") cease for any reason to constitute at least a majority of such Board; provided, however, that any individual becoming a director after the Effective Date whose election or nomination for election by the Company's shareholders was approved by a vote of at least a majority of the Continuing Directors will be deemed to be a Continuing Director, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities and Exchange Act of 1934 (the "Exchange Act")) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) approval by the shareholders of the Company of a reorganization, merger, consolidation or other transaction that will result in the transfer of ownership of more than 50% of the Company's Common Stock; or (4) liquidation or dissolution of the Company or sale of substantially all of the Company's assets. In addition, for purposes of this definition the following terms have the meanings set forth below: "Common Stock" means the then outstanding Common Stock of the Company plus, for purposes of determining the stock ownership of any Person, the number of unissued shares of Common Stock which such Person has the right to acquire (whether such right is exercisable immediately or only after the passage of time) upon the exercise of conversion rights, exchange rights, warrants or options or otherwise. Notwithstanding the foregoing, the term "Common Stock" does not include shares of preferred stock or convertible debt or options or warrants to acquire shares of Common Stock (including any shares of Common Stock issued or issuable upon the conversion or exercise thereof) to the extent that the Board expressly so determines in any future transaction or transactions. Severance Agreement Page 10 of 10 A Person will be deemed to be the "owner" of any Common Stock of which such Person would be the "beneficial owner", as such term is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Exchange Act. "Person" has the meaning used in Section 13(d) of the Exchange Act, except that "Person" does not include (i) the Executive, and Executive Related Party, or any group of which the Executive or Executive Related Party is a member, or (ii) the Company or a wholly-owned subsidiary of the Company or an employee benefit plan (or related trust) of the Company or of a wholly-owned subsidiary. An "Executive Related Party" means any affiliate or associate of the Executive other than the Company or a subsidiary of the Company. The terms "affiliate" and "associate" have the meanings given in Rule 12b-2 under the Exchange Act; the term "registrant" in the definition of "associate" means, in this case, the Company. EX-10.11 3 SEVERANCE AGREEMENT (GenRad logo) GenRad The Technology of Knowledge ---------------------------------------------------- GENRAD, INC. SEVERANCE AGREEMENT This is an AGREEMENT entered into between GenRad, Inc. (the "Company") and Gary H. Mueller ("Executive") effective as of the 24th day of October, 1997. Executive is a key executive of the Company and a vital part of its management. In consideration of Executive's continued employment with the Company, the parties agree as follows: 1. Term; Window Period. The term during which this Agreement (the "Agreement") will be in effect (the "Term of the Agreement") will begin on October 24, 1997 (the "Effective Date") and, except as provided below, will terminate on the date which is two years from the date the Company advises the Executive in writing that it is terminating this Agreement. If a Change of Control (as defined in Exhibit A) occurs during the Term of the Agreement, the Agreement will remain in effect until all obligations hereunder have been discharged. The period starting on the date of such a Change of Control and ending on the third anniversary of the Change of Control will be a "Window Period" during which special provisions of this Agreement will apply. 2. Positions and Duties. Subject to the provisions of the Agreement: 2.1 Executive will serve as Vice President and General Manager, Mitron, of the Company with responsibilities consistent with these positions. 2.2 Executive will be a full-time employee of the Company and, except for reasonable work-related travel, will perform his duties at the Company's headquarters location or, if different, the location at which he now principally performs his employment duties for the Company. 2.3 Executive will devote his entire business time and attention and his best efforts to the duties and services of his positions. However, Executive may serve on boards of directors of other businesses and attend to personal investments and community and charitable service, provided that such activities are not competitive with the business of the Company and do not interfere with the performance of Executive's duties to the Company. 3. Compensation and Benefits. During the term of the Agreement, the Company will provide compensation and benefits to Executive as follows: 3.1 Base Salary. Executive's base salary as of the Effective Date will be $175,008.00 per year, payable in accordance with the applicable payroll practices of the Company. The Company will review Executive's base salary annually, and Executive will receive such increases in base salary, if any, for each succeeding year as the Board of Severance Agreement Page 2 of 10 Directors of the Company (the "Board") determines in its sole discretion. Executive's Base Salary will not be decreased during the Term of the Agreement except as part of a general reduction in which the base salaries of all corporate officers of the Company have been decreased and will not be decreased during a Window Period without Executive's prior written agreement. 3.2 Performance Bonus. Executive will be eligible for an annual performance bonus. Executive's bonus for any year ending during a Window Period will not be less than 100 percent of his bonus for the completed year immediately preceding the Change of Control. 3.3 Other Benefits. Executive will be entitled to participate in all policies and arrangements (or in any successor or supplemental plans, policies or arrangements) generally made available to officers of the Company. Such benefits shall not be reduced during the Window Period. 4. Termination of Employment; Severance Benefits. 4.1 Terminability of Employment. Either the Company or Executive may at any time terminate Executive's employment with the Company after giving 30 days' written notice to the other party. However, if Executive's employment terminates during the Term of the Agreement, the parties will be required to discharge the applicable obligations described in this Section 4 and elsewhere in this Agreement. If Executive's employment terminates at any time other than during the Term of the Agreement, Executive will have no rights under the Agreement. 4.2 Termination upon Death or Disability. If Executive ceases to be an employee of the Company as a result of death or disability, the Executive will be entitled to receive the severance benefits set forth in Section 4.4. However, nothing in this Agreement is intended to interfere with the rights of Executive and his family or beneficiaries under other applicable plans, policies or arrangements of the Company. For purposes of this Section 4.2, the Company may terminate Executive's employment for "disability" if, because of physical or mental incapacity, Executive is unable for a period of 30 consecutive days to perform each of the material duties of his position and if determined by a qualified physician chosen by the Company (and, if during a Window Period, approved by the Executive or his conservator) to be probable that such incapacity will continue for an additional 60 consecutive days. 4.3 Termination by the Company for Cause or by Executive Without Good Reason. If the Company terminates Executive's employment for Cause (as defined in this Section 4.3) or if Executive terminates his employment other than for Good Reason (as defined in Section 4.4), the Company will have no further obligation or liability to Executive hereunder other than for Base Salary earned and unpaid at the time of termination and compensation for accrued vacation, and the term of the Agreement will end when those amounts are paid. Severance Agreement Page 3 of 10 "Cause" mean (a) willful malfeasance or gross negligence in the performance by Executive of his duties, resulting in harm to the Company, (b) fraud or dishonesty by Executive with respect to the Company, or (c) Executive's conviction of a felony. 4.4 By the Company Without Cause or by Executive for Good Reason. (a) Entitlement to Severance Benefits. If, during the Term of the Agreement, the Company terminates Executive's employment without Cause, or if Executive terminates his employment for Good Reason, the Company will, subject to Section 5 below, provide severance benefits to Executive as set forth below in this Section 4.4. "Good Reason" means (i) failure by the Company to maintain Executive in the positions described in Section 2 or assignment to Executive of duties materially inconsistent with such positions, (ii) failure by the Company to provide Executive with the compensation and benefits described in Section 3, or (iii) relocation of Executive's principal place of work to a location more than 50 miles from the previous location. (b) Normal Severance Benefits. Except as provided in paragraph (c), the Company will provide severance benefits as follows: (i) The Company will pay to Executive within 30 days of the termination a lump-sum cash amount equal to one hundred percent (100%) of his annual Base Salary in effect at the time of his termination (or, if his Base Salary has been reduced within 60 days of the termination, his Base Salary in effect prior to the reduction). (ii) The Company will continue for a period of one year from the date of termination to provide Executive with the benefits set forth in Section 3.3 above. To the extent that the Company is unable to provide such benefits to Executive under its existing plans and arrangements, it will pay Executive cash amounts equal to the cost the Company would have incurred to provide these benefits. (iii) Notwithstanding any contrary provisions of the plans or arrangements under which they are granted, all options to purchase Company stock held by Executive will immediately become exercisable. Severance Agreement Page 4 of 10 (c) Severance Benefits Following a Change of Control. If the termination occurs during a Window Period, the Company will, instead of the benefits prescribed in paragraph (b), provide severance benefits to Executive as follows: (i) The Company will pay to Executive within 30 days of the termination a lump-sum cash amount equal to two hundred percent (200%) of the sum of (A) Executive's annual Base Salary in effect immediately prior to the termination (or, if his Base Salary has been reduced within 60 days of the termination or at any time after the Change of Control, his Base Salary in effect prior to the reduction), plus (B) an amount equal to the bonus earned by Executive for the fiscal year completed immediately prior to the termination. (ii) The Company will also pay to Executive within 30 days of the termination a pro-rata portion of his target bonus (provided for in Section 3.2 above) for the year of termination. (iii) The Company will continue for a period of three years from the date of termination to provide Executive with the benefits set forth in Section 3.3 above. To the extent the Company is unable to provide such benefits to Executive under its existing plans and arrangements, it will either arrange to provide Executive with substantially similar benefits upon comparable terms or pay Executive cash amounts equal to Executive's cost of obtaining such benefits. (iv) Notwithstanding any contrary provisions of the plans or arrangements under which they are granted, all options to purchase Company stock held by Executive will immediately become exercisable. 5. Limitations on Severance Benefits. 5.1 Except as provided in Section 5.2 below, the payments and benefits to which Executive will be entitled under Section 4 of this Agreement will be reduced to the extent necessary to prevent Executive from becoming liable for the excise tax levied on certain "excess parachute payments" under section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"). If a reduction is made under this Section 5.1, Executive will have the right to determine which payments and benefits will be reduced. Severance Agreement Page 5 of 10 5.2 The limitations of Section 5.1 will not apply if-- (i) the present value, net of all federal, state and other income and excise taxes, of all payments and benefits to which Executive is entitled hereunder without such limitations, exceeds (ii) the present value, net of all federal, state and other income and excise taxes, of all payments and benefits to which Executive would be entitled hereunder if such limitations applied. 5.3 Determinations under this Section 5 will be made by the firm of certified public accountants then serving as the Company's auditor unless Executive has reasonable objections to the use of that firm, in which case the determinations will be made by a comparable firm chosen by Executive after consultation with the Company. The determinations of such firm will be binding upon the Company and Executive. 6. Withholding. All payments required to be made by the Company to Executive under this Agreement will be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as may be required by law. 7. Fees and Expenses. In the event of Executive's termination of employment during a Window Period, the Company will pay any and all fees and expenses (including legal fees and other costs of arbitration or litigation) that may be incurred by Executive in enforcing his rights under this Agreement. If the termination of employment does not occur during a Window Period, the Company will pay that amount of such fees and expenses that bears the same ratio to the total fees and expenses as the dollar amount of payments and benefits determined to be payable to Executive bears to the total dollar amount of payments and benefits in dispute. 