-----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, I/2uMSUU5cf7IUAVvsWGVj1vTaA1BtJs+CHrMopnnpTllPu/Tm1DkkxwmPojRAGF uilT/IMhThpDhcBwIeApKQ== 0000073568-97-000005.txt : 19970306 0000073568-97-000005.hdr.sgml : 19970306 ACCESSION NUMBER: 0000073568-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970305 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OAK INDUSTRIES INC CENTRAL INDEX KEY: 0000073568 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC CONNECTORS [3678] IRS NUMBER: 361569000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04474 FILM NUMBER: 97551060 BUSINESS ADDRESS: STREET 1: 1000 WINTER STREET STREET 2: BAY COLONY CORP CENTER CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 6178900400 MAIL ADDRESS: STREET 1: BAY COLONY CORPORATE CENTER STREET 2: 1000 WINTER STREET CITY: WALTHAM STATE: MA ZIP: 02154 FORMER COMPANY: FORMER CONFORMED NAME: OAK ELECTRONETICS CORP DATE OF NAME CHANGE: 19720827 10-K 1 MAIN DOCUMENT =========================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K ------------------ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 COMMISSION FILE NO. 1-4474 ------------------ OAK INDUSTRIES INC. (Exact name of Registrant as specified in its charter) DELAWARE 36-1569000 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 1000 WINTER STREET WALTHAM, MASSACHUSETTS 02154 (Address of principal executive offices) (Zip Code)
(617) 890-0400 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, $0.01 par value, together with New York Stock Exchange Junior Prefered Stock Purchase Rights Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No 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 [X]. The aggregate market value of Registrant's Common Stock held by persons who are not affiliates of Registrant was $380,682,178 on February 19, 1997. The Registrant had 18,236,272 shares of Common Stock, $0.01 par value, issued and outstanding on February 19, 1997. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement to be filed no later than March 31, 1997......................Part III, Items 10-13 =========================================================================== PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS Oak Industries Inc. (the "Company") was incorporated under the laws of the State of Delaware in 1960. The predecessor of the Company was incorporated in 1932 under the laws of the State of Illinois. The present corporate name was adopted in 1972. The Company's executive offices are located at 1000 Winter Street, Waltham, Massachusetts 02154, and its telephone number is (617) 890-0400. The Company operates entirely in one industry segment, the Components Segment. The Components Segment designs, manufactures and sells active and passive components for communications networks including cable connectors, frequency control devices and fiber optic lasers. This segment also designs, manufactures and sells components for the home gas cooking appliance industry as well as a broad line of control and sensing devices for use in testing equipment and industrial applications. On February 26, 1996, the Company sold its 49% interest in Video 44 (WSNS-TV Channel 44), and received net proceeds of $29.4 million which was used to reduce debt. The Company recorded a pre-tax gain of $20.5 million from the sale. On October 8, 1996, the Company sold its Nordco Inc. ("Nordco") subsidiary to an affiliate of Banc One Venture Corporation and members of Nordco management for net cash proceeds of approximately $19.4 million. Nordco had previously been reported as the "other" segment and as a result of the sale, the Company has restated prior year consolidated financial statements to reflect Nordco as a discontinued operation. On November 1, 1996, the Company purchased the 20% interest in Connector Holding Company ("Connector") owned by certain affiliates of Bain Capital, Inc. ("Bain") for approximately $95.0 million in cash, including transaction expenses. Connector owns 85% of Gilbert Engineering Co., Inc. ("Gilbert"), and as a result of this transaction the Company acquired Bain's 17% indirect interest in Gilbert. The acquisition was accounted for as a purchase, and accordingly, the minority interest expense previously related to Bain is excluded from the Company's consolidated financial statements subsequent to the date of acquisition. Goodwill of approximately $72 million resulting from this acquisition is being amortized over 36 years. The purchase price was financed with the proceeds from a new $300 million revolving credit facility (as discussed below). On November 1, 1996, the Company entered into a new credit agreement with various lenders that provides for a $300 million unsecured revolving credit facility (the "Facility"). On November 1, 1996, borrowings of $95 million under the Facility were used to purchase the minority interest of Connector owned by Bain and $21 million was used to refinance existing indebtedness of the Company. The Company's previously existing credit agreements were terminated on November 1, 1996. The Company incurred a non-cash, after tax charge of approximately $0.9 million in 1996 related to the early extinguishment of the former credit facilities. On November 15, 1996, the Company agreed to purchase the 15% interest in Gilbert owned by management of Gilbert. The Company purchased 7.5% of Gilbert from Gilbert management in the fourth quarter of 1996 at a purchase price of approximately $30.6 million. The purchase price was financed with the borrowings under the Facility. This acquisition was accounted for as a purchase and accordingly the minority interest expense related to the portion purchased from Gilbert management is excluded from the Company's consolidated financial statements subsequent to the date of acquisition. Goodwill of approximately $20 million resulting from this acquisition is being amortized over 36 years. The Company now owns 92.5% of Gilbert. The Company intends to purchase the remaining 7.5% interest owned by certain members of Gilbert management over the next two years at a price that will be an agreed multiple of Gilbert's earnings before interest and taxes. These transactions will be financed with working capital and borrowings under the new Facility. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENT The Company's operations are conducted in one industry segment, the Components Segment. For information regarding sales, operating income and identifiable assets, see Note 10 of the Notes to Consolidated Financial Statements, which is incorporated herein by reference. (C) NARRATIVE DESCRIPTION OF BUSINESS Overview The Company manufactures coaxial connectors for CATV systems, frequency control devices for wireless communications, fiber optic components for communications, controls for home gas cooking appliances, and switches and encoders for test and measurement and communications. Business Strategy The Company's business strategy is to establish and maintain a leading position in markets with strong underlying growth characteristics. The Company attempts to achieve this position by providing a broad line of high quality, low cost products in each of its business lines. Most of the Company's customers are equipment manufacturers or communications service providers, and products are sold on an engineer-to-engineer basis, requiring stringent performance specifications. In many of the Company's markets, competition is strong. In spite of continual pressure on prices, the Company has maintained strong margins by introducing lower cost, higher performance designs, by investing in automation equipment to improve productivity and by transferring production to low cost locales when appropriate. The Company is continuously seeking to acquire complementary product lines that can be integrated into existing businesses as well as other component manufacturers supplying the CATV, wireless and telephony industries. Communications Components The Company's communications components include coaxial cable connectors, microwave connectors, quartz-based crystals, oscillators, fiber optic laser pumps, transmitters and detectors. These products are used in a broad range of applications in communications networks. Collectively, communications components accounted for approximately 70%, 68% and 59% of the Company's net sales for 1996, 1995 and 1994 respectively. CATV Connectors. The Company's Gilbert subsidiary is a leading manufacturer of coaxial connectors for the CATV industry. The Company manufactures both trunk and feeder connectors for use in the broadband distribution network, providing connections to coaxial cable lines, amplification equipment, power supplies and other active and passive devices. The Company also manufactures drop connectors used to link the distribution network to the subscriber's home. Gilbert's operations are based in Glendale, Arizona; Amboise, France; and Vordingborg, Denmark. Gilbert sells directly to the major multiple system operators ("MSOs"), the telephone operating companies, and to leading distributors of CATV components. Gilbert sells to its international customers from its locations in Arizona, France and Denmark. Gilbert's wholly owned French subsidiary, Societe d'Appareillages Electroniques, S.A. ("S.A.E."), sells primarily to cable operators in France and Western Europe. Cabel-Con A/S, a Danish subsidiary, sells to customers in Western Europe and other international markets. The CATV industry provides a service that delivers multiple channels of video entertainment to subscribers who pay a monthly fee. A cable system consists of three principal segments. The first is the headend where the cable system operator receives television signals via satellite, terrestrial, microwave and other sources. The headend facility organizes, processes and retransmits those signals through the second segment, the distribution network, to the subscriber. The distribution network typically consists of fiber optic and coaxial cables and associated optical and electronic equipment that take the signals from the headend and then transmit them throughout the cable system. The third segment is the subscriber drop, which extends from the distribution network to the subscriber's home, and connects either directly to the subscriber's television set or to a converter box. Connectors are used throughout the system to connect coaxial cable to electronic equipment such as amplifiers and at various termination points. In general, approximately 100 trunk and feeder connectors are used for each mile of coaxial cable in the distribution network, and approximately 15-20 drop connectors at each subscriber location. Industry sources estimate that cable service is available to 95% of households in the United States and more than 66% of those households are subscribers. As a result, the Company expects the majority of domestic revenue growth for Gilbert to come from the upgrade, rebuild and maintenance of existing cable systems. MSOs are continuing to upgrade their systems in order to improve signal quality and system reliability and to expand bandwidth to provide capacity for new services such as Internet access through cable modems, near video-on-demand and telephony. Cable networks are also being rebuilt or upgraded in response to new competitive multichannel services such as direct broadcast satellite and wireless cable. Industry data indicate that the majority of domestic cable systems have not yet been upgraded to 550 MHz or above, the minimum bandwidth targeted by MSOs to facilitate the deliveries of comprehensive services. Several of the Regional Bell Operating Companies and other traditional telephone companies are building broadband networks to offer video services to compete with the MSOs. Internationally, there is extensive new cable system construction in Asia, Latin America and Europe. Gilbert is the leading worldwide manufacturer of trunk and feeder connectors and a major U.S. manufacturer of drop connectors for the cable television industry. Although the market for these products is highly competitive with respect to price, quality and delivery, the Company believes it competes favorably with respect to each of these factors. The Company's connector products are engineered to meet stringent reliability requirements. Certain parties are attempting to develop technologies that could compete with those currently employed by Gilbert's customers. If successful, these developments could have a negative impact on Gilbert's business. The primary raw materials used in the manufacture of Gilbert's connectors are aluminum and brass. Gilbert currently purchases all of its aluminum requirements from a single supplier. Although the Company believes several alternative sources of supply of aluminum are available, a sudden disruption of its supply from this vendor could have a temporary adverse effect on the manufacture and sale of Gilbert's connector products. Gilbert is not dependent on any single supplier for its other raw materials other than discussed above. Management does not foresee any problems obtaining the raw materials necessary for the manufacture of connectors. Gilbert owns a number of patents but does not consider any one patent or group of patents material to the conduct of the business. Shipments of Gilbert's products are typically made shortly after the receipt of the order. Accordingly, the Company does not consider Gilbert's order backlog at any date to be a significant predictor of Gilbert's future results of operations. Frequency Control Devices. The Oak Frequency Control Group ("OFCG") is a leading supplier of quartz-based crystals and oscillators used within the wireless, military communications and test and instrumentation markets. Products are sold through its OFC, Croven Crystals Ltd., McCoy Crystals, H.E.S. International, Inc. ("H.E.S.") and McCoy International business units, which have manufacturing operations located in Mt. Holly Springs and Mercersburg, Pennsylvania; Whitby, Ontario, Canada; Kansas City, Kansas; and Charallave, Venezuela. Crystals and oscillators are highly engineered components that provide critical timing or frequency references for wireless communications networks, wired telephony systems, satellite communications and other applications requiring a high degree of signal precision. Vertical integration provides OFCG with significant cost and technology advantages in the market place. Precision crystals are the key component used in the manufacture of oscillators for wireless communications and other communications and test and instrumentation applications. H.E.S. is a leading supplier of hermetically sealed packages for the crystal and oscillator markets. There are four primary classes of crystal oscillators: uncompensated crystal oscillators ("XO"), temperature compensated crystal oscillators ("TCXO"), voltage controlled crystal oscillators ("VCXO"), and oven controlled crystal oscillators ("OCXO"). The type used depends on the performance characteristics required and the environment to which the oscillator will be exposed. OCXOs, for which OFCG is a leading manufacturer, provide the highest level of stability and are used when very precise timing and accuracy in frequency are required, such as in base stations for cellular, personal communications systems ("PCS") paging and mobile radio networks. Typically there are one or two OCXOs and eight to sixteen TXCOs and/or VCXOs in a cellular base station. The vast majority of the XO market is comprised of computer and consumer electronic applications, for which OFCG is not a participant. These products are characterized by standard designs and commodity pricing, and are predominantly supplied by Far Eastern manufacturers. OFCG has a leadership position in the design and manufacture of precision oscillators deployed in wireless base stations to synchronize the reception and retransmission of signals for cellular telephone, PCS, paging and mobile radio networks. OFCG has designed products that can be used with all major technologies used by cellular telephone and PCS service providers, including Code Division Multiple Access ("CDMA"), Time Division Multiple Access ("TDMA"), and Global System for Mobile Communications ("GSM"). The Company continues to make significant investments in people and equipment to meet customer needs by enhancing product performance and quality while lowering costs. Development efforts are focused on incorporating advanced integrated designs to meet market demands for components with higher stability, smaller size and lower power consumption. OFCG has invested in highly automated production and test systems to increase capacity and is certified as an ISO 9001 manufacturer. There are many domestic and foreign suppliers of crystal frequency control devices. In order to compete effectively in this market, the Company places a strong emphasis on high quality and sophisticated design technology. A large percentage of the Company's frequency control products are manufactured to exacting customer specifications, and the Company relies to a large extent on its engineering staff to design, manufacture, deliver and provide post-production support to meet customer needs. Sales of the Company's frequency control products are made principally through a direct sales force and manufacturers' representatives. The Company believes there is ready availability of the raw materials, principally natural and synthetic quartz, required for the production of its frequency control products. There are multiple suppliers of such raw materials, and the Company utilizes many of these suppliers. Moreover, the Company participates in a strategic joint venture with Alfa Quartz C.A. ("Alfa"), a subsidiary of Sural C.A. Alfa has made significant capital investments in its Venezuelan operations growing synthetic quartz for the world market. The strategic alliance provides the Company a ready supply of high-quality, low-cost crystal blanks. Fiber Optic Communications Components. The Company's Lasertron Inc., subsidiary ("Lasertron"), which operates in Bedford, Massachusetts, designs, manufactures and supplies active fiber optic components, including lasers and detectors, used primarily in long distance fiber optic telephone networks. Lasertron's amplification products, 980 nm wavelength pump lasers, are used in optical amplifiers to regenerate the light, which deteriorates as it passes through the fiber. Optical amplifiers offer significant cost reduction, higher levels of performance as well as increased network reliability. For these reasons, the major long distance carriers have been incorporating optical amplifiers in their networks. Lasertron's transmission components are used to generate or detect optical signals carried on fiber optic links. Transmission components continue to be upgraded in long distance networks to meet demands for increased capacity and higher data rates. Lasertron has developed a line of high speed transmission products for this market. Regional networks, long distance access infrastructure and international markets, where capacity requirements are not as demanding, will continue to use lower speed components. Lasertron is a supplier of active components for CATV that are used to amplify fiber optic signals being transmitted through the fiber optic portion of the network, allowing fiber optic interconnections between headends and from headends into the distribution network. Lasertron also provides products for the wireless communications industry. Products are being deployed in fiber optic links through remote antennas to extend wireless coverage in areas with poor reception, such as in tunnels and subways, and in dense urban areas with high capacity requirements, including large office buildings with high levels of cellular phone activity. Lasertron sells both directly and through distributors to its domestic and export customers which are primarily manufacturers of fiber optic communications, CATV or wireless communications equipment. Lasertron is a leading independent U.S. manufacturer of fiber optic modules for the telecommunications industry. Although the market for these products is highly competitive with respect to quality, price and delivery, the Company believes that it competes favorably with respect to each of these factors. While several of Lasertron's customers have captive operations that make products for their own use and for sale to others that compete with those of Lasertron, these customers have historically relied on Lasertron to supply a portion of their product needs. The components manufactured by Lasertron incorporate semiconductor diode laser and detector elements that are coupled to an optical fiber and supplied as compact fiber optic modules. Lasertron purchases some of these elements, as well as semiconductor wafers used by the Company to produce these elements, from a sole supplier. An inability to obtain these elements or wafers would have a material adverse effect on the Company's operations. Lasertron is currently acquiring the technology and developing the expertise to manufacture elements from supplied wafers to reduce costs and to ensure consistent quality and adequate supply. This technology has been licensed from its sole supplier. If Lasertron is not successful in developing the expertise to manufacture elements from supplied wafers in 1997 or if the supply of wafers were inadequate to meet projected needs, the Company's results of operations could be materially adversely affected. Lasertron licenses a number of patents from third parties and considers several licenses to be material to the conduct of its business. Controls Components Oak Controls is the market leader for components sold to the United States gas home cooking range appliance industry and a growing supplier of components for the outdoor grill industry. These components provide solutions for gas flow regulation, burner and oven control, and ignition and temperature control. The Company supplies all the major domestic gas manufacturers under the Harper-Wyman brand name. The Company also designs and manufactures switches and encoders for applications in the test and measurement, communications, medical and military markets sold under the OakGrigsby name. Collectively, Controls Components accounted for approximately 30%, 32% and 41% of the Company's net sales for 1996, 1995 and 1994, respectively. The Controls Group is aggressively pursuing a strategy to leverage its strong domestic position to penetrate international markets in South America and Europe, reducing reliance on the domestic industry. In addition, the Company is broadening its product line to allow greater participation in the outdoor gas grill market. As the OakGrigsby Inc. ("OakGrigsby") customer base transitions from traditional analog switch technology toward digital controls, OakGrigsby's product line is moving to sensors and controls. Products all use physical input, such as motion, to provide electrical or electronic output. Broader applications for the recently introduced line of motion sensors include gas pump meters, global positioning systems and medical equipment such as MRI scanners and liquid analyzers. The Company continued its aggressive investment program to further automate production at its facilities in Princeton, Illinois and Juarez, Mexico, which will improve product quality, reduce delivery lead times and lower costs. The Company also has made significant investments in engineering resources and computer-aided design systems to shorten its new product development cycle. Harper-Wyman's Mexican manufacturing facility received ISO 9002 certification during 1996. The sale of the Company's controls products is conducted primarily through its direct sales force with assistance from a small number of manufacturers' representatives, with an increasing amount of product sold through distributors. Harper-Wyman is dependent on a small number of customers in the U.S., Mexico and South America, principally the major original equipment appliance manufacturers. The loss of any one of these customers could have a material adverse effect on Harper-Wyman's business. The market in which Harper-Wyman participates is very competitive in terms of price, quality and delivery, with significant competitors. Harper-Wyman believes it is a leading supplier to the market for its components in the domestic market. OakGrigsby supplies to a highly fragmented market and competes primarily on the basis of price, technology, innovation and distribution. Harper-Wyman's domestic control products must conform to Underwriters' Laboratories and American Gas Association specifications. All such approvals have been obtained and Harper-Wyman's quality assurance team maintains compliance with these specifications. The Controls Group is not dependent upon any single supplier for raw materials. The Controls Group owns a number of patents but does not consider any one patent or group of patents material to the conduct of business. OTHER INVESTMENTS Wuhan Telecommunications Devices Company. The Company's Lasertron subsidiary owns a 50% interest in Wuhan Telecommunications Devices Company ("WTD"), located in the Peoples Republic of China. A research facility of the Ministry of Posts and Telecommunications owns the other 50%. WTD manufactures fiber optic, semiconductor laser components for the communications industry. McCoy (Cayman) Ltd. The Company owns a 50% interest in McCoy (Cayman) Ltd. which markets synthetic quartz crystal blanks to customers outside of the United States. McCoy (Cayman) Ltd., in turn, is the sole shareholder of Industrias McCoy de Venezuela C.A., which manufactures quartz crystal blanks. McCoy International. The Company owns a 50% interest in McCoy International, a Delaware partnership, which markets synthetic quartz crystal blanks to customers in the United States. EMPLOYEES At December 31, 1996, the Company had 2,944 employees, 1,906 of whom were located in the United States and 1,038 outside the United States. Of these employees, 161 are members of unions. The Company believes its relationships with its employees are good. BACKLOG The Company's backlog of domestic and foreign orders was $68,532,000 at December 31, 1996 and $77,597,000 at December 31, 1995. Substantially all orders in backlog are considered firm and are expected to be delivered within twelve months of the dates indicated above. Consistent with practices in the Company's businesses, a portion of the backlog is unscheduled as to the delivery date. Orders are normally cancelable subject to payment by the purchaser of charges incurred by the Company up to the time of cancellation. (D) FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES For information regarding foreign and domestic operations and export sales, see Note 10 of the Notes to Consolidated Financial Statements, which is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the name, age, position and offices of all executive officers of the Company. The term of office of all executive officers will expire upon the holding of the first meeting of the Board of Directors following the 1997 Annual Meeting of Stockholders.
Name Age Position - --------- ------ ----------- William S. Antle III...... 52 Chairman of the Board since May 1996. President and Chief Executive Officer since December 1989. From 1980-1989, Mr. Antle was at Bain and Company, an international strategy consulting firm, most recently as Executive Vice President. From 1973-1980, Mr. Antle was an executive at Cummins Engine Company, a manufacturer of diesel engines, where from 1976-1980, he served as General Manager of several manufacturing facilities in the United Kingdom. Coleman S. Hicks.......... 53 Senior Vice President, General Counsel, and Secretary of Oak Industries Inc. and President, Oak Frequency Control Group since September 1995. Prior to that time, Mr. Hicks was a partner at Covington and Burling, a Washington, D.C. law firm that he joined in 1972. From February 1979 until 1981, Mr. Hicks served as General Counsel of the Department of the Navy. Pamela F. Lenehan......... 44 Senior Vice President, Corporate Development and Treasurer since February 1995. From 1981 until December 1994, Ms. Lenehan was at CS First Boston, an investment banking firm, most recently as Managing Director-Investment Banking. From 1974-1981, Ms. Lenehan was a lending officer at the Chase Manhattan Bank where she was a Vice President in the Corporate Banking Department. Francis J. Lunger......... 51 Senior Vice President and Chief Financial Officer since November 1995. From August 1995 to November 1995, Mr. Lunger was Acting Chief Executive Officer and from March 1994 to August 1995, Chief Administrative Officer of Nashua Corporation, a manufacturer of office products. From January 1983 to March 1994, Mr. Lunger worked at Raychem Corporation, a specialty materials company, where he most recently was Vice President and Group General Manager for the Interconnect Components and Medical Division, having previously served as Vice President, Finance. From July 1976 to January 1983, Mr. Lunger was employed by Baxter International in a number of positions including Vice President, Travenol Home Health Care, Corporate Controller and Vice President Finance, Travenol International.
ITEM 2. PROPERTIES The Company believes that its plants and facilities are suitable and adequate for its business. They are well maintained, in sound operating condition, and in regular use. The table below sets forth the location and general character of important properties of the Company. Properties without reference to leases are owned by the Company.