8. No Duty to Mitigate. Benefits payable under this Agreement as a result of termination of Executive's employment will be considered severance pay in consideration of his past service and his continued service from the Effective Date, and his entitlement thereto will neither be governed by any duty to mitigate his damages by seeking further employment nor offset by any compensation that he may receive from other employment. 9. Confidentiality and Exclusivity. Executive agrees to maintain the confidentiality of the Company's (and its related entities and projects) books, records, financial information, technical information, business plans and/or strategies, and other confidential matters unless required to make disclosure in the performance of his duties for the Company or as a result of a legal proceeding or other legally mandated cause. In the event of termination without Good Reason by Executive, other than such a termination occurring during a Window Period, Executive will not for one year following termination act as an executive officer for any company that directly competes against the Company. The parties recognize and agree that should the Company be required to Severance Agreement Page 6 of 10 pursue a claim against Executive under this Section 9, the Company will likely be required to seek injunctive relief as well as damages at law. Accordingly, Section 11, Arbitration, will not apply to any action by the Company against Executive for violation of this Section 9. Executive agrees for purposes of any disputes arising under this Section 9 to submit to the exclusive jurisdiction of the federal and state courts in the Commonwealth of Massachusetts. 10. Indemnification. To the extent permitted by law, the Company will defend, indemnify and hold Executive harmless from and against any and all losses, liabilities, damages, expenses (including attorneys' fees and costs), actions, causes of action or proceedings arising directly or indirectly from Executive's performance of this Agreement or services as an employee of the Company. Executive may retain his own counsel to defend himself in such actions, and the Company will pay for the reasonable costs and expense of such counsel. This indemnification is in addition to any right of indemnification to which Executive may be entitled under the Company's Articles of Organization and By-laws and any insurance policies that may be maintained by the Company. 11. Arbitration. Except as otherwise provided in Section 9, any dispute or controversy between the parties involving the construction or application of any terms, covenants or conditions of this Agreement, or any claim arising out of or relating to this Agreement, or any claim arising out of or relating to Executive's employment by the Company that is not resolved within ten days by the parties will be settled by arbitration in Boston, Massachusetts, in accordance with the rules of the American Arbitration Association then in effect, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The Company and Executive agree that the arbitrator(s) will have no authority to award punitive or exemplary damages or so-called consequential or remote damages such as damages for emotional distress. Any decision of the arbitrator(s) will be final and binding upon the parties. Upon request, the arbitrator(s) shall submit written findings of fact and conclusions of law. The parties agree and understand that they hereby waive their rights to a jury trial of any dispute or controversy relating to the matters specified above in this Section 11. 12. Rights of Survivors. If Executive dies after becoming entitled to benefits under Section 4 following termination of employment but before all such benefits have been provided, (a) all unpaid cash amounts will be paid to the beneficiary that have been designated by Executive in writing (the "beneficiary"), or if none, to Executive's estate, (b) all applicable insurance coverage will be provided to Executive's family as though Executive had continued to live, and (c) any stock options that become exercisable under Section 4.4(b)(iii) or Section 4.4(iv) will be exercisable by the beneficiary, or if none, the estate. 13. Successors. This Agreement will inure to and be binding upon the Company's successors. The Company will require any successor to all or substantially all of the business and/or assets of the Company by sale, merger or consolidation (where the Severance Agreement Page 7 of 10 Company is not the surviving corporation), lease or otherwise, by agreement in form and substance satisfactory to Executive, to assume this Agreement expressly. This Agreement is not otherwise assignable by the Company. 14. Subsidiaries. For purposes of this Agreement, employment by a corporation or other entity that is controlled directly or indirectly by the Company will be deemed to be employment by the Company. Thus, references in the Agreement to "Company" include such corporations or other entities where appropriate in the context. 15. Amendment or Modification; Waiver. Except as provided in clause (1) of Exhibit A, this Agreement may not be amended unless agreed to in writing by Executive and the Company. No waiver by either party of any breach of this Agreement will be deemed a waiver of a subsequent breach. 16. Severability. In the event that any provision of this Agreement is determined to be invalid or unenforceable, the remaining provisions shall remain in full force and effect to the fullest extent permitted by law. 17. Controlling Law. This Agreement will be controlled and interpreted pursuant to Massachusetts law without regard to the conflict of laws principles thereof. 18. Superseded Agreement. This Agreement supersedes any prior or contemporaneous agreement between the parties with respect to the subject matter hereof. 19. Notices. Any notices required or permitted to be sent under this Agreement are to be delivered by hand or mailed by registered or certified mail, return receipt requested, and addressed as follows: If to the Company: GenRad, Inc. 7 Technology Park Drive Westford, MA 01886-0033 Attn: President If to Executive: Gary H. Mueller 3205 NW 132nd Place Portland, OR 97229 Severance Agreement Page 8 of 10 Either party may change its address for receiving notices by giving notice to the other party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. /s/ Gary H. Mueller ------------------------------------ Gary H. Mueller GENRAD, INC. /s/ James F. Lyons By ----------------------------------- James F. Lyons Its President Severance Agreement Page 9 of 10 EXHIBIT A "Change of Control" means the occurrence of any of the following events: (1) any Person becomes the owner of 20% or more of the Company's Common Stock; provided, however, that the Board of Directors of the Company may unilaterally amend this clause (1) to increase the 20% threshold to any percentage up to, but not exceeding, 50%; or (2) individuals who, as of the Effective Date, constitute the Board of Directors of the Company (the "Continuing Directors") cease for any reason to constitute at least a majority of such Board; provided, however, that any individual becoming a director after the Effective Date whose election or nomination for election by the Company's shareholders was approved by a vote of at least a majority of the Continuing Directors will be deemed to be a Continuing Director, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities and Exchange Act of 1934 (the "Exchange Act")) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) approval by the shareholders of the Company of a reorganization, merger, consolidation or other transaction that will result in the transfer of ownership of more than 50% of the Company's Common Stock; or (4) liquidation or dissolution of the Company or sale of substantially all of the Company's assets. In addition, for purposes of this definition the following terms have the meanings set forth below: "Common Stock" means the then outstanding Common Stock of the Company plus, for purposes of determining the stock ownership of any Person, the number of unissued shares of Common Stock which such Person has the right to acquire (whether such right is exercisable immediately or only after the passage of time) upon the exercise of conversion rights, exchange rights, warrants or options or otherwise. Notwithstanding the foregoing, the term "Common Stock" does not include shares of preferred stock or convertible debt or options or warrants to acquire shares of Common Stock (including any shares of Common Stock issued or issuable upon the conversion or exercise thereof) to the extent that the Board expressly so determines in any future transaction or transactions. Severance Agreement Page 10 of 10 A Person will be deemed to be the "owner" of any Common Stock of which such Person would be the "beneficial owner", as such term is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Exchange Act. "Person" has the meaning used in Section 13(d) of the Exchange Act, except that "Person" does not include (i) the Executive, and Executive Related Party, or any group of which the Executive or Executive Related Party is a member, or (ii) the Company or a wholly-owned subsidiary of the Company or an employee benefit plan (or related trust) of the Company or of a wholly-owned subsidiary. An "Executive Related Party" means any affiliate or associate of the Executive other than the Company or a subsidiary of the Company. The terms "affiliate" and "associate" have the meanings given in Rule 12b-2 under the Exchange Act; the term "registrant" in the definition of "associate" means, in this case, the Company. EX-11 4 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 GENRAD, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
Three Months Ended Twelve Months Ended ---------------------------- ---------------------------------- January 3, December 28, January 3, December 28, 1998 1996 1998 1996 BASIC: --------------------------- ---------------------------------- - ------ Weighted average number of common shares outstanding 27,310,000 24,474,000 26,814,000 22,488,000 =========== =========== =========== =========== Net income available to common stockholders $12,052,000 $9,665,000 $41,295,000 $27,335,000 =========== =========== =========== =========== Basic earnings per share $0.44 $0.39 $1.54 $1.22 =========== =========== =========== ============ DILUTED: - -------- Weighted average number of common shares outstanding 27,310,000 24,474,000 26,814,000 22,488,000 Weighted average incremental shares from assumed conversion of stock options 2,311,000 2,270,000 1,974,000 2,015,000 Weighted average incremental shares from assumed conversion of 7 1/4% convertible subordinated debentures -- 1,491,000 -- 2,981,000 ----------- ----------- ----------- ----------- Total: 29,621,000 28,235,000 28,788,000 27,484,000 =========== =========== =========== =========== Net income $12,052,000 $9,665,000 $41,295,000 $27,335,000 Assumed reduction of 7 1/4% convertible subordinated debenture interest expense -- 480,000 -- 3,131,000 ----------- ----------- ----------- ----------- Net income and total earnings applicable to common shares and common equivalent shares $12,052,000 $10,145,000 $41,295,000 $30,466,000 =========== =========== =========== ============ Diluted earnings per share $0.41 $0.36 $1.43 $1.11 =========== =========== =========== ============
EX-13 5 A/R OR Q/R TO SECURITY HOLDERS Exhibit 13 GenRad, Inc. and Subsidiaries Financial Review MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS 14-19 REPORTS 20 CONSOLIDATED STATEMENTS OF OPERATIONS 21 CONSOLIDATED BALANCE SHEET 22 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) 23 CONSOLIDATED STATEMENT OF CASH FLOWS 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25-37 SUPPLEMENTARY INFORMATION 38 INVESTORS' REFERENCE GUIDE 39 CORPORATE DATA 40 13 GenRad, Inc. and Subsidiaries Selected Financial Data Five Year Summary - --------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share amounts and number of employees): - ----------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------- Operations: Net product and service sales $236,761 $183,545 $158,753 $147,903 $161,868 Gross margin 126,764 96,408 76,822 69,407 69,153 Operating income (loss) 38,486 25,856 16,369 8,657 (39,623) Net income (loss) $ 41,295 $ 27,335 $ 12,271 $ 4,512 $(43,957) Net income (loss) per common and common equivalent share: Basic $ 1.54 $ 1.22 $ 0.59 $ 0.23 $ (2.39) Diluted $ 1.43 $ 1.11 $ 0.56 $ 0.22 $ (2.39) Balance sheet: Current ratio 3.6 2.7 1.7 1.3 1.2 Total assets $178,957 $115,765 $ 87,406 $ 81,816 $ 78,997 Long-term debt, including current portion 10,953 146 49,073 48,955 48,990 Stockholders' equity (deficit) $115,013 $ 63,680 $(23,238) $(37,788) $(44,829) Other data: Number of employees 1,388 1,239 1,138 1,137 1,216 Weighted average common and common equivalent shares used in computing per share amounts Basic 26,814 22,488 20,869 19,775 18,382 Diluted 28,788 27,484 21,866 20,493 18,382
1 GenRad, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Operating Results OVERVIEW GenRad, Inc. (the "Company" or "GenRad") commenced operations as a corporation in June 1915. The Company provides manufacturers and OEMs with hardware, software and services to optimize manufacturing and after-market service productivity through increased yields and lower life cycle costs. GenRad employs approximately 1,400 employees worldwide, of whom 35 percent are applications, software and hardware engineers. The Company offers products and services in two core business areas: electronic manufacturing systems ("EMS") and advanced diagnostic solutions ("ADS"). EMS, headquartered in Westford, Massachusetts, is a leading supplier of integrated test and inspection solutions that provide electronic manufacturers the ability to manage and control their manufacturing processes. ADS, headquartered in Manchester, England, is a leading supplier of diagnostic information solutions, specializing in complex electrical and electronic systems for automotive, aerospace, agriculture and related industries. The fiscal year ended January 3, 1998 includes 53 weeks. The two prior fiscal years, which ended on December 28, 1996 and December 30, 1995, respectively, each include 52 weeks. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items in the Company's Consolidated Statement of Operations.