Floor Space (Approximate Location Square Feet) ---------- ------------- Amboise, France {B,C}.................................. 35,000 (2 buildings) Aurora, Illinois (lease expires 11/30/99) {B}.......... 18,000 Bedford, Massachusetts (lease expires 4/30/06) {B,C}... 80,000 (2 buildings) Glendale, Arizona (leases expire 12/31/97, 12/31/98 and 8/31/10) {B,C}................................. 202,820 (5 buildings) Juarez, Mexico (lease expires 5/16/98) {C.............. 51,000 Kansas City, Kansas {B,C} (lease expires 9/30/02)...... 19,000 Mercersburg, Pennsylvania {C}.......................... 34,000 (2 buildings) Mt. Holly Springs, Pennsylvania {B,C}.................. 79,000 (2 buildings) Phoenix, Arizona (leases expire 8/31/06 and 1/31/99) {B,C}................................. 43,000 (2 buildings) Princeton, Illinois {C}................................ 235,000 (2 buildings) Sugar Grove, Illinois (leases expire 6/18/97 and 12/14/01) {B,C}................................ 86,000 (2 buildings) Vordingborg, Denmark {B,C}............................. 31,000 Waltham, Massachusetts (lease expires 7/31/00) {A,B}... 15,000 Whitby, Ontario, Canada {B,C}.......................... 25,000 Zaragosa, Mexico (lease expires 6/30/97) {C}........... 97,000 {A} Corporate Headquarters. {B} Office Space. {C} Manufacturing Facilities.
ITEM 3. LEGAL PROCEEDINGS Various pending or threatened legal proceedings by or against the Company or one or more of its subsidiaries involve alleged breaches of contract, torts and miscellaneous other causes of action arising in the ordinary course of business. The Company's management does not consider any of such proceedings to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1996, no matters were submitted to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The markets on which the common stock of the Company is traded are the New York Stock Exchange and the Pacific Stock Exchange. As of February 19, 1997, there were approximately 6,245 stockholders of record of common stock of the Company. Information regarding the trading price of the Company's common stock as reported on the New York Stock Exchange for each quarterly period during the last two fiscal years is set forth below. No dividends on the Company's common stock were paid during 1996 or 1995. (See description of dividend restrictions included in the Revolving Credit Facility Agreement in Note 5 of the Notes to Consolidated Financial Statements.)
Price of Common Stock ---------------------------- 1996 1995 ------ ------ High Low High Low ---- --- ---- --- First Quarter............... $25 5/8 $18 3/4 $28 3/8 $22 1/2 Second Quarter.............. 31 3/4 23 1/8 30 3/8 25 1/8 Third Quarter............... 33 3/4 27 1/8 32 22 3/8 Fourth Quarter.............. 39 22 30 3/8 16 1/2
ITEM 6. SELECTED FINANCIAL DATA FINANCIAL RESULTS
YEAR ENDED DECEMBER 31 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Net sales................ $ 303,536 $ 255,364 $ 230,894 $ 204,417 $ 126,146 Purchased in-process research and development expense... -- 80,872 -- -- -- Operating income (loss).. 46,987 (27,897) 44,113 29,815 5,503 Interest expense......... 5,767 6,273 5,906 6,973 520 Income (loss) from continuing operations before income taxes, minority interest and extraordinary charge. 62,012 (30,926) 41,840 25,246 8,527 Income (loss) from continuing operations. 31,976 (52,983) 41,041 25,710 10,206 Net income (loss)........ 41,836 (52,124) 42,446 26,660 14,438 Earnings per common share: Continuing operations. 1.71 (2.87) 2.23 1.42 .58 Net income (loss)..... 2.24 (2.83) 2.31 1.47 .82 Cash dividends per common share................. -- -- -- -- -- FINANCIAL POSITION Working capital.......... $ 79,019 $ 73,168 $ 67,544 $ 64,772 $ 50,953 Plant and equipment, net. 65,026 53,074 36,253 33,084 32,290 Total assets............. 374,285 312,544 279,800 231,201 221,013 Long-term debt, net of current maturities. 138,161 91,570 34,403 57,349 71,486 Stockholders' equity..... 171,723 119,213 167,150 126,919 98,074 GENERAL STATISTICS Capital expenditures..... $ 23,205 $ 16,942 $ 6,723 $ 6,946 $ 3,996 Depreciation............. $ 10,028 $ 7,694 $ 6,569 $ 6,037 $ 4,290 Amortization of intangible assets..... $ 3,609 $ 2,760 $ 2,372 $ 2,413 $ 706 Average common shares outstanding........... 18,684,281 18,423,014 18,384,342 18,100,104 17,666,745 Number of recordholders (at year-end)......... 6,312 7,144 8,346 9,732 12,146 Number of employees (at year-end)......... 2,944 2,931 2,776 2,549 2,179 Salaries and wages....... $ 72,054 $ 65,543 $ 59,938 $ 49,833 $ 37,274
IITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 1996 Compared to 1995 Sales for 1996 were $303.5 million, an increase of 18.9% over the $255.4 million in 1995 due primarily to incremental sales of Lasertron Inc., ("Lasertron") purchased in September 1995 and increased sales of controls components. The Company reported net income of $41.8 million in 1996 compared to a net loss of $52.1 million in 1995. Several unusual transactions affected the results of operations over the past two years. Net income for 1996 reflects a restructuring charge of $3.8 million, a gain of $21.5 million for the sale of equity investments, a gain of $9.4 million on the sale of a subsidiary, a $4.2 million charge associated with the write-down of certain assets and a reserve for potential legal and environmental matters, a $0.9 million charge to cost of goods sold related to the write-up of Gilbert inventory required by purchase accounting and an extraordinary charge of $0.9 million net of tax related to the early extinguishment of debt. In early 1997, the Company discovered that the controller of one of its divisions, in collusion with two of his assistants, capitalized certain amounts which should have been expensed in the periods incurred. Because the irregularities which occurred in 1995 were not material to the 1995 results ($1.1 million pre-tax, $0.7 million after-tax), the 1995 financial statements were not restated. The irregularities which occurred in 1995 are reflected as an unusual item below in 1996 results. Net income for 1995 reflects non-cash charges of $82.9 million associated with the acquisition of Lasertron, including an $80.9 million charge for purchased in-process research and development and a $2.0 million charge for the expensing of the write-up of purchased inventory. The 1995 results also include an extraordinary charge of $1.6 million net of tax and minority interest related to the early extinguishment of debt. The Company's results of operations for the past two years can be summarized as follows (dollars in millions):
1996 1995 ------ ------ Pre-tax income excluding unusual transactions........................ $ 50.5 $ 51.9 Income taxes........................... (18.4) (11.9) Minority interest...................... (7.3) (10.9) ------ ------ Net income excluding unusual transactions........................ 24.8 29.1 Lasertron purchased in-process R and D. -- (80.9) Gain on sale of equity investments..... 21.5 -- Restructuring charge................... (3.8) -- Asset write-down and other reserves.... (4.2) -- Purchase accounting adjustments........ (0.9) (2.0) Improperly capitalized expenses........ (1.1) -- Tax impact of unusual transactions above............................... (4.4) 0.8 Net income from discontinued operations.......................... 1.4 2.5 Extraordinary charge, early extinguishment of debt, net of tax.. (0.9) (1.6) Gain on sale of discontinued operation, net of tax.......................... 9.4 -- ------ ------ Net income (loss) as reported.......... $ 41.8 $(52.1) ====== ======
The 1996 provision for income taxes excluding unusual transactions increased $6.5 million over the prior year principally due to an increase in the effective tax rate for financial reporting purposes. The annual effective income tax rate for financial reporting purposes increased to 36% in 1996 as compared to 23% in 1995 reflecting the provision of a full U.S. statutory rate in 1996. Minority interest expense excluding unusual transactions decreased $3.6 million due primarily to the result of a tax sharing agreement between the Company and Gilbert. The minority interest in Gilbert benefited from a lower tax rate for financial reporting purpose in 1995. The Company also purchased an additional 24.5% interest in Gilbert in late 1996 which lowered minority interest expense in 1996. Pre-tax income before minority interest and unusual transactions decreased slightly to $50.5 million in 1996 from the prior year level of $51.9 million. Operating income before unusual transactions increased $0.8 million from 1995 results and it was offset by the combination of decreased interest income ($1.1 million), decreased equity income ($1.6 million) and decreased interest expense of $0.5 million. Communications Components Communications Components revenues increased 21.6% in 1996. Excluding the impact of the acquisition of Lasertron which, because it was acquired in September 1995, is not included in all of 1995 results, net sales increased 4.0% over the 1995 period. Communications Components includes the sales of Gilbert Engineering, a manufacturer of cable connectors, Lasertron, a manufacturer of active fiber optic components, and Oak Frequency Control Group, a manufacturer of quartz-based crystals and oscillators. These products are generally used in communications networks covering a broad range of applications, including wired telephony service, cable television and cellular communications. Sales of Communications Components are dependent on the rate of network infrastructure buildout and upgrade in both domestic and international markets. Excluding Lasertron, the Company's sales growth in 1996 is attributable to increased construction of cable television systems in international markets, upgrades of domestic cable systems, and expanding applications for products in cellular, paging and personal communications systems. A significant contract between Gilbert and one of its customers expires by its terms on December 31, 1997. The impact, if any, on this portion of the Company's business cannot be determined at this time. Controls Components The sales of Controls Components increased 13.0% in 1996 to $91.9 million from the prior year level of $81.4 million. Controls Components consist primarily of flow and temperature control devices for gas cooking appliances and switches and encoders for equipment used in consumer, commercial, medical and military applications. Sales of Controls Components are sensitive to changes in consumer spending. Sales of Controls Components increased principally as the result of increased demand for sensing devices combined with modest sales growth of components for gas cooking. Gross Profit The gross profit margin excluding unusual transactions decreased to 39.1% in 1996 from 40.4% in 1995 due primarily to higher volume sales of lower margin controls components. In aggregate, sales prices have declined modestly during the year. Material costs were relatively stable and wage rate increases were moderate. Selling, General and Administrative Expenses Selling, general and administrative expenses excluding unusual transactions increased $14.9 million, or 31%, in 1996 over the prior year due to an increase in research and development expenditures related to the acceleration of product prototyping activities for wireless communications and wired telephony applications. Most of the increase was attributable to Lasertron which was acquired in September 1995 and therefore not included in full year 1995 results. Annual amortization expense of approximately $2.5 million relating to the goodwill from the purchase of 24.5% interest in Gilbert in November 1996, will be reflected in selling, general, and administrative expense. Interest Interest expense decreased slightly from $6.3 million in 1995 to $5.8 million in 1996. The decrease in interest expense reflected lower average borrowings during 1996. Interest income decreased from $1.7 million in 1995 to $0.5 million in 1996 as average cash balances decreased. Equity Income (Loss) Equity in net income of affiliated companies excluding unusual transactions related to the write-down of certain joint ventures, decreased from $1.6 million in 1995 to a loss of $0.01 million in 1996. During 1996, the Company sold its 49% interest in Video 44 (WSNS-TV Channel 44), and received net proceeds of $29.4 million. The Company recorded a pre-tax gain of $20.5 million from the sale. Due to this transaction, the Company's proportionate share of Video 44's earnings was included in 1995 results but not in 1996 results subsequent to the sale. In addition, as a result of its acquisition of Lasertron, the Company has included in equity income its proportionate share of the earnings or losses of its 50% owned Wuhan Telecommunications Devices Company ("WTD"), located in the People's Republic of China in 1996 results. 1995 Compared to 1994 Sales for 1995 reached $255.4 million, an increase of 10.6% over the $230.9 million in 1994 reflecting strong growth in Communications Components businesses offset by a slow down in the sale of Controls Components. The Company reported a net loss of $52.1 million in 1995 compared to net income of $42.4 million in 1994. Several unusual transactions affected the results of operations over these two years. Net income for 1995 includes non-cash after tax charges of $82.1 million associated with the acquisition of Lasertron, comprised of an $80.9 million charge for purchased in-process research and development and a $1.2 million after tax charge for the expensing of the write-up of purchased inventory. The 1995 results also include an extraordinary charge of $1.6 million net of tax and minority interest related to the early extinguishment of debt. Net income for 1994 includes a restructuring charge of $2.0 million, a $0.9 million tax gain resulting from a state income tax law change and a net tax benefit of $10.8 million (a $14.0 million tax benefit net of minority interest of $3.2 million) related to the recognition of tax net operating loss carryforwards. The Company's results of operations for these two years is summarized as follows (dollars in millions):
1995 1994 ------ ------ Pre-tax income excluding unusual transactions........................... $ 51.9 $ 43.9 Income taxes.............................. (11.9) (4.1) Minority interest......................... (10.9) (8.5) ------ ------ Net income excluding unusual transactions. 29.1 31.3 Lasertron purchase accounting adjustments. (82.1) -- Extraordinary charge, early extinguishment of debt................. (1.6) -- Income from discontinued operations....... 2.5 1.4 Restructuring charge...................... -- (2.0) Tax gain.................................. -- 0.9 Tax benefit of net operating loss carryforward, net of minority interest. -- 10.8 ------ ------ Net income (loss) as reported............. $(52.1) $ 42.4 ====== ======
The 1995 provision for income taxes excluding unusual transactions increased $7.8 million over the prior year principally due to an increase in the effective tax rate for financial reporting purposes. Beginning in the third quarter of 1995, the Company began recording a full tax provision for financial reporting purposes. The Company had approximately $78.0 million of unused net operating loss carryforwards for tax return purposes at December 31, 1995 and will, therefore, pay minimal federal income taxes until these carryforwards are utilized. Minority interest expense excluding unusual transactions increased $2.4 million due to higher earnings at Gilbert Engineering. As a result of the tax sharing agreement between the Company and Gilbert, the tax liability for Gilbert has been calculated free of federal income taxes. Pre-tax income before minority interest and unusual transactions increased 18.2% to $51.9 million in 1995 from the prior year level of $43.9 million. Communications Components Communications Components revenues increased 28.5% in 1995. Excluding the impact of the Lasertron acquisition in September 1995, net sales increased 22.0% over the 1994 period. Communications Components includes the sales of Gilbert Engineering, a manufacturer of cable connectors, Lasertron Inc., a manufacturer of active fiber optic components, and Oak Frequency Control Group, a manufacturer of quartz-based crystals and oscillators. These products are generally used in communications networks covering a broad range of applications, including wired telephony service, cable television and cellular communications. Sales of Communications Components are dependent on the rate of network infrastructure buildout and upgrade in both domestic and international markets. The Company's sales growth in 1995 is attributable to increased new construction of cable television systems in international markets, upgrades of domestic cable systems, and expanding applications for products in cellular, paging and personal communications systems. Controls Components The sales of Controls Components decreased 12.6% in 1995 to $81.4 million from the prior year level of $93.1 million. Controls Components consist primarily of flow and temperature control devices for gas cooking appliances and switches and encoders for equipment used in consumer, commercial, medical and military applications. Sales of Controls Components are sensitive to changes in consumer spending. Sales of gas cooking appliances are particularly susceptible to changes in domestic housing starts, which were below expectations in the second half of 1995. The sales of switching devices for military applications also decreased during the year, offset by an increase in demand from commercial customers. Gross Profit The gross profit margin excluding unusual transactions increased to 40.4% in 1995 from 37.6% in 1994. The improvement in profitability has been driven by cost reductions, productivity improvements and an enhanced mix of higher margin communications components. In aggregate, sales prices have declined modestly during the year. Material costs were relatively stable and wage rate increases were moderate. Selling, General and Administrative Expenses Selling, general and administrative expenses excluding unusual transactions increased $5.5 million, or 12.8%, in 1995 over the prior year but approximated 18% of sales in both periods. Research and development spending increased 53.7% to $4.7 million, accounting for $1.6 million of the change. The acquisition of Cabel-Con in June 1994 accounted for a portion of the increases. Interest Interest expense increased from $5.9 million in 1994 to $6.3 million in 1995. The increase in interest expense reflected higher average borrowings during the first three quarters of 1995. However, in September 1995, the Company borrowed $80.0 million on its new debt facility in connection with the Lasertron acquisition. Interest expense in the fourth quarter of 1995 was $2.2 million. Interest income increased from $1.3 million in 1994 to $1.7 million in 1995 as average cash balances increased. However, in September 1995, the Company used approximately $20.0 million of cash in conjunction with the Lasertron acquisition. Interest income in the fourth quarter of 1995 was $0.2 million. Equity Income Equity in net income of affiliated companies decreased from $2.3 million in 1994 to $1.6 million in 1995, primarily as a result of start up losses at McCoy de Venezuela S.A. de C.V., which manufactures quartz crystal blanks. Equity income related to Video 44 in 1995 approximated that of the prior year. As a result of its acquisition of Lasertron, the Company has included its proportionate share of the earnings and losses of its 50% owned Wuhan Telecommunications Devices Company ("WTD"), located in the Peoples Republic of China in 1995 results. Liquidity and Capital Resources Cash flow from operations increased to $47.2 million in 1996 from $37.0 million in 1995, reflecting an increase in income from operations excluding unusual transactions, combined with a decrease in the level of working capital. The Company increased its capital spending to $23.2 million in 1996 from $16.9 million in 1995 due to: bringing on line new capacity to support higher production volumes and new products; automation of production processes to reduce both cost and manufacturing cycle time; and expanded use of CAD capabilities and new prototyping equipment to reduce development cycle times. On November 1, 1996, the Company entered into a new credit agreement with various lenders which provides for a $300 million unsecured revolving credit facility (the "Facility"). On November 1, 1996, borrowings of $95 million under the Facility were used to purchase the minority interest of Connector held by Bain and $21 million was used to refinance existing indebtedness of the Company. The Company's previous credit agreements were terminated on November 1, 1996. The Facility will be reduced by $50 million on each of November 1, 1999 and November 1, 2000 and matures on December 31, 2001. On November 15, 1996, the Company agreed to purchase the 15% interest in Gilbert owned by certain members of the management of Gilbert. The Company purchased from Gilbert management 7.5% of Gilbert in the fourth quarter of 1996 at a purchase price of approximately $30.6 million. The Company will purchase the remaining 7.5% over the next two years at a price that will be an agreed multiple of Gilbert's earnings before interest and taxes. These transactions will be financed with working capital and borrowings under the Facility. In October 1996, the Company sold Nordco to an affiliate of Banc One Venture Corporation and members of Nordco management for net cash proceeds of $19.4 million. As a result of the transactions above, debt net of cash increased to $132.3 million at December 31, 1996 from $89.4 million at December 31, 1995. Cash proceeds of $29.4 million from the sale of the Company's 49% interest in Video 44 (WSNS-TV Channel 44), and cash proceeds of $19.4 million from the sale of Nordco were used to reduce debt. In addition, the Company repaid $44.0 of debt in 1996 from cash generated from operations. In January 1997, the Company's Board of Directors authorized the repurchase of up to $75.0 million of the Company's common stock contingent on bank approval. The repurchased stock is to be held by the Company and used to meet the Company's obligations under its existing stock incentive plans and for other corporate purposes. The Company intends to pursue acquisitions in the communications sector which will enhance growth and profitability. An acquisition may require new borrowing arrangements. Currently, the Company has no commitment, understanding, or arrangement relating to any material acquisition and there is no assurance that any transactions will be completed in 1997. The Company believes that funds generated by operations, existing cash balances and its available credit facility will be sufficient to fund the Company's ongoing operations over the next year. Risks and Uncertainties Revenues from sales of communications components will account for a majority of the Company's future revenues. Although demand for these products has grown in recent years with the buildout of communications networks in domestic and international markets, a decrease in the rate of infrastructure construction or upgrade programs could have an adverse impact on the Company's results of operations. The communications industry is very competitive and is characterized by rapid technological change, new product development, product obsolescence and evolving product specifications. Additionally, price competition in this market is intense with significant price erosion over the life cycle of a product. The ability of the Company to compete successfully depends on the continued introduction of new products and ongoing manufacturing cost reduction. The Company believes that it will continue to see varying degrees of price pressure across all product lines. These price pressures, if not offset by cost reductions, could result in lower average gross margins. Sales of the Company's controls components are in large part dependent on the production level of a few North American appliance manufacturers, which in turn is sensitive to the strength of the economy, including housing starts, consumer disposable income and interest rates. Adverse changes in the economy could have a negative impact on the Company's financial results. The Company currently buys a number of raw materials from single sources. In most cases there are readily available and qualified external alternative sources of supply. Although the Company does not at this time have a qualified second external source for one critical component used in the production of fiber optic modules, management believes there are other suppliers that could provide a like quality product on comparable terms. A change in suppliers for this product could cause a delay in manufacturing and adversely impact operating results. The Company must comply with governmental regulations relating to the environment. The cost of compliance with environmental regulations in 1996 was immaterial and is not expected to have a material effect on capital expenditures or operating results in 1997. Various pending or threatened legal proceedings by or against the Company or one or more of its subsidiaries involve alleged breaches of contract, torts and miscellaneous other causes of action arising in the course of business. The Company's management, based upon advice of legal counsel representing the Company with respect to each of these proceedings, does not believe any of these proceedings will have a significant impact on the Company's consolidated financial position. The Company's international operations and its results could be affected by changes in policies of foreign governments and in social and economic conditions outside the U.S. including civil unrest, changing inflation and foreign exchange rates, and trade restrictions or prohibitions. Any of the foregoing could have an adverse effect on future results. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OAK INDUSTRIES INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ------ REPORT OF INDEPENDENT ACCOUNTANTS............................ xx FINANCIAL STATEMENTS - Consolidated Balance Sheet at December 31, 1996 and 1995.. xx Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994................. xx Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994....... xx Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994................. xx Notes to Consolidated Financial Statements................ xx SCHEDULE - II - Valuation and Qualifying Accounts................ xx