1997 1996 1995 NET PRODUCT AND SERVICE SALES 100.0% 100.0% 100.0% COST OF PRODUCTS AND SERVICES SOLD 46.5 47.5 51.6 ---------------------------------------- GROSS MARGIN 53.5 52.5 48.4 SELLING, GENERAL AND ADMINISTRATIVE 28.9 29.4 28.8 RESEARCH AND DEVELOPMENT 8.4 9.0 9.9 RESTRUCTURING CREDIT -- -- (0.6) --------------------------------------- OPERATING INCOME 16.2 14.1 10.3 OTHER EXPENSE (0.3) (0.1) (2.3) INCOME TAX BENEFIT (PROVISION) 1.5 0.9 (0.3) --------------------------------------- NET INCOME 17.4% 14.9% 7.7% =======================================
OPERATING RESULTS - 1997 VS. 1996 Orders for the Company's products and services increased to $237.0 million for the twelve months ended January 3, 1998, from $181.0 million for the prior fiscal year. The increase in orders resulted from the strong demand in all aspects of the Company's business, particularly from customers in the following industries: contract manufacturing, computer manufacturing, telecommunications, data communications and transportation. Demand was strong in all of the Company's major markets: North America, Europe and Asia. Backlog at the end of 1997 was $24.9 million compared to $24.7 million at the end of 1996. The Company believes that a substantial portion of the 1997 backlog will be recognized as revenue during the first quarter of 1998. Net product and service sales were $236.8 million for the twelve months ended January 3, 1998, as compared to $183.5 million for the prior fiscal year. The increase was due to increased sales in both EMS and ADS. The EMS increase was due primarily to an increase in product volume as well as the continuing shift towards the Company's higher priced, higher pin count machines required by computer and contract manufacturing customers and the strong demand for the Company's functional test equipment in the data communication and telecommunication marketplaces. The ADS increase was due primarily to hardware sales to new customers and the initial application software revenue from a Ford Motor Company contract which was entered into in 1997. 14 GenRad, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Operating Results OPERATING RESULTS - 1997 VS. 1996 (CONTINUED) Sales to international markets accounted for 52.3% of total sales for the twelve months ended January 3, 1998, as compared to 55.1% for the prior fiscal year. Less than 10% of the sales to international markets for the twelve months ended January 3, 1998 and the prior fiscal year were sales to the Asian market. Product and service sales from international markets are subject to the risks of currency fluctuations and other customary risks associated with international markets. Product gross margins as a percent of sales increased to 56.2% for the twelve months ended January 3, 1998, as compared to 55.3% for the prior fiscal year. Product margins improved due to the continued shift towards higher pin count machines, increased sales from the introduction of new product offerings and the continued efforts to minimize product costs. Service gross margins as a percent of sales increased to 42.5% for the twelve months ended January 3, 1998, as compared to 42.3% for the prior fiscal year. Service margins improved due to a shift in the service mix towards value-added services such as training, software support and applications programming, which historically have had higher gross margins than maintenance services. Selling, general and administrative expenses increased for the twelve months ended January 3, 1998, to $68.4 million from $54.1 million in the prior fiscal year. As a percent of sales, selling, general and administrative expenses were 28.9% as compared to 29.4% for the comparable period in 1996. Selling expenses increased due to the expansion of the sales force in its existing and new regions and incremental commission expense associated with the 31% increase in orders in 1997, as compared to 1996. Facility expenses increased as a result of the relocation of the corporate headquarters to Westford, Massachusetts in June of 1997, as well as the relocation of the European headquarters in Manchester, England in October of 1996. These increased costs were partially offset by a $0.9 million gain in the fourth quarter of 1997 for the settlement of a portion of the Company's U.S. defined benefit pension plan through the purchase of non-participating group annuity contracts for approximately one third of the plan's participants. Research and development expenses increased for the twelve months ended January 3, 1998 to $19.9 million from $16.5 million in the prior fiscal year. As a percent of sales, research and development expenses were 8.4%, as compared to 9.0% for the prior fiscal year. In 1997, the three primary research and development projects were for the design of a GR Vision product, enhancements to a Mitron software suite of products and a redesign of the in-circuit test equipment operating systems. The Company capitalized $0.2 million and $1.2 million of software development costs for the fiscal years ended January 3, 1998 and December 28, 1996, respectively. Operating income increased to $38.5 million for the twelve months ended January 3, 1998 from $25.9 million in the prior fiscal year. For the fiscal year ended January 3, 1998, operating profit was 21.6% in North America and 7.2% in Europe as compared to 24.4% and 3.9%, respectively, in the prior fiscal year. Operating margins are lower in the European sector as compared to North America primarily due to the combination of heavy price competition, lower margin machines being sold and additional European infrastructure costs required to support multiple languages and sites. The Company continues to support the European markets to maintain its status as a worldwide solution provider and is working to minimize costs through engineered cost reductions. Interest expense was $0.8 million for the fiscal year ended January 3, 1998 as compared to $4.6 million for the prior fiscal year. Interest expense in 1997 related to a $12 million term loan entered into on June 26, 1997 for the purchase of furniture and fixtures for the Company's new corporate headquarters and manufacturing facilities in Westford, Massachusetts. During the prior fiscal year, interest expense of $3.1 million related to the Company's 7-1/4% convertible subordinated debentures and $0.5 million related to a credit facility. Additionally, the Company recorded $1.0 million of interest expense in the fourth quarter of 1996 to obtain a short-term financing facility, which was not utilized, for the redemption of all of its 7-1/4% convertible subordinated debentures and to replace its $15 million secured credit facilities with a $25 million unsecured credit facility. Other net expense of $0.5 million for the fiscal year ended January 3, 1998 was primarily from foreign currency exchange losses. Other net income of $4.3 million for the fiscal year ended December 28, 1996 was primarily the result of a $4.0 million gain from the sale of property, plant and equipment, primarily generated from the sale of the Company's corporate headquarters and manufacturing facility in Concord, Massachusetts. 15 GenRad, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Operating Results OPERATING RESULTS - 1997 VS. 1996 (CONTINUED) A net income tax benefit of $5.4 million was recorded in the first quarter of fiscal 1997 as compared to $2.5 million for the comparable period in 1996. The benefits represent reductions in the Company's valuation allowance for deferred taxes, which were recorded due to management's improved expectations of future income and expected utilization of the Company's domestic net operating loss carryforwards. Excluding the previously noted deferred income tax benefits, the income tax provision was $1.9 million for the twelve months ended January 3, 1998, as compared to $0.8 million for the prior fiscal year. In the fourth quarter of 1997, the Company recorded a $0.7 million net tax benefit due to a reduction in the 1997 estimated annualized effective tax rate, resulting from higher annualized profits in the U.S., as compared to Europe. At January 3, 1998, the Company had a net deferred tax asset of $61.0 million with a valuation allowance of $53.2 million. Management will continue to assess the realizability of the deferred tax asset based on actual and forecasted results. As a result of the above, the Company reported net income of $41.3 million for the twelve months ended January 3, 1998, as compared to net income of $27.3 million for the comparable period in 1996. OPERATING RESULTS - 1996 VS. 1995 Orders for the Company's products and services increased to $181.0 million for the twelve months ended December 28, 1996, compared to $153.4 million for the comparable period in 1995. The increase in orders between the periods resulted from the strong demand in all aspects of the Company's business, including strong demand from contract manufacturing, computer manufacturers, diagnostic customers, and transportation customers in the North American and Asian markets, as well as from the acquisition of Test Technology Associates, Inc. ("TTA") and Testware, Inc. ("Testware"). Backlog at the end of 1996 was $24.7 million compared to $26.3 million at year-end 1995. Net product and service sales were $183.5 million for the twelve months ended December 28, 1996, as compared to $158.8 million for the comparable period in 1995. The increase is due to increased sales in EMS and ADS; new product introductions; and incremental sales associated with the acquisition of TTA and Testware. Partially offsetting these increases were decreasing sales from the MCATES contract for the U.S. Marine Corps, a $29.3 million contract. Sales for the MCATES contract were $1.1 million for the twelve months ended December 28, 1996 as compared to $9.3 million for the comparable period in 1995, as the contract was completed in fiscal 1996. Sales to international markets accounted for 55.1% of sales for the twelve months ended December 28, 1996, as compared to 58.0% for the comparable period in 1995. Product and service sales from international markets are subject to the risks of currency fluctuations. Product gross margin as a percent of sales increased to 55.3% for the twelve months ended December 28, 1996, as compared to 49.0% for the comparable period in 1995. Product margin improvements resulted from a combination of new product offerings which yielded higher gross margins, continued improvements in controlling manufacturing costs that commenced in 1993, and a reduction of warranty costs. Service gross margins as a percent of sales decreased to 42.3% for the twelve months ended December 28, 1996, as compared to 46.4% for the comparable period in 1995. Service margins were impacted by customer funded development at a lower margin and continuing competitive pricing pressures in the maintenance business. Selling, general and administrative expenses increased for the twelve months ended December 28, 1996 to $54.1 million from $45.7 million in the comparable period of 1995. The increase in expenses is due primarily to increased selling expenses associated with increased orders, additional expenses from the newly acquired TTA and Testware subsidiaries and start-up expenses incurred to support new product offerings. Additionally, in 1995 the Company resolved all legal issues and settled patent infringement litigation with a competitor. The settlement resulted in the elimination of previously established reserves and reduced selling, general and administrative expenses by $1.3 million in 1995. Furthermore, on January 31, 1995 the Company ceased all benefit accruals under the Company's domestic noncontributory defined benefit pension plan as part of its redesigning of the Company's domestic employee benefit plans. This change resulted in the Company recognizing a curtailment gain of $1.9 million in 1995, which reduced selling, general and administrative expenses. 16 GenRad, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Operating Results OPERATING RESULTS - 1996 VS. 1995 (CONTINUED) Research and development expenses increased for the twelve month period ended December 28, 1996 to $16.5 million from $15.7 million in the comparable period in 1995. In the fourth quarter of 1996, the Company capitalized $1.2 million of software development costs. As a percentage of net product and service sales, research and development expenses prior to capitalization of software development costs decreased to 9.6% for the twelve months ended December 28, 1996 from 10.0% for the comparable period in 1995. The Company continues to invest in new product development and enhancements to existing products. As part of a 1993 restructuring, the Company established a reserve for discontinued product lines. As a result of the sale of one such product line in March 1995, $1.0 million of the reserve was reversed in 1995. During 1996, interest expense was $4.6 million as compared to $4.0 million for the comparable period in 1995. The Company recorded $1.0 million of expense in the fourth quarter of 1996 to obtain short-term financing for the redemption of all of its 7-1/4% convertible subordinated debentures, which was not utilized, and to replace its $15 million secured credit facilities with a $25 million unsecured credit facility. This was offset by interest savings of $0.4 million in the fourth quarter of 1996 due to the redemption of these debentures. Other net income increased to $4.3 million in 1996 from $0.1 million in 1995. The Company realized a $4.0 million gain from the sale of property, plant and equipment. Other net income also includes foreign currency exchange gains and other miscellaneous income of $0.3 million. A net income tax benefit of $2.5 million was recorded in the first quarter of 1996. The benefit represents a reduction in the valuation allowance for deferred taxes and was recorded due to management's improved expectations of future income and expected utilization of the Company's domestic net operating loss carryforwards in 1997. Excluding the $2.5 million income tax benefit, the income tax provision of $0.8 million for the twelve months ended December 28, 1996 increased by $0.3 million from the comparable period in 1995. Although pretax profitability increased substantially for the twelve months ended December 28, 1996, GenRad's annualized effective tax rate, excluding the $2.5 million income tax benefit, decreased due to higher profits in the U.S. as compared to Europe. The 1996 income tax expense represents U.S. and foreign income taxes. As a result of the above, the Company reported net income of $27.3 million for the twelve months ended December 28, 1996, as compared to net income of $12.3 million for the comparable period in 1995. LIQUIDITY AND SOURCES OF CAPITAL Cash and cash equivalents at January 3, 1998 totaled $21.9 million, compared to $10.6 million at December 28, 1996. The Company's current ratio at January 3, 1998 increased to 3.6 from 2.7 at December 28, 1996. Cash generated from operating activities was $12.2 million for the fiscal year ended January 3, 1998, compared to $4.8 million and $1.2 million, respectively, for the two prior fiscal years. The increase in cash provided by operating activities in the fiscal year ended January 3, 1998 is primarily attributable to an increase in overall net income. Accounts receivable and inventory increased by $35.1 million in the fiscal year ended January 3, 1998 due to the increase in sales and the maintenance of higher inventory levels to meet increasing customer demands for shorter delivery periods. An increase in current liabilities provided cash of $2.3 million in the fiscal year ended January 3, 1998 and was attributable to the general timing of vendor and employee payments. During the fiscal year ended January 3, 1998, net cash used in investing activities was $22.7 million, compared to $7.2 million and $3.4 million, respectively, for the two prior fiscal years. Capital expenditures were $24.9 million in 1997, $8.9 million in 1996 and $6.6 million in 1995. The increase in capital expenditures during the fiscal year ended January 3, 1998 is due primarily to the relocation of the Company's corporate headquarters and manufacturing facilities to Westford, Massachusetts. Fiscal 1998 capital expenditures are expected to be approximately $15 million, which includes the implementation of a new business system. Net cash provided by financing activities was $20.9 million for the fiscal year ended January 3, 1998, compared to cash provided of $4.7 million for the fiscal year ended December 28, 1996, and cash provided of $3.4 million for the fiscal year ended December 30, 1995. The increase in cash provided by financing activities in fiscal 1997, as compared to previous years, is attributable to the increase in the proceeds from issuance 17 GenRad, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Operating Results LIQUIDITY AND SOURCES OF CAPITAL (CONTINUED) of stock under the Company's employee stock plans as well as from the issuance of debt. Proceeds from the issuance of stock were $9.4 million, $6.1 million and $2.6 million in 1997, 1996 and 1995, respectively. Proceeds from the issuance of debt were $12.0 million, $0 and $0.1 million in 1997, 1996 and 1995, respectively. In the fourth quarter of 1996, the Company replaced its $12.8 million U.S. secured credit facility and its $2.2 million U.K. secured credit facility with an unsecured U.S. credit facility. The new line provides borrowings up to $25 million. There were no borrowings outstanding at January 3, 1998. The new credit facility will expire on December 31, 1998. Borrowings under the credit facility are subject to compliance with specified financial and operating covenants. In June 1997, the Company entered into an unsecured term loan which provided approximately $12 million. The proceeds of the loan were used for the purchase of furniture and fixtures for the new corporate headquarters and manufacturing facilities in Westford, Massachusetts. The term of the loan is five years and will expire on June 26, 2002. Twenty equal quarterly principal payments of $0.6 million are due, commencing in September 1997. Interest is payable quarterly in arrears at LIBOR plus 1.25%. The Company's primary source of liquidity is internally generated funds. In 1998, the Company anticipates it will fund its working capital and capital expenditure requirements, make interest payments on its borrowings and meet its cash obligations from internally generated funds and from the available credit facility. As the Company continues to invest in new product developments and enhancements to existing products, it expects research and development net expenditures to continue at approximately the same percentage of sales as prior fiscal years. EFFECTS OF INFLATION AND FOREIGN EXCHANGE Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on sales or results of operations. The Company attempts to mitigate inflationary cost increases by continuously improving manufacturing methods and technologies. Management does not expect inflation to have a significant impact on operations in the foreseeable future. The Company conducts a significant amount of its business and has a number of operating facilities in countries outside the United States (e.g., England, France, Italy, Germany, Switzerland, Singapore, Malaysia, Canada and Mexico). As a result, the Company may experience transaction and translation gains and losses because of currency fluctuations. In order to minimize foreign exchange transaction risk, the Company selectively hedges certain of its foreign exchange exposures through forward exchange contracts. The strategy of selective hedging can partially reduce the Company's vulnerability to certain of its foreign exchange exposures and the Company expects to continue this practice in the future to the extent appropriate. FACTORS THAT MAY AFFECT FUTURE RESULTS This Annual Report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results of operations and future financial conditions may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be beyond the Company's control. Factors that might cause such differences include, but are not limited to, those discussed below. The Company has experienced and expects to continue to experience fluctuations in its results of operations, particularly on a quarterly basis. The Company's expense levels are based, in part, on expectations of future revenues. If revenue levels in a particular period do not meet expectations, due to the timing of the receipt of orders from customers, customer cancellations or delays of shipments, then operating results could be adversely impacted. The market for the Company's products is characterized by rapid technological change, an increased demand for specific feature requests by customers, evolving industry standards, and frequent new product introductions. The introduction of products embodying new technology or the emergence of new industry standards or practices could render the Company's existing products obsolete or otherwise unmarketable. Future operating results are dependent upon the Company's ability to develop, design, manufacture and market technologically innovative products that meet customer needs. 18 GenRad, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Operating Results FACTORS THAT MAY AFFECT FUTURE RESULTS (CONTINUED) Competition in the markets where the Company operates is intense. The Company continues to invest in manufacturing productivity to try to minimize the impact of competitive pricing pressures, fluctuations within the Company's product mix, potential inventory obsolescence exposure and start-up manufacturing costs for new product introductions. The Company is dependent upon a number of suppliers for several key components of its products. The loss of certain of the Company's suppliers, supply shortages or increases in the costs of key raw materials could have a material adverse effect on the Company. The Year 2000 issue is the result of a computer program being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company is in the process of rectifying the Year 2000 issue in its core business systems, and it is projected to be complete by the third quarter of 1998. Both internal and external resources will be utilized, and the projected costs, which are expected to be minimal, will be expensed as incurred. The Company has established a task force to ensure that the software utilized within its wide suite of products is Year 2000 compliant and any vendor or customer related issues are addressed. At this point, the Company cannot project when it will be completed nor the estimated total costs associated with the remediation plan. Other factors which could impact future results are past and future acquisitions, strategic alliances, patent or product liability claims in excess of available insurance coverage, changes in the Company's effective tax rates, new regulatory requirements, political and economic changes, tariffs, trade restrictions, transportation delays, foreign currency fluctuations and inflation. The Company disclaims any intent or obligation to update any forward-looking statements that may be included in this report. Additionally, there can be no assurance that other factors, not included above, could impact future results. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income". This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement is required to be adopted in the Company's fiscal year-end 1998. The Financial Accounting Standards Board issued Statement No. 131, "Disclosure about Segments of an Enterprise and Related Information". This Statement requires an enterprise to report financial and descriptive information about its reportable operating income. Operating segments are components that are evaluated regularly by chief operating decision makers in deciding how to allocate resources and in assessing performance. This Statement requires a business enterprise to report a measure of segment profit or loss, certain specific revenue and expense items (including interest, depreciation, and income taxes), and segment assets. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement is required to be adopted in the Company's fiscal year-end 1998. These Statements will not affect the Company's consolidated financial position or results of operations because they impact disclosure only. 19 GenRad, Inc. and Subsidiaries Reports MANAGEMENT REPORT Management is responsible for the preparation and integrity of the consolidated financial statements appearing in this Annual Report. The financial statements were prepared in conformity with generally accepted accounting principles. Management has included in the Company's financial statements, amounts that are based on estimates and judgement, which they believe are reasonable under the existing circumstances. Management believes that its established accounting procedures and related systems of internal control provide reasonable assurance, at an appropriate cost/benefit relationship, that assets are safeguarded, that the books and records properly reflect all transactions, and the policies and procedures are implemented by qualified personnel. Our independent auditors, Price Waterhouse LLP, have audited the consolidated financial statements. Their audit was conducted in accordance with generally accepted auditing standards and provides an independent opinion about the fair presentation of the consolidated financial statements. When performing their audit, Price Waterhouse LLP considers the Company's internal control structure to the extent they deem necessary to issue their opinion on the financial statements. The Board of Directors appoints the independent auditors; ratification of the appointment is solicited annually from the stockholders. The Board of Directors, through its Audit Committee, consisting solely of outside directors of the Company, is responsible for reviewing and monitoring the Company's financial reporting and accounting practices. Price Waterhouse LLP has full and free access to the Audit Committee, and meets with the Committee, with and without the presence of management. /s/ Paul Pronsky, Jr. - --------------------- Paul Pronsky, Jr. Vice President, Chief Financial Officer and Secretary January 26, 1998 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of GenRad, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of GenRad, Inc. and its subsidiaries at January 3, 1998 and December 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP - ------------------------ Price Waterhouse LLP Boston, Massachusetts January 26, 1998 20 GenRad, Inc. and Subsidiaries Consolidated Statement of Operations YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------
1997 1996 1995 SALES: SALES OF PRODUCTS $191,120 $144,325 $122,105 SALES OF SERVICES 45,641 39,220 36,648 -------------------------------------------- TOTAL SALES 236,761 183,545 158,753 -------------------------------------------- COST OF SALES: COST OF PRODUCTS SOLD 83,738 64,500 62,277 COST OF SERVICES SOLD 26,259 22,637 19,654 -------------------------------------------- TOTAL COST OF SALES 109,997 87,137 81,931 -------------------------------------------- GROSS MARGIN 126,764 96,408 76,822 -------------------------------------------- SELLING, GENERAL AND ADMINISTRATIVE 68,376 54,061 45,736 RESEARCH AND DEVELOPMENT 19,902 16,491 15,717 RESTRUCTURING CREDIT -- -- (1,000) -------------------------------------------- TOTAL OPERATING EXPENSES 88,278 70,552 60,453 -------------------------------------------- OPERATING INCOME 38,486 25,856 16,369 -------------------------------------------- OTHER INCOME (EXPENSE): INTEREST INCOME 530 106 238 INTEREST EXPENSE (793) (4,575) (4,009) OTHER, NET (477) 4,292 136 -------------------------------------------- TOTAL OTHER EXPENSES (740) (177) (3,635) -------------------------------------------- INCOME BEFORE INCOME TAXES 37,746 25,679 12,734 INCOME TAX (BENEFIT) PROVISION (3,549) (1,656) 463 -------------------------------------------- NET INCOME $ 41,295 $ 27,335 $ 12,271 ============================================ NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: BASIC $ 1.54 $ 1.22 $ 0.59 ============================================ DILUTED $ 1.43 $ 1.11 $ 0.56 ============================================ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES USED IN COMPUTING PER SHARE AMOUNTS: BASIC 26,814 22,488 20,869 ============================================ DILUTED 28,788 27,484 21,866 ============================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 21 GenRad, Inc. and Subsidiaries Consolidated Balance Sheet JANUARY 3, 1998 AND DECEMBER 28, 1996 (IN THOUSANDS) - ----------------------------------------------------