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Oak Industries Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Oak Industries Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. 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. PRICE WATERHOUSE LLP Boston, Massachusetts January 31, 1997 OAK INDUSTRIES INC. CONSOLIDATED BALANCE SHEET AT DECEMBER 31 (DOLLARS IN THOUSANDS) ASSETS
1996 1995 --------- -------- Current Assets: Cash and cash equivalents.......................... $ 6,116 $ 16,842 Receivables, less reserves of $2,330 and $1,573.... 40,202 38,314 Inventories........................................ 53,355 48,514 Deferred income taxes.............................. 22,210 19,900 Other current assets............................... 2,641 3,088 --------- --------- Total current assets......................... 124,524 126,658 --------- --------- Plant and Equipment: Land............................................... 931 1,001 Buildings and leasehold improvements............... 23,584 18,036 Machinery and equipment............................ 111,082 97,559 Furniture and fixtures............................. 7,803 6,487 --------- --------- 143,400 123,083 Less _ Accumulated depreciation.................... (78,374) (70,009) --------- --------- Total plant and equipment.................... 65,026 53,074 --------- --------- Other Assets: Deferred income taxes.............................. 4,348 17,242 Goodwill and other intangible assets, less accumulated amortization of $11,451 and $9,518....................................... 166,498 79,094 Investment in affiliates........................... 8,315 20,940 Net assets of discontinued operations.............. -- 8,438 Other assets....................................... 5,574 7,098 --------- --------- Total other assets........................... 184,735 132,812 --------- --------- Total Assets.............................. $ 374,285 $ 312,544 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. OAK INDUSTRIES INC. CONSOLIDATED BALANCE SHEET AT DECEMBER 31 (DOLLARS IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995 -------- -------- Current Liabilities: Current portion of long-term debt.............. $ 290 $ 14,691 Accounts payable............................... 16,162 15,103 Accrued liabilities............................ 29,053 23,696 --------- --------- Total current liabilities................... 45,505 53,490 --------- --------- Other Liabilities: Deferred compensation and pensions............. 4,717 5,505 Other.......................................... 3,256 6,123 --------- --------- Total other liabilities..................... 7,973 11,628 --------- --------- Long-Term Debt, Less Current Maturities........... 138,161 91,570 --------- --------- Minority Interest................................. 10,923 36,643 --------- --------- Commitments and Contingent Liabilities (Note 12) Stockholders' Equity: Preferred stock, no par value; authorized 5,000,000 shares; none issued.............. -- -- Junior preferred stock, no par value; authorized 500,000 shares; none issued..... -- -- Common stock, par value of $0.01; authorized 50,000,000 shares;issued 18,482,069 and 17,667,788 shares........... 184 177 Additional paid-in capital..................... 296,185 282,179 Accumulated deficit............................ (119,692) (161,528) Cumulative translation adjustment.............. (378) 248 Unearned compensation - restricted stock....... (2,945) -- Treasury stock, 64,487, and 65,672 shares...... (1,369) (1,316) Stock purchase loans........................... (262) (547) --------- -------- Total stockholders' equity.................. 171,723 119,213 --------- -------- Total Liabilities and Stockholders'Equity................... $ 374,285 $ 312,544 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. OAK INDUSTRIES INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 -------- -------- -------- Net Sales............................................ $ 303,536 $ 255,364 $ 230,894 Cost of sales........................................ (189,410) (154,281) (144,145) --------- --------- --------- Gross profit...................................... 114,126 101,083 86,749 Selling, general and administrative expenses......... (67,139) (48,108) (42,636) Purchased in-process research and development........ -- (80,872) -- --------- --------- --------- Operating income (loss)........................... 46,987 (27,897) 44,113 Interest expense..................................... (5,767) (6,273) (5,906) Interest income...................................... 541 1,661 1,329 Gain on sales of equity investments.................. 21,502 -- -- Equity in net income (loss) of affiliated companies.. (1,251) 1,583 2,304 --------- --------- --------- Income (loss) from continuing operations before income taxes,minority interest and extraordinary charge.......................... 62,012 (30,926) 41,840 Income tax benefit (provision)....................... (22,764) (11,199) 10,891 Minority interest in net income of subsidiaries...... (7,272) (10,858) (11,690) --------- --------- --------- Income (loss) from continuing operations.......... 31,976 (52,983) 41,041 Income from discontinued operations,net of tax....... 1,442 2,469 1,405 Gain on sale of discontinued operations, net of tax.. 9,367 -- -- --------- --------- --------- Net income (loss) before extraordinary charge..... 42,785 (50,514) 42,446 Extraordinary charge for early extinguishment of debt, net of tax benefit of $582 and $1,506 in 1996 and 1995 respectively; and minority interest of $746 in 1995........... (949) (1,610) -- --------- --------- --------- Net income (loss).................................... $ 41,836 $ (52,124) $ 42,446 ========= ========= ========= Income (loss) per common share: Continuing operations............................. $ 1.71 $ (2.87) $ 2.23 Discontinued operations........................... .08 .13 .08 Gain on sale of discontinued operation............ .50 -- -- --------- --------- --------- Net income (loss) before extraordinary charge..... 2.29 (2.74) 2.31 Extraordinary charge.............................. (.05) (.09) -- --------- --------- --------- Net income (loss).................................... $ 2.24 $ (2.83) $ 2.31 ========= ========= ========= Average number of common shares outstanding.......... 18,684 18,423 18,384 ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. OAK INDUSTRIES INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS)
Additional Cumulative Stock Common Paid-In Accumulated Translation Unearned Treasury Purchase Stock Capital Deficit Adjustment Compensation Stock Loans Total ----- --------- ----------- --------- ------------ ------- -------- ------- Balance, December 31, 1993..... $ 172 $ 280,467 $(151,850) $ (530) $ -- $ (35) $(1,305) $126,919 Net income.............. -- -- 42,446 -- -- -- -- 42,446 Current year translation adjustment............ -- -- -- (128) -- -- -- (128) Exercise of options and warrants.......... 3 1,546 -- -- -- (418) -- 1,131 Acquisition of warrants. -- (3,061) -- -- -- -- -- (3,061) Other................... -- 24 -- -- -- (442) 261 (157) ----- --------- --------- ------ -------- ------- ------- -------- Balance, December 31, 1994..... 175 278,976 (109,404) (658) -- (895) (1,044) 167,150 Net loss................ -- -- (52,124) -- -- -- -- (52,124) Current year translation adjustment............ -- -- -- 906 -- -- -- 906 Exercise of options..... 2 3,229 -- -- -- (43) -- 3,188 Other................... -- (26) -- -- -- (378) 497 93 ----- --------- --------- ------ -------- ------- ------- -------- Balance, December 31, 1995..... 177 282,179 (161,528) 248 -- (1,316) (547) 119,213 Net income.............. -- -- 41,836 -- -- -- -- 41,836 Current year translation adjustment............ -- -- -- (626) -- -- -- (626) Exercise of options..... 6 8,762 -- -- -- (133) -- 8,635 Tax benefit from stock options............... -- 2,300 -- -- -- -- -- 2,300 Issuance of restricted stock................. 1 2,944 -- -- (2,945) -- -- -- Other................... -- -- -- -- -- 80 285 365 ----- --------- --------- ------ -------- ------- ------- -------- Balance, December 31, 1996..... $ 184 $ 296,185 $(119,692) $ (378) $ (2,945) $(1,369) $ (262) $171,723 ===== ========= ========= ====== ======== ======= ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. OAK INDUSTRIES INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM:
1996 1995 1994 -------- --------- -------- OPERATING ACTIVITIES: Income (loss) from continuing operations.............. $ 31,976 $ (52,983) $ 41,041 Adjustments to reconcile income (loss) from continuing operations to net cash provided by operations: Purchased in-process research and development...... -- 80,872 -- Depreciation and amortization...................... 13,998 11,314 10,360 Change in minority interest........................ 7,273 10,858 11,690 Gain on sales of equity investments................ (21,502) -- -- Undistributed earnings of affiliated companies..... 1,263 (723) (1,464) Change in assets and liabilities, net of effects from acquisition of businesses: Receivables..................................... (582) (4,119) (2,615) Inventories..................................... (4,036) (6,923) (2,624) Accounts payable and accrued liabilities........ 5,204 (5,618) 6,371 Deferred compensation and pensions.............. (172) (90) 134 Deferred income taxes .......................... 14,690 6,292 (14,979) Other........................................... (920) (1,831) (3,240) -------- --------- -------- Net cash provided by operations.......................... 47,192 37,049 44,674 -------- --------- -------- Investing Activities: Capital expenditures.................................. (23,205) (16,942) (6,723) Acquisition of businesses, net of cash acquired....... (125,600) (100,019) (8,309) Proceeds from the sale of equity investment........... 30,871 -- -- Advances to affiliated companies...................... -- (300) (308) Disposition of business............................... -- -- 2,092 Repayments from employees............................. 285 497 261 Other................................................. (12) (116) 101 -------- --------- -------- Net cash used in investing activities.................... (117,661) (116,880) (12,886) -------- --------- -------- Financing Activities: Long-term borrowings.................................. 146,000 114,000 -- Repayment of borrowings............................... (92,810) (30,020) (11,860) Early retirement of debt.............................. (21,000) (28,610) (4,200) Exercise of options and warrants...................... 8,635 3,188 1,155 Acquisition of warrants............................... -- -- (3,061) Deferred debt issuance costs.......................... (720) (1,805) -- Other................................................. -- (404) (442) -------- --------- -------- Net cash provided by (used in) financing activities...... 40,105 56,349 (18,408) -------- --------- -------- Effect of exchange rate changes on cash.................. (333) 906 (128) -------- --------- -------- Net cash provided by (used in) discontinued operations... 19,971 1,870 (2,971) -------- --------- -------- Net change during year................................... (10,726) (20,706) 10,281 Balance, beginning of year............................... 16,842 37,548 27,267 -------- --------- -------- Balance, end of year..................................... $ 6,116 $ 16,842 $ 37,548 ======== ========= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. (1) NATURE OF BUSINESS: Oak Industries Inc. (the "Company") manufactures and sells active and passive components for communications networks including cable connectors, fiber optic lasers and frequency control devices. The Company also develops, manufactures and sells a broad line of control and sensing devices both electronic and mechanical for use in consumer appliances, testing equipment and industrial applications. (2) STATEMENT OF ACCOUNTING POLICIES: Following are the significant financial and accounting policies of the Company: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All significant transactions between the Company and its subsidiaries are eliminated. PERVASIVENESS OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. MINORITY INTEREST Minority interest represents the minority stockholders' proportionate share of the equity and the net income of Connector and Gilbert (See Note 12). INVESTMENTS IN AFFILIATES The Company's investments in affiliates consist of a 50% interest in Wuhan Telecommunications Devices Company, a manufacturer of fiber optic components in Wuhan, The Peoples Republic of China and a 50% interest in McCoy (Cayman) Ltd. and McCoy International that, along with Industrias McCoy de Venezuela S.A. de C.V. manufacture quartz crystal blanks in Venezuela and market them to customers worldwide. Investments in these affiliated companies are recorded at cost plus equity in undistributed earnings. Dividends received from affiliated companies were $1,985,000, $860,000 and $840,000 for 1996, 1995, and 1994, respectively. TRANSLATION OF FOREIGN CURRENCIES The financial statements of foreign subsidiaries are translated into U. S. dollars in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." Under this statement, balance sheet accounts are translated at the current exchange rate and income statement items are translated at the average exchange rate for the year. Resulting translation adjustments, if any, are made directly to a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in net income when realized and are insignificant. REVENUE RECOGNITION Revenues from product sales are recognized at the time products are shipped. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out basis) or market. Inventory costs, which include material, labor and factory manufacturing overhead expenses, are as follows (dollars in thousands):