1997 1996 ASSETS CURRENT ASSETS: CASH AND EQUIVALENTS $ 21,883 $ 10,557 ACCOUNTS RECEIVABLE, LESS ALLOWANCES OF $1,127 AND $1,431 73,006 49,142 INVENTORIES 29,896 20,250 OTHER CURRENT ASSETS 4,194 4,501 --------------------------- TOTAL CURRENT ASSETS 128,979 84,450 --------------------------- PROPERTY, PLANT AND EQUIPMENT, NET 33,479 19,168 DEFERRED TAX ASSET 7,868 2,480 INTANGIBLE ASSETS 7,107 8,486 OTHER ASSETS 1,524 1,181 --------------------------- $178,957 $115,765 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: TRADE ACCOUNTS PAYABLE $ 12,730 $ 7,171 ACCRUED LIABILITIES 12,445 15,007 ACCRUED COMPENSATION AND EMPLOYEE BENEFITS 6,884 7,096 ACCRUED INCOME TAXES 1,029 1,537 CURRENT PORTION OF LONG-TERM DEBT 2,434 - --------------------------- TOTAL CURRENT LIABILITIES 35,522 30,811 --------------------------- LONG-TERM LIABILITIES: LONG-TERM DEBT 8,519 146 ACCRUED PENSIONS AND BENEFITS 11,239 12,177 FUTURE LEASE COSTS OF UNUSED FACILITIES 4,106 4,949 OTHER LONG-TERM LIABILITIES 4,558 4,002 --------------------------- TOTAL LONG-TERM LIABILITIES 28,422 21,274 --------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: COMMON STOCK, $1 PAR VALUE, 60,000,000 SHARES AUTHORIZED; 27,349,000 AND 26,048,000 ISSUED AND OUTSTANDING 27,349 26,048 ADDITIONAL PAID-IN CAPITAL 172,026 163,099 ACCUMULATED DEFICIT (82,492) (123,787) CUMULATIVE TRANSLATION ADJUSTMENT (1,870) (1,680) --------------------------- TOTAL STOCKHOLDERS' EQUITY 115,013 63,680 --------------------------- $178,957 $115,765 ===========================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 22 GenRad, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity (Deficit) YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (IN THOUSANDS) - --------------------------------------------------------------------
TOTAL COMMON STOCK- STOCK, ADDITIONAL CUMULATIVE HOLDERS' $1 PAR PAID-IN ACCUMULATED TRANSLATION EQUITY VALUE CAPITAL DEFICIT ADJUSTMENT (DEFICIT) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 $19,738 $108,304 $(163,393) $(2,437) $ (37,788) NET INCOME -- -- 12,271 -- 12,271 TRANSLATION ADJUSTMENT -- -- -- (347) (347) STOCK ISSUED UNDER EMPLOYEE STOCK PLANS 1,494 1,132 -- -- 2,626 --------------------------------------------------------------------------- BALANCE AT DECEMBER 30, 1995 21,232 109,436 (151,122) (2,784) (23,238) NET INCOME -- -- 27,335 -- 27,335 TRANSLATION ADJUSTMENT -- -- -- 1,104 1,104 STOCK ISSUED UNDER EMPLOYEE STOCK PLANS 1,256 4,835 -- -- 6,091 STOCK ISSUED IN CONNECTION WITH COMPANY ACQUISITIONS 108 1,972 -- -- 2,080 CONVERSION OF 7-1/4% CONVERTIBLE DEBENTURES 3,452 46,856 -- -- 50,308 --------------------------------------------------------------------------- BALANCE AT DECEMBER 28, 1996 26,048 163,099 (123,787) (1,680) 63,680 NET INCOME -- -- 41,295 -- 41,295 TRANSLATION ADJUSTMENT -- -- -- (190) (190) STOCK ISSUED UNDER EMPLOYEE STOCK PLANS 1,301 8,121 -- -- 9,422 TAX BENEFIT OF STOCK OPTIONS -- 806 -- -- 806 --------------------------------------------------------------------------- BALANCE AT JANUARY 3, 1998 $27,349 $172,026 $ (82,492) $(1,870) $ 115,013 ===========================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 23 GenRad, Inc. and Subsidiaries Consolidated Statement of Cash Flows YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (IN THOUSANDS) - --------------------------------------------------------------------
1997 1996 1995 OPERATING ACTIVITIES: NET INCOME $ 41,295 $27,335 $12,271 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 9,250 6,825 5,577 LOSS (GAIN) ON DISPOSITION OF PROPERTY, PLANT AND EQUIPMENT 265 (4,034) 694 PAYMENT FOR LEASE COSTS OF EXCESS FACILITIES, NET (843) (1,671) (4,775) (DECREASE) INCREASE RESULTING FROM CHANGES IN OPERATING ASSETS AND LIABILITIES: ACCOUNTS RECEIVABLE (24,941) (3,845) (8,321) INVENTORIES (10,185) (4,211) 208 OTHER CURRENT ASSETS 173 (1,373) 1,102 DEFERRED TAX ASSET (5,388) (2,480) -- TRADE ACCOUNTS PAYABLE 5,689 (1,375) (736) ACCRUED LIABILITIES (2,305) (7,692) (2,951) ACCRUED COMPENSATION AND EMPLOYEE BENEFITS (600) (2,930) (957) ACCRUED INCOME TAXES (474) 775 (201) OTHER, NET 221 (485) (698) -------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 12,157 4,839 1,213 -------------------------------------------- INVESTING ACTIVITIES: PURCHASES OF PROPERTY, PLANT AND EQUIPMENT (24,879) (8,947) (6,598) PURCHASE OF SUBSIDIARIES -- (4,989) -- PROCEEDS FROM SALE OF PROPERTY, PLANT AND EQUIPMENT 2,175 6,769 73 PROCEEDS FROM SALE OF ASSETS HELD FOR SALE -- -- 3,157 -------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (22,704) (7,167) (3,368) -------------------------------------------- FINANCING ACTIVITIES: PROCEEDS FROM ISSUANCE OF DEBT 12,009 -- 76 REPAYMENT OF DEBT (1,337) (642) -- NET CHANGE IN REVOLVING LINE OF CREDIT -- (729) 729 PROCEEDS FROM EXERCISE OF STOCK OPTIONS 9,423 6,091 2,626 TAX BENEFIT FROM EXERCISE OF STOCK OPTIONS 806 -- -- -------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 20,901 4,720 3,431 -------------------------------------------- EFFECTS OF EXCHANGE RATES ON CASH 972 (899) (209) -------------------------------------------- INCREASE IN CASH AND EQUIVALENTS 11,326 1,493 1,067 CASH AND EQUIVALENTS AT BEGINNING OF YEAR 10,557 9,064 7,997 -------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $ 21,883 $10,557 $ 9,064 ============================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY: In conjunction with the purchase of TTA in 1996, the Company recorded a minimum future obligation of $2.0 million which was classified as accrued liabilities and other long-term liabilities. Stock issued in association with the Company's acquisitions in 1996 increased total stockholders' equity by $2.1 million. The net carrying amount of convertible debt, including unamortized debt issue costs and accrued interest, which converted to equity in 1996, was $50.3 million. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 24 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996, and December 30, 1995 NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Business: GenRad, Inc. (the "Company" or "GenRad") commenced operations as a corporation in June 1915. The Company is a leading worldwide supplier of integrated test, measurement and diagnostic solutions for the manufacture and maintenance of electronic products. The Company offers products and services in two core business areas: electronic manufacturing systems and advanced diagnostic solutions. Accounting Estimates: The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses at and during the reporting periods of the financial statements. Actual results could differ from those estimates. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated. Revenue Recognition and Accounts Receivable: Revenue from product sales is generally recognized at the time the product is shipped or delivered to the customer. Service revenue is recognized over the contractual period on a straight-line basis for service contracts or as services are performed. Revenue under certain contracts is recognized under the percentage-of-completion method. Financial instruments which potentially expose the Company to concentration of credit risks include accounts receivable. The Company maintains reserves for potential credit issues which, in the aggregate, have not exceeded management's expectations. Net Income Per Common and Common Equivalent Share: In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128), was issued which supercedes the old methodology for calculation of EPS, as promulgated under APB Opinion No. 15. The new Standard simplifies the existing computational guidelines, revises the disclosure requirements and increases the comparability of EPS data on an international basis. SFAS No. 128 requires presentation of "basic" earnings per share (which excludes dilution as a result of unexercised stock options and convertible subordinated debentures) and "diluted" earnings per share. The Statement was adopted in fiscal 1997 and all prior periods were retroactively restated. Earnings per share was calculated in accordance with SFAS No. 128 for the fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995 as follows (in thousands, except per share amounts):
1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- PER PER PER SHARE SHARE SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT - --------------------------------------------------------------------------------------------------------------------------------- BASIC: INCOME AVAILABLE TO COMMON STOCKHOLDERS $41,295 26,814 $1.54 $27,335 22,488 $1.22 $12,271 20,869 $0.59 ------- ------ ------ EFFECT OF DILUTIVE SECURITIES: ASSUMED CONVERSION OF 7-1/4% CONVERTIBLE SUBORDINATED DEBENTURES -- -- 3,131 2,981 -- -- ASSUMED EXERCISE OF STOCK OPTIONS -- 1,974 -- 2,015 -- 997 ------------------ ---------------- ---------------- DILUTED EPS: INCOME AVAILABLE TO COMMON STOCKHOLDERS AND ASSUMED CONVERSIONS $41,295 28,788 $1.43 $30,466 27,484 $1.11 $12,271 21,866 $0.56 --------------------------------------------------------------------------------------
25 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996, and December 30, 1995 NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and Equivalents: The Company considers cash on hand, certificates of deposit, loan participation notes and money market funds as cash and equivalents. Such cash equivalents have maturities of less than ninety days. Inventory Valuation: Inventories include material, labor and overhead and are stated at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment: These assets are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the assets (buildings and improvements, 3 to 15 years; machinery and equipment, 3 to 8 years; and service parts, 5 to 7 years). Intangible Assets: Goodwill, representing the excess of the purchase price over the fair value of the net assets of the acquired entities, is being amortized on a straight-line basis over the period of expected benefit of three to ten years. The Company capitalizes certain computer software development costs once technological feasibility is established. Capitalized computer software costs are amortized over the economic lives of the related products, generally two years, beginning from when the product is available for general release to customers. Computer software costs capitalized for the fiscal years ended January 3, 1998 and December 28, 1996 were $0.2 million and $1.2 million, respectively. Accumulated amortization was $0.7 million at January 3, 1998 and $0 at December 28, 1996. Amortization expense was $0.7 million in 1997 and $0 in both 1996 and 1995. Purchased software of $0.8 million, which was attributable to the acquisition of Field Oriented Engineering, AG, was recorded in the third quarter of fiscal 1996. This purchased software is being amortized on a straight-line basis over three years. Other intangibles also include the cost of patents and trademarks acquired, which are amortized on a straight-line basis over their estimated useful lives. The Company evaluates the net realizable value of its intangible assets on an ongoing basis. Should the review indicate that an intangible asset will not be recoverable, the Company's carrying value will be reduced by the estimated shortfall of the undiscounted cash flows. Foreign Currency Translation: The local currency is the functional currency (primary currency in which business is conducted) for the Company's subsidiaries with the exception of the Company's Mexican subsidiary whose functional currency is the U.S. dollar. All balance sheet accounts of foreign subsidiaries are translated at the current exchange rates and statement of operations items are translated at the average exchange rates during the year. Resulting translation adjustments are made directly to a separate component of stockholders' equity (deficit). The effect of foreign currency transaction gains and losses, included in the determination of 1997, 1996 and 1995 results of operations, was not significant. Fiscal Year: The Company's fiscal year ends on the Saturday nearest December 31. Fiscal year 1997 includes 53 weeks, whereas fiscal years 1996 and 1995 include 52 weeks. Reclassifications: Certain reclassifications were made to the 1995 consolidated financial statements to conform to the 1997 presentation. The pension curtailment gain of $1.9 million was reclassified from Restructuring and pension curtailment gain to Selling, general and administrative. 26 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996, and December 30, 1995 NOTE 2: ACQUISITIONS Test Technology Associates, Inc. ("TTA") and Testware, Inc. ("Testware"): On January 16, 1996 and November 8, 1996, respectively, the Company acquired TTA and Testware. These companies provide custom test programming, test fixture integration and other value-added services to manufacturers and users of electronic products. The acquisition of TTA was for cash and the acquisition of Testware was for cash and 80,000 shares of the Company's Common Stock. Both acquisitions were accounted for by the purchase method of accounting. Pro forma results of operations have not been presented because the effects of the acquisitions were not significant. The results of TTA and Testware are included in the 1996 financial statements beginning from the date of purchase. The excess purchase price over the net assets acquired, recorded as goodwill, is being amortized on a straight-line basis over the lesser of its useful life or 10 years. In conjunction with the purchase of TTA, the Company agreed to pay to the sellers for each of fiscal years 1996 through 1999 the greater of $0.5 million per year, or fifty percent of TTA's profit before taxes in excess of $0.3 million for the respective years. The minimum obligation of $2.0 million was recorded at the date of acquisition. At January 3, 1998 the total remaining obligation was $1.5 million, with $0.5 million classified as accrued liabilities and $1.0 million classified as other long-term liabilities. Mitron Corporation ("Mitron"): On June 20, 1996, GenRad, Inc. acquired Mitron. Mitron is a developer of an integrated family of software applications, tools and services for electronics manufacturing including its CIMBridge(R) software applications. The products enable users to generate and collect electronics manufacturing data to achieve greater control, shorten time-to-market and lower costs. In connection with the acquisition, the Company issued approximately 1,196,000 shares of GenRad Common Stock in exchange for all outstanding shares of Mitron common stock. The acquisition was accounted for as a pooling of interests, and accordingly, the consolidated financial statements and all financial data contained herein have been restated to include the accounts of Mitron for all periods presented. Financial results for each of the previously separate companies have not been presented because the effects of the acquisition were not significant. Merger costs were insignificant and were expensed in the second quarter of 1996. Field Oriented Engineering, AG ("FOE AG"): On August 14, 1996, GenRad acquired certain assets of FOE AG, consisting primarily of the software program known as TRACS(R) III, which had been and is now sold to electronic manufacturing systems customers. In close collaboration with GenRad, FOE AG developed TRACS(R) III which provides manufacturers of electronic products real-time data collection, analysis and reporting for improved manufacturing process control and paperless repair. The acquisition was accounted for by the purchase method of accounting. Pro forma results of operations have not been presented because the effects of the acquisition were not significant. The purchase price paid by GenRad in connection with the acquisition of certain assets consisted of shares of GenRad Common Stock and cash. The excess purchase price over the net assets acquired, recorded as goodwill, is being amortized on a straight-line basis over three years. NOTE 3: EXCESS FACILITY RESERVES The Company had excess facility reserves of $4.9 million and $6.6 million at January 3, 1998 and December 28, 1996, respectively. The excess facilities reserves were provided for two buildings: one in Milpitas, California with a lease expiration of March 1998 and the other in Maidenhead, England with a lease expiration date of 2013. The Milpitas, California building has been partially subleased through March 1998, and the Maidenhead building has been subleased through March 2001. As the Company continues to renegotiate leasing arrangements, the utilization of excess facilities reserves and related cash outflows may differ from the present estimates. 27 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996 and December 30, 1995 NOTE 4: DETAILS OF FINANCIAL STATEMENT COMPONENTS (IN THOUSANDS) 1997 1996 CASH AND EQUIVALENTS: CASH $ 5,118 $ 5,957 CERTIFICATE OF DEPOSIT -- 300 MONEY MARKET 11,365 -- LOAN PARTICIPATIONS 5,400 4,300 -------------------------- $ 21,883 $ 10,557 ========================== INVENTORIES: RAW MATERIALS $ 18,378 $ 10,632 WORK IN PROCESS 8,355 4,075 FINISHED GOODS 3,163 5,543 --------------------------- $ 29,896 $ 20,250 ========================== PROPERTY, PLANT AND EQUIPMENT: BUILDINGS AND LEASEHOLD IMPROVEMENTS $ 14,612 $ 2,908 MACHINERY AND EQUIPMENT 56,259 64,058 SERVICE PARTS 12,757 13,189 --------------------------- 83,628 80,155 ACCUMULATED DEPRECIATION (50,149) (60,987) --------------------------- $ 33,479 $ 19,168 ========================== INTANGIBLE ASSETS: GOODWILL $ 6,029 $ 6,029 CAPITALIZED AND PURCHASED COMPUTER SOFTWARE 2,374 2,187 OTHER INTANGIBLE ASSETS 1,534 1,333 --------------------------- 9,937 9,549 ACCUMULATED AMORTIZATION (2,830) (1,063) --------------------------- $ 7,107 $ 8,486 ========================== ACCRUED LIABILITIES: LEASE COSTS OF UNUSED FACILITIES $ 1,315 $ 1,686 CUSTOMER PREPAYMENTS 6,059 10,238 OTHER ACCRUED LIABILITIES 5,071 3,083 --------------------------- $ 12,445 $ 15,007 ========================== ACCRUED PENSION AND BENEFITS: ACCRUED U.S. PENSION COST $ 4,258 $ 5,507 ACCRUED FOREIGN PENSION COST 4,247 4,159 ACCRUED POSTRETIREMENT BENEFIT COST 2,734 2,511 --------------------------- $ 11,239 $ 12,177 ========================== 28 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996 and December 30, 1995 NOTE 5: DEBT Term Loan: On June 26, 1997, the Company entered into a five year term loan which provided approximately $12 million for the purchase of furniture and fixtures for the Company's new corporate headquarters and manufacturing facilities in Westford, Massachusetts. The principal of the loan is repayable in twenty equal quarterly payments of $0.6 million. Interest is payable quarterly in arrears at LIBOR plus 1.25%. At January 3, 1998, the outstanding balance of the term loan was $11.0 million, of which $2.4 million is classified as current. Annual maturities of the term loan for the five years subsequent to January 3, 1998 are as follows: 1998 through 2001 - $2.4 million per year; and 2002 - $1.4 million. Convertible Subordinated Debentures: On October 22, 1996, the Company announced its redemption of all $50 million of its 7-1/4% convertible subordinated debentures due in 2011 at par value plus accrued interest to the redemption date. Prior to the November 6, 1996 redemption date, holders of the debentures converted $49.6 million of principal into common stock at a price of $14.375 per share. The remaining principal was redeemed in cash totaling $0.4 million, including accrued interest and bond redemption costs. The net carrying amount of convertible debt, including unamortized debt issue costs and accrued interest, which was converted to equity was $50.3 million. The Company recorded $1.0 million of interest expense in the fourth quarter of 1996 to obtain short-term financing for the redemption of all of its 7-1/4% convertible subordinated debentures, which was not utilized, and to replace its $15 million secured credit facilities with a $25 million unsecured credit facility. Line of Credit: The Company has a $25 million credit facility. Borrowings under the credit facility will expire on December 31, 1998 and are subject to compliance with specified financial and operating covenants. Interest is payable at the lesser of (i) the prime interest rate, or (ii) under a LIBOR option, with borrowing spreads of LIBOR plus 1.25% to LIBOR plus 1.75%. The unused commitment fee ranges from 0.250% to 0.625% based upon the Company's financial performance. There were no borrowings outstanding on the line of credit at January 3, 1998. Interest Paid: Interest paid amounted to $0.5 million in 1997, $5.1 million in 1996 and $4.0 million in 1995. NOTE 6: FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company operates internationally and is exposed to market risks from changes in foreign exchange rates. Derivative financial instruments are utilized by the Company to partially mitigate those risks. The Company does not hold or issue financial instruments for trading purposes. The Company enters into foreign exchange contracts to hedge certain purchases and accounts receivable denominated in foreign currencies (principally European currencies). The term of the currency derivatives is rarely more than six months. Market value gains and losses are recognized and the resulting gain or loss offsets foreign exchange gains or losses on those transactions. The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk that the eventual net cash inflows resulting from the sale of products to foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates. At January 3, 1998, the Company had contracts comprised primarily of European currencies maturing through June 25, 1998 to sell $17.4 million, net, of foreign currency at various rates. NOTE 7: STOCK PLANS Stock Option and Restricted Stock Award Plans: The Company has four stock option plans: a 1982 plan for 2,700,000 shares (terminated in 1991); a 1991 plan (amended in 1993, 1994, 1996 and 1997) for 8,250,000 shares for key employees; a 1991 plan (amended in 1995) for 200,000 shares for non-employee directors, and a 1997 plan for 500,000 shares for key employees excluding directors and officers. In general, option shares granted under these plans are exercisable in installments based on years of service or stock price. Options under the 1991 and 1997 key employee plans generally become vested over a four-year period and have a maximum term of ten years. 29 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996 and December 30, 1995 NOTE 7: STOCK PLANS (CONTINUED) Options under the 1991 non-employee directors plan generally become vested upon issuance of options and have a maximum term of five years. Stock options issued under the 1991 plans may be either non-qualified stock options or incentive stock options. Stock options issued under the 1997 plan are non-qualified stock options. Certain stock options were granted in 1997 with an exercise price below the fair market value of the underlying stock. This resulted in deferred compensation expense of $1.9 million, which will be recognized over the future years of service. Compensation expense was $0.3 million in 1997 and the deferred compensation balance was $1.6 million at January 3, 1998. The 1991 Equity Incentive Plan contains provisions for stock options, as described above, and restricted stock awards. All restricted stock awards are granted subject to restrictions as to continuous employment, except in the case of death, permanent disability or retirement. One fourth of the shares vest at the end of one year from the date of grant and the remaining shares are vested at a one-fourth rate per year through the fourth year. The cost of the awards, determined as the fair market value of the shares on the date of grant, is charged to expense ratably over the vesting period. No restricted stock awards were issued in 1997, 1996 and 1995. Stock option activity is summarized below (thousands of shares):
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED TOTAL AVERAGE TOTAL AVERAGE TOTAL AVERAGE SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE - ---------------------------------------------------------------------------------------------------------------------------------- OPTIONS: OUTSTANDING AT BEGINNING OF YEAR 4,043 $ 8.88 3,514 $ 5.06 4,170 $ 4.66 GRANTED 2,593 16.19 2,021 13.44 728 5.55 EXERCISED (1,175) 6.40 (1,132) 5.16 (759) 3.08 CANCELED (418) 12.82 (360) 8.95 (625) 5.35 --------- --------- --------- OUTSTANDING AT END OF YEAR 5,043 12.88 4,043 8.88 3,514 5.06 ========= ========= ========= OPTIONS EXERCISABLE 1,896 2,644 1,466 ========= ========= ========= OPTIONS AVAILABLE FOR FUTURE GRANTS 517 195 162 ========= ========= =========
The following table summarizes information about the stock options outstanding at January 3, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------------------------------------------------------------------------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE AT 1/03/98 CONTRACTUAL EXERCISE AT 1/03/98 EXERCISE PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE - ---------------------------------------------------------------------------------------------------------------------------------- $ 0.54 - $ 3.50 306 5.7 $ 3.08 283 $ 3.25 $ 4.38 - $ 7.63 910 6.5 5.75 910 5.75 $ 8.13 - $11.38 452 7.8 8.55 452 8.55 $12.13 - $14.75 825 8.6 13.39 87 13.23 $15.00 - $18.38 2,268 9.2 16.57 113 17.77 $20.50 - $25.75 282 9.4 22.43 51 21.17 - ---------------------------------------------------------------------------------------------------------------------------------- 5,043 1,896 ==================================================================================================================================
30 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996 and December 30, 1995 NOTE 7: STOCK PLANS (CONTINUED) Employee Stock Purchase Plan: Under the Company's Employee Stock Purchase Plan, eligible employees may invest up to 10% of their base salary in shares of the Company's Common Stock. The purchase price of the shares is 85% of the fair market value of the stock on the offering commencement date or the offering termination date (typically three months after commencement date), whichever is lower. In 1994, the Plan was amended, increasing the amount of shares from 1,962,000 to 2,462,000. During the fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995, the Company issued 87,000, 74,000 and 39,000 shares under the Plan, respectively. At January 3, 1998, there were 1,873,000 shares available for future issuance. Stock Based Compensation: The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation". Had compensation cost been determined based on the fair value of the options at the grant dates for awards in 1997, 1996 and 1995 on a basis consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share on a fully diluted basis would have been reduced to the pro forma amounts indicated below: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ----------------------------------------
1997 1996 1995 NET INCOME-AS REPORTED $41,295 $27,335 $12,271 NET INCOME-PRO FORMA 33,700 22,803 10,556 BASIC EARNINGS PER SHARE-AS REPORTED 1.54 1.22 0.59 DILUTED EARNINGS PER SHARE-AS REPORTED 1.43 1.11 0.56 BASIC EARNINGS PER SHARE-PRO FORMA 1.25 1.01 0.51 DILUTED EARNINGS PER SHARE-PRO FORMA 1.21 0.96 0.48
The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