DECEMBER 31, ----------------- 1996 1995 ------- ------ Raw materials....................... $ 13,134 $ 12,308 Work in process..................... 28,182 29,679 Finished goods...................... 12,039 6,527 ------- -------- $ 53,355 $ 48,514 ======== ========
PLANT AND EQUIPMENT Plant and equipment are stated at cost. Replacements and improvements are capitalized, while repairs and maintenance costs are charged to expense as incurred. Depreciation is provided under the straight-line method over the following useful lives: Buildings and leasehold improvements........ 5 to 40 years Machinery and equipment..................... 3 to 15 years Furniture and fixtures...................... 5 to 15 years The cost and accumulated depreciation of items sold or retired are removed from the plant and equipment accounts and any resulting profit or loss is recognized currently. INTANGIBLE ASSETS Goodwill and other intangibles, and the related amortization are as follows (dollars in thousands):
OTHER GOODWILL INTANGIBLES TOTAL --------- ----------- --------- Balance, December 31, 1994.... $ 74,525 $ 587 $ 75,112 Additions..................... 4,728 2,014 6,742 Amortization.................. (2,415) (345) (2,760) --------- ------- --------- Balance, December 31, 1995.... 76,838 2,256 79,094 Additions..................... 90,543 470 91,013 Amortization.................. (3,060) (549) (3,609) --------- ------- --------- Balance, December 31, 1996.... $ 164,321 $ 2,177 $ 166,498 ========= ======= =========
Goodwill represents the excess of the cost of acquired businesses over the fair market value of their net tangible and identified intangible assets. Goodwill is being amortized on the straight-line method over periods of 8 to 40 years. Other intangibles are stated at cost and amortized on the straight-line method over periods of 3 to 17 years. Goodwill and other intangibles are reassessed annually to determine whether any potential impairment exists. The Company assesses annually the potential impairment of goodwill and other identified intangible assets based on anticipated undiscounted cash flows from operations and its knowledge of the industry. CAPITALIZED DEBT COSTS The Company capitalizes all costs related to the issuance of debt. The resulting capitalized debt costs ($698,000 and $1,869,000 at December 31, 1996 and 1995, respectively) are classified as "Other assets" on the consolidated balance sheet, and are amortized to expense under the straight-line method over the life of the related debt issue. During 1996, 1995 and 1994, the Company amortized $361,000, $567,000 and $1,034,000, respectively, of capitalized debt costs. As a result of terminating its previous debt facilities the Company wrote off capitalized debt costs of $1,531,000 and $785,000 in 1996 and 1995 respectively, which are included in the extraordinary charge for early extinguishment of debt. INCOME TAXES The provision for income taxes includes federal, foreign and state income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets are recognized, utilizing current tax rates, for deductible temporary differences and operating loss and credit carryforwards that are more likely than not to be realized. Deferred tax benefit or expense represents the change in the deferred tax asset or liability balances. RESEARCH AND DEVELOPMENT Research and development costs, which are expensed as incurred, were $10,510,000, $4,737,000 and $3,082,000 in 1996, 1995 and 1994, respectively. These costs are included in selling, general and administrative expenses in the consolidated statement of operations. EARNINGS PER COMMON SHARE Earnings per share are based on the weighted-average number of shares of common stock and common stock equivalents outstanding as follows: 18,684,281 in 1996; 18,423,014 in 1995, and; 18,384,342 in 1994. Included in these weighted-average shares figures are common stock equivalents of 786,905 in 1996; 902,786 in 1995, and; 1,102,624 in 1994. CASH EQUIVALENTS The Company's cash equivalents represent funds invested in a variety of liquid short-term instruments with maturities of less than three months at time of purchase. The carrying amount of these instruments approximates fair value. INVESTMENTS During 1994, the Company adopted FAS 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). In accordance with FAS 115, the Company's cash and cash equivalents, which include debt securities, are classified as held to maturity. The recorded value of these investments approximates fair value. INTEREST RATE SWAP AGREEMENTS The Company enters into interest rate swap agreements in order to manage its exposure to interest rate fluctuations. The swap agreements are contracts to exchange floating rate for fixed interest payments periodically over the life of the agreements without the exchange of the underlying notional amounts. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. In the unlikely event that a counterparty fails to meet the terms of an interest rate swap agreement, the Company's exposure is limited to the interest rate differential on the notional amount. The Company does not anticipate non- performance by any of the counterparties. Net interest differentials to be paid or received related to interest rate swap agreements are accrued and ultimately recognized as an adjustment to interest expense over the life of the agreements. The fair values of interest rate swap agreements are the estimated amounts that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the counterparties. CONSOLIDATED STATEMENT OF CASH FLOWS Supplementary information for the consolidated statement of cash flows is as follows (dollars in thousands): Cash paid during the year for:
1996 1995 1994 -------- ------- ------- Interest........................ $ 4,696 $ 4,841 $ 4,418 Income taxes.................... 6,171 3,255 1,751
Details of businesses acquired were as follows:
1996 1995 1994 ------ ------ ------ Assets acquired................. $ 92,607 $ 45,948 $ 18,269 Minority interest elimination... 32,993 -- -- Purchased in-process research and development............. -- 80,872 -- Liabilities assumed............. -- (18,582) (3,313) Debt assumed.................... -- -- (5,706) --------- --------- -------- Cash paid....................... 125,600 108,238 9,250 Cash acquired................... -- (8,219) (941) --------- --------- -------- Net cash paid................... $ 125,600 $ 100,019 $ 8,309 ========= ========= ========
RECLASSIFICATIONS Certain items in the 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentation. (3) ACQUISITIONS: CONNECTOR AND GILBERT MINORITY INTEREST On November 1, 1996, the Company purchased the 20% interest in Connector Holding Company ("Connector") owned by certain affiliates of Bain Capital, Inc. ("Bain") for approximately $95,000,000 in cash, including transaction expenses. Connector owned 85% of Gilbert Engineering Co., Inc. ("Gilbert"), and as a result of this transaction the Company acquired Bain's 17% indirect interest in Gilbert. The acquisition was accounted for as a purchase and accordingly the minority interest expense previously related to Bain is excluded from the Company's consolidated financial statements subsequent to the date of acquisition. Goodwill of approximately $72,000,000 resulting from this acquisition is being amortized over 36 years which is consistent with the remaining period relating to goodwill resulting from the purchase of an 80% equity interest in Connector during 1992. The purchase price was financed with the borrowings from a new $300,000,000 revolving credit facility. The following unaudited pro forma summary combines the consolidated results of operations of the Company as if the acquisition of the Bain interest had occurred at the beginning of 1996 and 1995, after giving effect to certain adjustments, including amortization of intangible assets, increased interest expense and related income tax effects. The pro forma summary does not necessarily reflect the results of operations as they would have been if the Company had acquired the Bain interest during such periods. (Dollars in thousands, except per share amounts)
Year Ended December 31, (Unaudited) ------------------------- 1996 1995 --------- --------- Net sales....................... $ 303,536 $ 255,364 Income (Loss) from operations before extraordinary charge... $ 41,676 $ (52,234) Net income (loss)............... $ 40,727 $ (53,844) Income (Loss) from operations before extraordinary charge per common share.............. $ 2.23 $ (2.83) Net income (loss) per common share......................... $ 2.18 $ (2.92)
On November 15, 1996, the Company agreed to purchase the 15% interest in Gilbert that was owned by certain members of the management of Gilbert. The Company purchased 7.5% of Gilbert from Gilbert management in the fourth quarter of 1996 at a purchase price of approximately $30,600,000. This acquisition was accounted for as a purchase and accordingly, the minority interest expense previously related to the portion purchased from Gilbert management is excluded from the Company's consolidated financial statements subsequent to the date of acquisition. Goodwill of approximately $20,000,000 resulting from this acquisition is being amortized over 36 years. The Company now owns 92.5% of Gilbert. The Company will purchase the remaining 7.5% interest owned by Gilbert management over the next two years at a price that will be a multiple of Gilbert's earnings before interest and taxes. These transactions will be financed with working capital and the borrowings from the new $300,000,000 revolving credit facility. Pro-forma results of operations have not been presented for the 7.5% acquisition of Gilbert because the effects of the acquisition were not significant. LASERTRON On September 6, 1995, the Company acquired all of the common stock of Lasertron Inc., ("Lasertron"), a Bedford, Massachusetts manufacturer of fiber optic components for the communications and CATV industries for approximately $108,238,000 cash, including transaction expenses. Lasertron had cash of $8,219,000 at the time of the acquisition. In addition, the Company assumed all of the outstanding and unexercised stock options under Lasertron's existing stock option plans (see Note 7). Upon exercise of such options, option holders shall receive shares of the Company's common stock, adjusted to take into account the relative share prices of the Company and Lasertron at the acquisition date. At the date of acquisition, the Company recorded a liability of approximately $6,150,000 related to this obligation. The acquisition was accounted for as a purchase and, accordingly, operating results of this business subsequent to the date of acquisition were included in the Company's consolidated financial statements. The excess purchase price over fair value of the net tangible assets acquired was $86,705,000 of which $80,872,000 was allocated to purchased in-process research and development and $5,833,000 was allocated to goodwill and other intangible assets. The purchased in-process research and development was charged to operations upon acquisition, and the goodwill and other intangible assets are being amortized over 3 to 10 years. The following unaudited pro forma summary combines the consolidated results of operations of the Company and Lasertron as if the acquisition had occurred at the beginning of 1995 and 1994, after giving effect to certain adjustments, including amortization of intangible assets, increased interest expense on the acquisition debt, and related income tax effects. The pro forma summary does not necessarily reflect the results of operations as they would have been if the Company and Lasertron had constituted a single entity during such periods. (Dollars in thousands, except per share amounts)