1997 1996 1995 EXPECTED LIFE (YEARS) 6 5 4 INTEREST RATE 6.6% 6.5% 6.5% VOLATILITY 66.2% 63.0% 57.4% DIVIDEND YIELD 0% 0% 0% FAIR VALUE OF OPTIONS GRANTED AT FAIR MARKET VALUE $ 11.10 $ 6.58 $ 3.27 FAIR VALUE OF OPTIONS GRANTED BELOW FAIR MARKET VALUE $ 9.55 N/A N/A
SFAS NO. 123 DOES NOT APPLY TO AWARDS PRIOR TO 1995. Director Restricted Stock Plan: In 1994, the Company adopted the 1994 Director Restricted Stock Plan (amended in 1996), which contains provisions for restricted stock awards. Up to 50,000 shares of the Company's Common Stock may be issued under the Plan. On August 31 of each year, while the Plan is in effect, each eligible non-employee director is granted a restricted stock award of 2,500 shares of the Company's Common Stock. The awards are subject to certain restrictions that generally prohibit the transfer of any shares except upon the director's death or disability, upon the director's resignation with the consent of the Board of Directors, upon a change in control of the Company as defined under the Plan, or prior to the third anniversary of the award with certain restrictions remaining through the fifth anniversary. During 1997, 1996 and 1995, the Company granted restricted stock awards for 17,500, 10,500 and 10,500 shares, respectively. Compensation expense related to these awards was not significant in 1997, 1996 and 1995. At January 3, 1998 there were 4,000 shares available for future issuance. Shareholder Rights Plan: GenRad has a shareholder rights program that was adopted June 17, 1988. Under the Plan, the holder of each share of the Company's Common Stock is entitled to purchase from the Company one share of Common Stock at a purchase price of $50.00 subject to adjustment. The Rights expire June 17, 1998 and are exercisable only if an individual or group has acquired or obtained the right to acquire beneficial 31 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996, and December 30, 1995 NOTE 7: STOCK PLANS (CONTINUED) ownership of 20% or more of the Company's Common Stock or announces a tender or exchange offer that would result in such individual or group owning 30% or more of the Company's Common Stock. Such percentages may, at the Board's discretion be lowered, although in no event below 10%. When the Rights become exercisable, they separate from the Company's Common Stock. The Company is entitled to redeem the Rights in whole at $0.02 per Right under certain circumstances. NOTE 8: INCOME TAXES The components of income before income taxes consist of the following (in thousands):
1997 1996 1995 DOMESTIC $38,942 $24,082 $11,229 FOREIGN (1,196) 1,597 1,505 ------------------------------------------ $37,746 $25,679 $12,734 ==========================================
The provision (benefit) for income taxes consists of the following (in thousands):
1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED - ----------------------------------------------------------------------------------------------------------------------------------- FEDERAL $1,088 $ (5,388) $ 219 $(2,480) $ -- $ -- FOREIGN 671 -- 520 -- 420 -- STATE 80 -- 85 -- 43 -- -------------------------------------------------------------------------------------------- $1,839 $ (5,388) $ 824 $(2,480) $ 463 $ -- ============================================================================================
A reconciliation of tax on income at the federal statutory rate to the recorded income tax (benefit) provision is presented below (in thousands):
1997 1996 1995 TAX PROVISION AT STATUTORY RATE $13,211 $ 8,988 $ 4,330 STATE INCOME TAXES LESS RELATED FEDERAL INCOME TAX BENEFITS 52 55 28 REALIZATION OF DEFERRED TAX ASSETS (11,374) (8,155) (3,893) NET REVERSAL OF DEFERRED TAX ASSET VALUATION ALLOWANCE (5,388) (2,480) -- FOREIGN EARNINGS TAXED AT DIFFERENT RATES, INCLUDING WITHHOLDING TAXES (50) (64) (2) ------------------------------------------ RECORDED INCOME TAX (BENEFIT) PROVISION $(3,549) $(1,656) $ 463 ==========================================
The temporary differences and carryforwards that gave rise to the significant deferred tax assets and liabilities as of January 3, 1998 and December 28, 1996 were as follows (in thousands):
1997 1996 DEFERRED TAX ASSETS: DOMESTIC NET OPERATING LOSSES $ 44,181 $49,193 RESEARCH AND DEVELOPMENT TAX CREDITS 8,670 9,569 ALTERNATIVE MINIMUM TAX CREDIT 633 -- FOREIGN NET OPERATING LOSSES NOT YET BENEFITED 943 -- INVENTORY VALUATION RESERVES 2,026 2,993 RETIREMENT BENEFIT ACCRUALS 2,797 3,207 RESTRUCTURING RESERVES, SEVERANCE AND LEASE COSTS OF UNUSED FACILITIES 2,848 4,136 OTHER RESERVES 939 1,978 -------------------------- TOTAL DEFERRED TAX ASSETS 63,037 71,076 VALUATION ALLOWANCE (53,162) (66,678) -------------------------- NET DEFERRED TAX ASSETS $ 9,875 $ 4,398 -------------------------- DEFERRED TAX LIABILITIES: DEPRECIATION $ (1,779) $(1,649) OTHER (228) (269) -------------------------- TOTAL DEFERRED TAX LIABILITIES (2,007) (1,918) -------------------------- NET DEFERRED TAXES RECORDED $ 7,868 $ 2,480 ==========================
32 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996 and December 30, 1995 NOTE 8: INCOME TAXES (CONTINUED) Deferred income taxes are provided to reflect the future tax consequences of differences between the book and the tax basis of assets and liabilities. At January 3, 1998 and December 28, 1996, the Company had a net deferred tax asset of $61.0 million and $69.2 million, before valuation allowance, respectively. At January 3, 1998, $1.7 million of the Company's deferred tax asset was applicable to net operating losses generated by the disqualified disposition of stock options. When realized, the related tax benefit will be credited to paid-in capital. The Company's net deferred tax asset consists primarily of the future tax benefits from domestic net operating loss carryforwards and other tax credits. Realization of the net deferred tax asset and future reversals of the valuation allowance depend on the Company's ability to generate taxable income during the respective carryforward periods. Under the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", the Company is required to recognize all or a portion of its net deferred tax asset if it is believed that it is more likely than not that all or a portion of the benefits of the carryforward losses and tax credits will be realized. In establishing the valuation reserve, management considers positive factors, including positive earnings in recent years, and negative factors including the tax basis losses incurred for eleven consecutive years through 1995; the scheduled expiration of certain tax credit and net operating loss carryovers; the competitive nature of the industry in which the Company sells its products and services; and uncertainties relating to the tax jurisdiction in which income will be generated. Based on all of these factors, primarily the positive taxable income in 1996 and 1997, the Company reversed $5.4 million and $2.5 million of the valuation allowance in the first quarter of 1997 and 1996, respectively. Management continues to assess the realizability of the net deferred tax asset on an ongoing basis, and believes that it is reasonably possible that an additional portion of the valuation allowance will be reduced in the near term. It has been the practice of the Company to reinvest unremitted earnings of foreign subsidiaries outside the United States. Accordingly, the Company does not provide for federal income taxes that would result from the remittance of such earnings. At January 3, 1998 the Company had, for tax purposes, domestic and foreign unused net operating loss carryforwards of $125.8 million and $3.0 million, respectively. The net operating losses are available to offset future income and will begin expiring in 2001. The Tax Reform Act of 1986 contains provisions that limit the net operating loss carryforwards available to be used in any given year upon the occurrence of certain events, including significant changes in ownership interests. For tax purposes, the Company has $8.7 million of investment and research credit carryforwards at January 3, 1998, which will expire starting in 1998. Net taxes paid were $1,065,000 in 1997, $154,000 in 1996 and $43,000 in 1995. NOTE 9: RETIREMENT BENEFITS U.S. Pension Plan: The Company maintains a noncontributory defined benefit pension plan which covered substantially all domestic employees. On January 31, 1995, the Company ceased all benefit accruals under this plan as part of redesigning the Company's employee benefit plans. Participants of the Plan who met the vesting requirements earned benefits based on years of service, age and the average of the employee's compensation during the last 10 years of his or her employment through January 31, 1995. The change resulted in a curtailment gain of $1.9 million, which is included in selling, general and administrative expenses in 1995. The Company's funding policy is to contribute amounts to the Plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company determined to be appropriate from time to time. On December 12, 1997, the Company used plan assets to purchase non-participating group annuity contracts for a group of participants which represented approximately one third of the Plan's liability. The purchase resulted in a $0.9 million gain in the fourth quarter of 1997 utilizing a 7-1/4% discount rate, which is included in selling, general and administrative expenses in 1997. 33 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996 and December 30, 1995 NOTE 9: RETIREMENT BENEFITS (CONTINUED) Net pension cost included the following components (in thousands):
1997 1996 1995 SERVICE COST $ -- $ -- $ 66 INTEREST COST ON PROJECTED BENEFIT OBLIGATION 3,102 2,779 2,781 ACTUAL RETURN ON PLAN ASSETS (6,090) (4,013) (2,565) NET DEFERRAL AND (AMORTIZATION) 2,664 776 (368) OTHER (BENEFIT) (925) -- (1,946) ------------------------------------------- NET PERIODIC PENSION (BENEFIT) $(1,249) $ (458) $(2,032) ===========================================
The Plan's funded status and amounts recognized in the Company's consolidated financial statements are as follows (in thousands):
1997 1996 ACTUARIAL PRESENT VALUE OF ACCUMULATED PLAN BENEFITS, INCLUDING VESTED BENEFITS OF $30,737 AND $39,772 $(30,743) $(39,800) ========================= ACTUARIAL PRESENT VALUE OF PROJECTED BENEFIT OBLIGATION FOR SERVICE RENDERED TO DATE $(30,743) $(39,800) PLAN ASSETS AT FAIR VALUE, PRIMARILY LISTED STOCK AND U.S. BONDS 28,171 38,679 ------------------------- PROJECTED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS (2,572) (1,121) UNRECOGNIZED NET ASSET AT TRANSITION (1,929) (3,282) UNRECOGNIZED NET ACTUARIAL LOSS (GAIN) 243 (1,104) ------------------------- ACCRUED U.S. PENSION COST $ (4,258) $ (5,507) =========================
The discount rate used in determining the actuarial present value of the projected benefit obligation was 7% and 7.5% at January 3, 1998 and December 28, 1996, respectively. There was no rate increase in future compensation levels to determine the actuarial present value of the projected benefit obligation at January 3, 1998 and December 28, 1996, as the Company ceased all benefit accruals on January 31, 1995. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 5% at December 31, 1994. The expected long-term rate of return on plan assets was 8% in 1997, 1996 and 1995. No contributions were required from the Company for 1997, 1996 or 1995. The Company also sponsors a defined contribution plan. The plan covers employees who work at least 1,000 hours per year and provides for contributions by the employee between 1% and 15% of an employee's salary, which is capped by the maximum amount permitted by the Internal Revenue Code. The Company matches 50% of the first 6% of the employee's contributions. Pension expense recognized for the defined contribution plan totaled $1.0 million in 1997, $0.8 million in 1996 and $0.7 million in 1995. Non-U.S. Plans: The Company has a defined benefit pension plan for one of its subsidiaries outside the U.S. For the non-U.S. defined benefit pension plan, the net pension cost included the following components (in thousands):
1997 1996 1995 SERVICE COST $ 98 $270 $141 INTEREST COST ON PROJECTED BENEFIT OBLIGATION 232 267 257 NET (AMORTIZATION) AND DEFERRAL (242) 129 (20) ---------------------------------------- NET PERIODIC PENSION COST $ 88 $666 $378 ========================================
The Plan's unfunded status and amounts recognized in the Company's financial statements are as follows (in thousands):
1997 1996 ACTUARIAL PRESENT VALUE OF ACCUMULATED PLAN BENEFITS, INCLUDING VESTED BENEFITS OF $3,039 AND $3,089 $(3,217) $(3,217) ========================= ACTUARIAL PRESENT VALUE OF PROJECTED BENEFIT OBLIGATION FOR SERVICE RENDERED TO DATE $(3,688) $(3,499) UNRECOGNIZED NET ASSET AT TRANSITION (45) (56) UNRECOGNIZED NET ACTUARIAL GAIN (514) (604) ------------------------- ACCRUED FOREIGN PENSION COST $(4,247) $(4,159) =========================
34 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996 and December 30, 1995 NOTE 9: RETIREMENT BENEFITS (CONTINUED) The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 6.5% at January 3, 1998 and 7.5% at December 28, 1996. Accrued Postretirement Benefits: Effective January 3, 1993, the Company put in place the provisions of Statement of Financial Accounting Standards No. 106 (SFAS No. 106), "Employer's Accounting for Postretirement Benefits Other Than Pensions", for its postretirement benefit plan. The Company provides certain health care and life insurance benefits for retired U.S. employees. Employees become eligible for these benefits when they reach normal retirement age while working for the Company. Prior to the adoption of this Statement, the cost was recognized as claims were paid. The Company's postretirement benefit plans were modified at the end of 1995 and include a limit on the cost of the Company's contributions for all retirees. The Plan is not funded. The following table sets forth the Plan's projected funded status (in thousands):
1997 1996 ACCUMULATED AND UNFUNDED POSTRETIREMENT BENEFIT OBLIGATION: RETIRED EMPLOYEES $(6,812) $(6,775) ACTIVE EMPLOYEES (1,127) (999) ------------------------- TOTAL ACCUMULATED AND UNFUNDED POSTRETIREMENT BENEFIT OBLIGATION (7,939) (7,774) UNRECOGNIZED NET LOSS (GAIN) 19 (269) UNRECOGNIZED TRANSITION OBLIGATION 5,186 5,532 ------------------------- ACCRUED POSTRETIREMENT BENEFIT COST $(2,734) $(2,511) =========================
The Company is recognizing the actuarial present value of the accumulated postretirement benefit obligation at transition on the delayed recognition method over 20 years. Net periodic postretirement benefit costs for fiscal 1997, 1996 and 1995 include the following components (in thousands):
1997 1996 1995 SERVICE COST $ 72 $ 62 $ 95 INTEREST COST 557 505 1,028 AMORTIZATION OF UNRECOGNIZED NET ACTUARIAL LOSS - - 24 AMORTIZATION OF TRANSITION OBLIGATION 346 345 582 ----------------------------------------- NET PERIODIC POSTRETIREMENT BENEFIT COST $ 975 $ 912 $1,729 =========================================
For measurement purposes, an 8.0%, 8.5% and 9.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal 1997, 1996 and 1995, respectively. The Company's annual per capita cost commitment for retiree medical care is capped at 1995 levels. As a result, the health care cost trend rate assumption does not have a significant effect on the amounts reported. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% at January 3, 1998 and 7.5% at December 28, 1996. 35 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996 and December 30, 1995 NOTE 10: LEASES The Company leases certain manufacturing facilities, sales and service offices and equipment under operating leases. Total rental expense for these leases amounted to $7.1 million in 1997, $4.8 million in 1996 and $4.9 million in 1995. The future minimum commitments as of January 3, 1998 for noncancelable operating leases are as follows (in thousands):
REAL ESTATE EQUIPMENT TOTAL 1998 $ 6,506 $1,260 $ 7,766 1999 5,456 939 6,395 2000 4,853 310 5,163 2001 4,510 36 4,546 2002 4,478 2 4,480 THEREAFTER 44,320 -- 44,320 ------------------------------------------ GROSS COMMITMENT $70,123 $2,547 $72,670 LESS SUBLEASE INCOME 3,282 -- 3,282 ------------------------------------------ NET COMMITMENT $66,841 $2,547 $69,388 ==========================================
NOTE 11: CONTINGENCIES On August 17, 1995, the Company settled litigation with a competitor relative to patent infringement. The Company had previously established reserves for legal fees and related costs with respect to the litigation. The settlement resulted in the elimination of previously established reserves and reduced selling, general and administrative expenses by $1.3 million in fiscal 1995. The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the results of operations or the financial position of the Company. NOTE 12: FINANCIAL INFORMATION BY GEOGRAPHIC AREA GenRad sells and services its products primarily through its own sales and service organizations consisting of sales offices and service centers located in the United States, the United Kingdom, Germany, France, Switzerland, Italy, Mexico, Malaysia and Singapore. Sales or service elsewhere is provided through independent representatives to whom GenRad provides technical and administrative assistance. GenRad's operations abroad consist of selling, marketing, distributing and servicing products, providing other types of customer support services such as software development and manufacturing of diagnostic systems. Transfer prices to foreign subsidiaries, combined with supplemental commission arrangements, are intended to produce profit margins commensurate with the sales and service effort associated with the products sold. 36 GenRad, Inc. and Subsidiaries Notes to Consolidated Financial Statements for the Years ended January 3, 1998, December 28, 1996 and December 30, 1995 NOTE 12: FINANCIAL INFORMATION BY GEOGRAPHIC AREA (CONTINUED) Certain information on a geographic basis (in thousands):
1997 1996 1995 NET SALES: NORTH AMERICA $143,032 $104,268 $ 85,292 INTERCOMPANY SALES 23,938 22,982 18,963 -------------------------------------------- TOTAL NORTH AMERICA 166,970 127,250 104,255 EUROPE 93,729 79,277 73,461 INTERCOMPANY SALES 3,881 1,332 2,869 -------------------------------------------- TOTAL EUROPE 97,610 80,609 76,330 ELIMINATIONS (27,819) (24,314) (21,832) -------------------------------------------- TOTAL $236,761 $183,545 $158,753 ============================================ OPERATING PROFIT: NORTH AMERICA $ 30,965 $ 25,454 $ 13,441 EUROPE 6,752 3,122 2,872 ELIMINATIONS 769 (2,720) 56 -------------------------------------------- TOTAL $ 38,486 $ 25,856 $ 16,369 ============================================ IDENTIFIABLE ASSETS: NORTH AMERICA $119,200 $ 70,040 $ 43,689 EUROPE 59,757 45,725 43,717 -------------------------------------------- TOTAL $178,957 $115,765 $ 87,406 ============================================
North America sales include export sales of $30.0 million in 1997, $21.9 million in 1996 and $18.6 million in 1995. Sales to one customer amounted to 10% of consolidated sales in 1997, 15% in 1996 and 16% in 1995. No other customer accounted for 10% or more of consolidated sales. 37 GenRad, Inc. and Subsidiaries Supplementary Information QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR - ----------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED JANUARY 3, 1998: NET SALES AND SERVICE SALES $52,500 $61,050 $58,870 $64,341 $236,761 GROSS MARGIN 29,015 29,537 32,831 35,381 126,764 NET INCOME 11,717 7,921 9,605 12,052 41,295 NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: BASIC .45 .30 .36 .44 1.54 DILUTED .42 .28 .33 .41 1.43 ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 28, 1996: NET SALES AND SERVICE SALES $43,554 $45,168 $46,152 $48,671 $183,545 GROSS MARGIN 22,835 24,222 23,898 25,453 96,408 NET INCOME 6,949 5,711 5,010 9,665 27,335 NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: BASIC .32 .26 .23 .39 1.22 DILUTED .29 .24 .21 .36 1.11 ----------------------------------------------------------------------------
COMMON STOCK As of February 13, 1998 there were 3,188 stockholders of record holding 27,376,983 shares. DIVIDENDS It is the policy of the Company to retain earnings to support the growth and expansion of the Company's business. Although the Company has paid dividends in the past, there are no plans to resume paying dividends. Payment of dividends is restricted by financing agreements to which the Company is a party. STOCK PRICE INFORMATION
1997 1996 HIGH LOW HIGH LOW - ---------------------------------------------------------------------------------------------- 1ST QUARTER 23-3/4 11-7/8 13-3/8 8-1/8 2ND QUARTER 22-15/16 13-5/8 17-5/8 11-3/4 3RD QUARTER 30-1/8 20-1/16 16-3/4 11-7/8 4TH QUARTER 34 23-7/16 23 15-5/8
This Annual Report contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from results discussed in the forward-looking statements due to a number of important factors, including, but not limited to, those discussed in the section "Factors That May Affect Future Results" of this Annual Report. 38 GenRad, Inc. and Subsidiaries Investors' Reference Guide COMMON STOCK The Company's Common Stock is listed and traded on the New York Stock Exchange (trading symbol "GEN"). TRANSFER AGENT AND REGISTRAR FOR COMMON STOCK BankBoston is the Company's stock transfer agent and registrar and maintains the stockholder accounting records. The agent will respond to questions regarding change of ownership, lost stock certificates and consolidation of accounts. Please direct questions of this nature to BankBoston's Consumer Service Department at (617) 575-3120. A change of address should be reported promptly by sending a signed and dated letter to BankBoston. Stockholders should state the name in which the stock is registered, account number, social security number and the new address. Please mail correspondence to: BankBoston c/o Boston EquiServe Investor Relations Department Mail Stop: 45-02-64 P.O. Box 8040 Boston, MA 02266-8040 Stockholders can access the EquiServe home page at the following web address: http://www.equiserve.com INVESTOR RELATIONS For information about the Company, please see the GenRad Home Page at http://www.genrad.com. Inquiries from stockholders and the financial community are welcome by telephone, fax or letter and should be directed to: Walter A. Shephard Nancy A. Miller Treasurer and Vice President, Investor Relations Director, Corporate Relations GenRad, Inc. GenRad, Inc. 101 Federal Street, 22nd Floor 101 Federal Street, 22nd Floor Boston, MA 02110-1817 Boston, MA 02110-1817 (978) 589-7440 Phone (978) 589-7144 Phone (978) 589-2002 Fax (978) 589-2002 Fax shephardwa@genrad.com millern@genrad.com
FORM 10-K AND OTHER DOCUMENTS The Company's Form 10-K for the fiscal year ended January 3, 1998, filed with the Securities and Exchange Commission, interim reports and additional information about the Company, its products, and the market it serves, can be obtained by request to the Corporate Relations office (above). By using GenRad, Inc.'s Investor Relations FAX-ON-DEMAND Service, you can receive GenRad's most current stockholder information. Please call 1-800-469-1261. ANNUAL MEETING The Annual Meeting of Stockholders will be held in Boston, Massachusetts on Thursday, May 14, 1998, 11:00 a.m. at the BankBoston auditorium. All stockholders are cordially invited to attend. INDEPENDENT ACCOUNTANTS Price Waterhouse LLP Boston, Massachusetts GENERAL LEGAL COUNSEL Nutter, McClennen & Fish, LLP Boston, Massachusetts GenRad, Inc. is an Equal Opportunity Employer. All employment related action(s) are taken without regard to race, color, sex, national origin, sexual orientation, religion, physical/mental disability, or veteran status. Additionally, the Company is committed to maintaining an atmosphere free of discrimination and one which fosters an environment that enables all employees to work to their potential. 39 GenRad, Inc. and Subsidiaries Corporate Data DIRECTORS William S. Antle III (1,2) President and Chief Executive Officer Oak Industries, Inc. Russell A. Gullotti (1,3) Chairman, President and Chief Executive Officer National Computer Systems, Inc. Lowell B. Hawkinson (2,4) Chairman and Chief Executive Officer Gensym Corporation James F. Lyons President and Chief Executive Officer GenRad, Inc. Richard G. Rogers (2,4) President Tokyo Electron Massachusetts, Inc. William G. Scheerer (3,4) President Performance QUEST LLC Adriana Stadecker (1,3) Director, Human Resources BTR plc. Ed Zschau (1,2,4) Professor of Management Harvard Business School (1) Member of Audit Committee (2) Member of Compensation Committee (3) Member of Corporate Governance Committee (4) Member of the Technology and Quality Committee SENIOR MANAGEMENT TEAM James F. Lyons President and Chief Executive Officer Paul Geere Vice President, Managing Director Advanced Diagnostic Solutions Lori B. Hannay Vice President, Worldwide Human Resources Sarah H. Lucas Vice President, Chief Strategic Officer Gary H. Mueller Vice President, General Manager Mitron Corporation Paul Pronsky, Jr. Vice President, Chief Financial Officer and Secretary Brian C. Quirk Vice President, Global Manufacturing Michael W. Schraeder Vice President, Worldwide Sales and Service Nan Xia Vice President, Global Software Development CORPORATE OFFICE 7 Technology Park Drive Westford, Massachusetts 01886-0033 USA MANUFACTURING AND SERVICE CENTERS Advanced Diagnostic Solutions Manchester, UK Dearborn, Michigan USA Electronic Manufacturing Systems Westford, Massachusetts USA Mitron Corporation Portland, Oregon USA Test Technology Associates, Inc. Milpitas, California USA Fern Park, Florida USA Hudson, Massachusetts USA Lewisville, Texas USA SALES OFFICES Irvine, California USA San Jose, California USA Altamonte Springs, Florida USA Arlington Heights, Illinois USA Frederick, Maryland USA Westford, Massachusetts USA Novi, Michigan USA Portland, Oregon USA Plano, Texas USA Cedex, France Ismaning, Germany Milan, Italy Penang, Malaysia Guadalajara, Mexico Science Park, Singapore Zurich, Switzerland Maidenhead, UK Manchester, UK Windsor, UK 40 EX-21 6 SCHEDULE OF SUBSIDIARIES EXHIBIT 21 GenRad, Inc. Schedule of Subsidiaries as of January 3, 1998 Subsidiary Name State/Jurisdiction of Incorporation - --------------- ----------------------------------- GenRad Canada Limited Canada GenRad Asia PTE Limited Singapore GenRad SA France GenRad GmbH Germany GenRad China Limited China GenRad Benelux B.V. Netherlands GenRad Europe Limited England GenRad Limited England GenRad Holdings Limited England GenRad Securities Corporation Massachusetts GenRad Mexico Incorporated Delaware Mitron Corporation Oregon Mitron Europe Limited England All subsidiaries are Consolidated Subsidiaries and do business under their own name. EX-23.1 7 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 2-85614, No. 2-89950, No. 33-28715, No. 333-09675 and No. 333-19685) and the Registration Statements on Form S-8 (No. 333-43445, No. 2-92786, No. 2-92800, No. 33-1667, No. 33-10658, No. 33-53869, No. 33-35918, No. 33-53871, No. 33-53867, No. 33-42789, No. 33-52009, No. 33-60153 and No. 333-05235) of GenRad, Inc. of our report dated January 26, 1998 appearing in the Annual Report to Stockholders which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the application of such report to the Financial Statement Schedule for the three years ended January 3, 1998 when such schedule is read in conjunction with the financial statements referred to in our report. The audits referred to in such report included this schedule. /s/ PRICE WATERHOUSE LLP ------------------------ PRICE WATERHOUSE LLP Boston, Massachusetts February 23, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JANUARY 3, 1998 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 3, 1998 FOR GENRAD, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. U.S. DOLLARS YEAR JAN-03-1998 JAN-03-1998 1 21,883 0 74,133 1,127 29,896 128,979 83,628 50,149 178,957 35,522 0 0 0 27,349 87,664 178,957 191,120 236,761 83,738 109,997 88,225 0 793 37,746 (3,549) 41,295 0 0 0 41,295 1.54 1.43
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