Year Ended December 31, (Unaudited) -------------------------- 1995 1994 ------------ ---------- Net sales............................ $ 277,890 $ 260,641 Loss from operations before extraordinary charge............. $ (54,267) $ (40,487) Net loss............................. $ (55,877) $ (42,097) Loss from operations before extraordinary charge per common share..................... $ (2.94) $ (2.18) Net loss per common share............ $ (3.03) $ (2.27)
CABEL-CON On June 10, 1994, Gilbert acquired all of the outstanding common stock of Cabel-Con A/S ("Cabel-Con"), a Danish manufacturer of connectors for the worldwide cable television markets, for $9,250,000. Cabel-Con had cash of $941,000 at the time of the acquisition. The acquisition was financed by borrowing under Gilbert's revolving credit facility. Concurrent with the acquisition, Gilbert paid off $2,625,000 of Cabel-Con's bank borrowings. The acquisition was accounted for as a purchase and, accordingly, operating results of this business subsequent to the date of acquisition were included in the Company's consolidated statement of operations. Substantially all of the goodwill resulting from this acquisition, approximately $7,496,000, is being amortized over 40 years. (4) DIVESTITURES: During 1996, the Company sold its 49% interest in Video 44 (WSNS-TV Channel 44), and received net proceeds of $29,400,000. The Company recorded a pre-tax gain of $20,550,000 from the sale. During 1996, the Company completed the sale of its 45% interest in O/E/N India Ltd. for $1,471,000 in cash. As a result of this sale the Company reported a pre-tax gain of $952,000. During 1996, the Company sold its Nordco Inc. ("Nordco") subsidiary to an affiliate of Banc One Venture Corporation and members of Nordco management for net cash proceeds of approximately $19,381,000. The Company reported a gain of $9,367,000 from the sale in 1996. Because the tax basis of Nordco is greater than the sales price, the Company will not pay income taxes or record an income tax provision related to this transaction. As a result of the sale of Nordco, the Company has restated its prior year consolidated financial statements to reflect Nordco as a discontinued operation. The results of the discontinued operations reflected in the consolidated statements of operations are as follows (dollars in thousands):
1996 1995 1994 -------- -------- -------- Net sales......................... $ 16,715 $ 21,216 $ 18,110 ======== ======== ======== Gross profit...................... $ 5,780 $ 7,801 $ 6,617 ======== ======== ======== Earnings before income taxes...... $ 2,325 $ 3,073 $ 1,551 Income taxes...................... (883) (604) (146) -------- -------- -------- Net earnings from discontinued operations.................... $ 1,442 $ 2,469 $ 1,405 ======== ======== ========
The components of net assets of discontinued operations included in the Consolidated Balance Sheet at December 31, 1995 were as follows (dollars in thousands):
December 31, 1995 ------------------- Inventories............................... $ 3,814 Receivables, less reserve................. 2,317 Other current assets...................... 827 PP and E, net............................. 494 Intangibles, net.......................... 699 Other..................................... 1,742 Current liabilities....................... (1,455) ------- Net assets of discontinued operations..... $ 8,438 =======
(5) INDEBTEDNESS: Long-term debt at December 31 is summarized as follows (dollars in thousands):
1996 1995 ------ ------ Corporate Borrowings: Term Loan A............................... $ -- $ 57,500 Revolving Credit Facility................. 136,000 23,000 Other..................................... 144 168 Gilbert Engineering borrowings: Term Loan................................. -- 20,900 Revolving Credit Facility................. -- 2,000 Cabel-Con Mortgages....................... 2,307 2,693 -------- --------- 138,451 106,261 Less _ Current maturities........................ (290) (14,691) -------- --------- $138,161 $ 91,570 ======== =========
On November 1, 1996, the Company entered into a new credit agreement with various lenders which provides for a $300,000,000 revolving credit facility (the "Facility"). During 1996, proceeds of $125,000,000 from the Facility were used to purchase the minority interest of Gilbert and $21,000,000 was used to refinance existing indebtedness of the Company. The Company's previously existing $200,000,000 credit agreements were terminated on November 1, 1996. As a result, the Company recorded a non- cash, after tax charge of $949,000 related to the early extinguishment of the former credit facilities. Borrowings under the Facility bear interest, at the option of the Company, either (i) at the prime rate (or, if higher, at 1/2% above the federal funds rate) or (ii) at a spread of (1/2% to 1%) over the reserve- adjusted 1, 2, 3 or 6 month LIBOR rate. The spread is initially 3/4% and is subject to adjustment based on certain financial tests. As of December 31, 1996, interest rates on outstanding borrowings under the Facility ranged from 6.25% to 6.375%. Commitment fees of .25% are payable on unused borrowings under these agreements. Certain of the Company's subsidiaries have guaranteed the obligations under the Facility. Pursuant to the Facility's terms, the Company is required to meet certain financial covenants and is prohibited from paying dividends. The Facility will be reduced by $50,000,000 on each of November 1, 1999 and November 1, 2000 and matures on December 31, 2001. Cabel-Con mortgages payable through 2009, bear interest at rates of 7.8% and 8.2%. These mortgages are secured by the related land, building, machinery and equipment. Scheduled maturities of long-term debt at December 31, 1996 are as follows (dollars in thousands):
December 31 -------------- 1997................ 290 1998................ 321 1999................ 347 2000................ 375 2001................ 136,072 Thereafter.......... 1,046
As of December 31, 1996 the Company had exchanged its floating rate obligation on a (i) a $20 million notional principal amount for a fixed rate payment obligation of 4.95% (plus a spread of 1/2% to 1%) per annum through February 23, 1998; (ii) a $25 million notional principal amount for a fixed rate payment obligation of 6.02% (plus a spread of 1/2% to 1%) per annum through December 24, 1999; (iii) a $25 million notional principal amount for a fixed rate payment obligation of 6.02% (plus a spread of 1/2% to 1%) per annum through December 27, 2000. The Company charged $72,000 to interest expense related to these agreements for 1996. As of December 31, 1996 the Company estimates it would have received $293,000 to terminate the agreements. (6) CAPITAL STOCK: SHAREHOLDERS' RIGHTS PLAN On December 7, 1995 the Company's Board of Directors adopted a shareholder rights plan. The Board declared a distribution of one right for each share of common stock outstanding on December 18, 1995. Stock issued after that date is issued with an attached right. Each right entitles the holder, upon the occurrence of certain events, to purchase 1/100th of a share of junior preferred stock at an initial exercise price of $125. The Board may, at any time, redeem the rights until their expiration on December 7, 2005, and may amend the rights under certain circumstances until they become exercisable. STOCK PURCHASE LOANS In connection with a secondary offering of its stock in December 1993, the Company lent $1,305,000 to its corporate officers and certain key divisional managers for the purchase of 90,000 shares of the Company's stock from the selling shareholders. The principal amount of the remaining loan is repayable in full on January 1, 2000. Interest on the loan is calculated quarterly, based on the interest rate applicable to the Company's outstanding debt, and is payable annually until maturity. The loan, which is included in stockholders' equity, is secured by the common stock purchased and certain other amounts owed to such individual by the Company. In 1996 and 1995, respectively, principal of $285,000 and $497,000 and interest of $55,000 and $60,000 was paid to the Company by the borrowers. The principal balance of the remaining loan at December 31, 1996 was $262,000. STOCK REPURCHASE In January 1997, the Board of Directors authorized the repurchase of up to $75.0 million of the Company's common stock contingent on bank approval. The repurchased stock is to be held by the Company and used to meet the Company's obligations under its existing stock incentive plans and for other corporate purposes. (7) STOCK OPTIONS AND AWARDS: The Company has award plans for directors, officers, employees and consultants and advisors, which provide for, among other things, the issuance of stock options and restricted stock. With respect to stock options, the Compensation Committee of the Company's Board of Directors determines the option price (not to be less than fair market value) at the date of the grant. Options granted pursuant to the Company's award plans generally vest over three to four years from the date of the grant and expire after ten years or ten years and one day. Certain options granted under the 1995 Stock Option and Restricted Stock plan were originally exercisable prior to the tenth anniversary of their grant date only if the Company's common stock closed at or above 150% of the grant date price for ten consecutive trading days within the three year period following the grant date. On December 4, 1996, the Board of Directors approved the amendment of the exercisability terms of these options. As a result, options for the purchase of 550,000 of the Company's shares were amended in order to provide for their exercisability over a period of 3 years from their original grant date. During December 1996, the Company granted 124,000 shares of restricted stock from the 1995 Stock Option and Restricted Stock Plan to certain of its officers and employees. These shares will vest on January 1, 2000 provided that the recipient is still employed by the Company. The market value of these shares awarded totaled $2,945,000 and has been recorded as restricted stock as a separate component of stockholders' equity. Unearned compensation is being amortized to expense over the three year vesting period. In connection with the acquisition of Lasertron, the Company assumed all of the outstanding stock options under Lasertron's 1982 Incentive Stock Option Plan and 1992 Stock Option Plan (together, the "Plans"). The exercise price and shares issuable under these plans were adjusted to approximate the cash paid by the Company for each share of Lasertron common stock at the acquisition date. No further grants will be made under these Plans. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure-only provisions of FAS 123. STOCK OPTION SUMMARY
Weighted-Average Shares Option Price Exercise Price --------- ----------------- ------------------- Outstanding at December 31, 1993........... 1,514,179 $ 4.06 to $ 17.50 $ 7.29 Granted................................. 313,500 $18.38 to $ 26.63 $ 25.15 Expired or cancelled.................... (32,269) $ 4.06 to $ 17.50 $ 10.36 Exercised............................... (217,667) $ 4.06 to $ 17.50 $ 5.45 --------- Outstanding at December 31, 1994........... 1,577,743 $ 4.06 to $ 26.63 $ 13.52 Granted................................. 1,812,003 $ 4.02 to $ 29.38 $ 23.54 Expired or cancelled.................... (8,190) $ 4.06 to $ 26.63 $ 5.87 Exercised............................... (188,590) $ 4.02 to $ 16.50 $ 5.42 --------- Outstanding at December 31, 1995........... 3,192,966 $ 4.02 to $ 29.38 $ 17.13 Granted................................. 894,000 $19.25 to $ 33.50 $ 25.16 Expired or cancelled.................... (935,199) $ 4.02 to $ 33.50 $ 12.02 Exercised............................... (690,281) $ 4.02 to $ 26.63 $ 8.14 --------- Outstanding at December 31, 1996........... 2,461,486 $ 4.02 to $ 33.50 $ 20.20 ========= Exercisable at December 31, 1996........... 1,382,063 $ 17.10 ========= Available for grant at December 31, 1996... 579,665 =========
There were 3,041,151 shares of Common Stock reserved for issuance in connection with the Company's stock option and award plans at December 31, 1996. Options issued under all option plans, if not exercised, expire ten years or ten years and one day from the date of grant. The following table summarizes information about stock options outstanding at December 31, 1996.
Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range Of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/31/96 Life Price at 12/31/96 Price ----------------- ------------ ----------- --------- ------------ ----------- $ 4.38 - 5.63 154,722 4 $ 5.26 154,722 $ 5.26 4.02 - 4.06 180,560 5 4.05 180,560 4.05 6.25 - 8.75 204,061 6 8.20 198,486 8.20 14.07 - 26.63 885,443 8 23.98 568,776 24.34 23.00 - 26.38 746,700 9 24.13 271,959 24.06 $ 23.64 - 33.50 290,000 10 24.89 7,560 24.53 ---------------- --------- --------- $ 4.02 - $33.50 2,461,486 1,382,063
Pro Forma information regarding net income and earnings per share is required by FAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates in the range of 5.4% to 7.9% in 1996 and 1995; volatility factors of the expected market price of the Company's common stock of .72; and a weighted-average expected life of the option of 6 years. The weighted-average fair value of options granted were $18.40 and $16.83 for 1996 and 1995 respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
1996 1995 -------- --------- Pro forma net income (loss)............ $ 35,590 $ (53,595) Pro forma earnings per share........... $ 1.90 $ (2.91)
(8) POSTRETIREMENT BENEFITS: The Company has a number of noncontributory pension plans covering a small group of its employees. Benefits under the plans are generally based on years of service and employees' compensation during the last years of employment or a specified dollar benefit. It is the Company's policy to fund at least the minimum amount required by ERISA for each plan. Net periodic pension cost for all defined benefit plans was comprised of the following (dollars in thousands):
1996 1995 1994 ------ ------ ------ Service costs - benefits earned during the period..................... $ 146 $ 357 $ 461 Interest cost on projected benefit obligation............................ 2,640 2,427 2,451 Actual return on assets..................... (3,990) (5,898) 588 Net amortization and deferral............... 1,214 3,262 (2,329) ------- ------- ------- Net periodic pension cost................... $ 10 $ 148 $ 1,171 ======= ======= =======
The following table sets forth the funded status of all defined benefit plans at December 31, 1996 and 1995 (dollars in thousands):
1996 1995 ------------------------------ ------------------------------ Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Exceed Accumulated Benefits Exceed Benefits Assets Benefits Assets ------------------------------ ------------------------------ Actuarial present value of benefit obligations: Vested......................... $ 753 $ 34,019 $ 789 $ 29,869 Nonvested......................... 20 351 10 335 ------- -------- ------ -------- Accumulated benefit obligation.... $ 773 $ 34,370 $ 799 $ 30,204 ======= ======== ====== ======== Fair value of assets................. $ 1,060 $ 33,609 $ 999 $ 26,695 Less: Projected benefit obligation... 773 34,370 986 30,204 ------- -------- ------ -------- Funded (underfunded) plans........... 287 (761) 13 (3,509) Unrecognized transition liability.... -- 467 9 -- Unrecognized prior service costs..... -- 753 -- -- Unrecognized net loss (gain)......... (48) (2,365) 63 -- Additional liability................. -- -- -- -- ------- -------- ------ -------- Prepaid (accrued) pension cost....... $ 239 $ (1,906) $ 85 $ (3,509) ======= ======== ====== ========
In 1996, 1995 and 1994, the Company incurred curtailments in several plans as a result of reduced employment levels and plan amendments. The impact of these curtailments was a gain of $139,000 in 1996, a gain of $691,000 in 1995, and a loss of $154,000 in 1994. The projected benefit obligation was determined using an assumed discount rate of 7.75% for 1996, 7.5% for 1995, and 8.5% for 1994 and assumed no increase in rate of compensation for 1996, an increase of 4.5% for 1995, and 5.0% for 1994. The expected long-term rate of return on plan assets was 9.0% for all three years. The assets of the plans at December 31, 1996 and 1995 consist principally of common stocks, bonds, cash equivalents and real estate. The Company has defined contribution plans covering substantially all full-time employees who meet certain eligibility requirements. Contributions by the Company and the employees are determined according to salary-based formulas. The expense recognized by the Company related to these plans was $2,422,000, $1,439,000, and $1,530,000 in 1996, 1995 and 1994, respectively. In 1993, the Company established a non-qualified supplemental retirement plan for certain employees. Under the plan, participants may elect to contribute up to 15% of their annual compensation. The Company is required to make matching contributions in the form of the Company's common shares of up to 50% of the participants' contributions. Upon termination, each participant will receive in cash the fair value of their account for the employee contribution portion and shares of the Company's common stock for the Company's matching contribution portion. Contributions by the employees earn a stated rate of interest. The Company recorded expense of $407,000, $632,000 and , $282,000 in 1996, 1995 and 1994, respectively related to this plan. In the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions" ("FAS 106"). This statement changes the past practice of accounting for the cost of postretirement benefits from a pay- as-you-go (cash) basis to an accrual basis. Under this statement, the expected cost of providing those benefits to an employee, the employee's beneficiaries, and covered dependents will be recognized in the years that the employee renders the necessary service. The accumulated postretirement benefit obligation related to those employees for which the Company is obligated to pay for continuing medical and/or dental coverage as of January 1, 1993 was $1,096,000. In determining the present value of the accumulated postretirement benefit obligation, none of which has been funded, the Company used a 15% health care cost trend rate for 1993, decreasing 1% per year until 1998, then decreasing 1/2% per year until leveling off at 5%. A 1% increase in the trend rate would increase the accumulated postretirement obligation by approximately 12%. The weighted- average discount rate used was 7.5%. The Company has elected to amortize this transition obligation over 20 years in accordance with the provisions of FAS 106. The effect of the adoption of this statement has not been material to the Company's financial position or results of operations. (9) INCOME TAXES: Pretax income (loss) from operations for the years ended December 31 consists of the following sources (dollars in thousands):
1996 1995 1994 ------ ------ ------ Domestic................................. $ 58,295 $ (33,322) $ 39,769 Foreign.................................. 3,717 2,396 2,071 -------- --------- -------- $ 62,012 $ (30,926) $ 41,840 ======== ========= ========
The income tax benefit (provision) for the years ended December 31 consists of the following (dollars in thousands):
1996 1995 1994 ------- ------ ------ Current -- Federal.................................. $ (1,800) $ (1,500) $ (1,000) Foreign.................................. (1,526) (1,089) (1,037) State and local (a)...................... (2,429) (2,724) (1,072) --------- --------- -------- $ (5,755) $ (5,313) $ (3,109) Deferred -- Provision for federal and state taxes payable in future................ (17,009) (5,886) -- Benefit from change in deferred tax asset valuation allowance.......... -- -- 14,000 --------- --------- -------- Total tax benefit (provision)............ $ (22,764) $ (11,199) $ 10,891 ========= ========= ======== (a) The state and local income tax in 1994 includes a benefit of $900,000 as a result of a new state income tax law enacted in 1994.
Deferred income tax assets (liabilities) at December 31 are comprised of the following (dollars in thousands):
1996 1995 ------- ------- Net operating loss carryforwards......... $ 13,700 $ 32,000 Other.................................... 20,000 15,400 --------- --------- Gross deferred tax assets................ 33,700 47,400 Gross deferred tax liabilities........... (8,000) (10,800) --------- --------- Net deferred tax asset................... $ 25,700 $ 36,600 ========= =========
During 1994, the net deferred income tax asset increased by $14,000,000, reflecting the increase in the expected future benefit from the utilization of the Company's net operating loss carryforwards due to management's improved expectations of future income and an increase in the federal income tax rate. During 1995, management determined that the full amount of the asset could be recorded thereby eliminating the need for a valuation allowance. The decrease in the asset during 1996 and 1995 results primarily from the utilization of the Company's net operating loss carryforwards. The income tax benefit (provision) differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income (loss) from continuing operations before income taxes and minority interest as a result of the following differences (dollars in thousands):
1996 1995 1994 ------------------- ------------------ ----------------- Amount Percent Amount Percent Amount Percent ------- ------- -------- -------- ------- ------- Computed statutory tax (provision) benefit...... $ (21,704) (35.0) $ 10,824 35.0 $(14,644) (35.0) Increase (decrease) in tax (provision) benefit resulting from _ Operating loss carryforward which resulted in current tax benefit..................... -- -- 9,376 30.3 13,919 33.3 Change in deferred tax asset valuation allowance................................. -- -- -- -- 14,000 33.5 State income taxes (net of federal benefit).. (1,580) (2.5) (1,800) (5.8) (1,180) (2.8) Alternative minimum tax...................... (1,150) (1.9) (500) (1.6) (1,000) (2.4) Goodwill amortization........................ (1,034) (1.7) (800) (2.6) (700) (1.7) Purchased in-process research and development............................... -- -- (28,305) (91.5) -- -- Foreign sales corporation.................... 1,200 1.9 900 2.9 -- -- Resolution of tax issues..................... 800 1.3 -- -- -- -- Other........................................ 704 1.2 (894) (2.9) 496 1.1 --------- ----- -------- ----- -------- ----- Income tax (provision) benefit.................. $ (22,764) (36.7) $(11,199) (36.2) $ 10,891 26.0 ========= ===== ========= ===== ======== =====
At December 31, 1996, the Company has net operating loss carryforwards of approximately $27,500,000 for tax reporting purposes, which will, if unused, expire from 2000 to 2006. The Company has an alternative minimum tax credit carryforward of approximately $3,700,000 as of December 31, 1996, which may be carried forward indefinitely. The Company has investment tax credit carryforwards of approximately $2,200,000 at December 31, 1996 which, if unused, will expire from 1997 to 2001. The Company has a research and development tax credit carryforward of approximately $800,000 at December 31, 1996 which will, if unused, expire from 1998 to 1999. The Company has foreign tax credit carryforwards of approximately $900,000 at December 31, 1996 which, if unused, will expire from 2000 to 2001. Realization of the loss and credit carryforwards is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset will be realized. Under federal tax law, certain potential changes in ownership of the Company, which may not be within the Company's control, may operate to restrict future utilization of these carryforwards. (10) GEOGRAPHIC INFORMATION: The Company operates entirely in one industry segment, the Components Segment. The Components Segment designs, manufactures and sells active and passive components for communications networks including cable connectors, frequency control devices and fiber optic lasers. This segment also designs, manufactures and sells components for the home gas cooking appliance industry as well as a broad line of control and sensing devices for use in testing equipment and industrial applications. The Company's geographic data for continuing operations for the years ended December 31 are as follows (dollars in thousands):
Sales --------------------------------------- 1996 1995 1994 ------------ ---------- --------- GEOGRAPHIC AREAS SALES United States: Unaffiliated....................... $ 276,057 $ 230,697 $ 209,723 To foreign affiliates.............. 668 430 396 Foreign: Unaffiliated....................... 27,479 24,667 21,171 To United States affiliates........ 1,961 1,751 810 Total sales between geographic areas.... (2,629) (2,181) (1,206) --------- --------- --------- Consolidated sales................. $ 303,536 $ 255,364 $ 230,894 ========= ========= ========= OPERATING INCOME (LOSS) United States......................... $ 42,156 $ (32,573) $ 40,723 Foreign............................... 4,831 4,676 3,390 --------- --------- --------- Operating income (loss)............ $ 46,987 $ (27,897) $ 44,113 ========= ========= ========= IDENTIFIABLE ASSETS United States......................... $ 332,005 $ 273,946 $ 251,210 Foreign............................... 42,280 38,598 28,590 --------- --------- --------- Identifiable assets................ $ 374,285 $ 312,544 $ 279,800 ========= ========= ========= (a) Sales to one customer amounted to $28,090,000 in 1994. (b) The 1996 operating income includes a $3,820,000 charge for restructuring related to the discontinuance of certain product lines; a $900,000 charge related to the write-up of Gilbert inventory required by purchase accounting; a $2,940,000 reserve for potential legal, environmental matters and other reserves, and a $1,139,000 charge for improperly capitalized expenses relating to 1995. The 1995 operating loss includes a $80,872,000 charge related to purchased in-process research and development and a $2,000,000 charge related to the write-up of Lasertron inventory in connection with the Lasertron acquisition. The 1994 operating income includes a $2,000,000 restructuring charge to cover write-downs of vacated facilities. (c) Unaffiliated export sales were $85,328,000, $63,815,000 and $48,528,000 for 1996, 1995, and 1994, respectively. These sales were principally to customers in Canada, Mexico, South America, Asia and Europe.
(11) ACCRUED LIABILITIES: Accrued liabilities at December 31 are summarized as follows (dollars in thousands):
1996 1995 -------- -------- Wages, bonuses, commissions, vacation, and other compensation.................... $ 8,598 $ 6,473 Income taxes.................................. 7,534 5,306 Insurance..................................... 2,592 3,725 Other......................................... 10,329 8,192 -------- -------- $ 29,053 $ 23,696 ======== ========
(12) COMMITMENTS AND CONTINGENCIES: In November 1996, the Company entered into an Amended and Restated Management Stockholders Agreement with Gilbert management. Pursuant to the terms of this Agreement, the Company purchased 7.5% of Gilbert's interest owned by Gilbert management in the fourth quarter of 1996 at a purchase price of approximately $30,600,000 and will purchase the remaining 7.5% interest over the next two years at a price that will be an agreed multiple of Gilbert's earnings before interest and taxes. These transactions will be financed with working capital and borrowings from the Company's credit facility. Rent expense for facilities and office equipment was $4,601,000, $3,827,000 and $3,205,000 in 1996, 1995, and 1994, respectively. At December 31, 1996, the Company was committed under non-cancellable operating leases for minimum annual rentals for the next five years as follows: 1997 - $3,544,000; 1998 - $3,026,000; 1999 - $2,883,000; 2000 - $2,542,000; 2001 - $2,177,000; thereafter - $10,268,000. Various pending or threatened legal proceedings by or against the Company or one or more of its subsidiaries involve alleged breaches of contract, torts and miscellaneous other causes of action arising in the course of business. The Company's management, based upon advice of legal counsel representing the Company with respect to each of these proceedings, does not believe any of these proceedings will have a significant impact on the Company's consolidated financial position. (13) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED): In early 1997, the Company discovered that the controller of one of its divisions, in collusion with two of his assistants, capitalized certain amounts which should have been expensed in the periods incurred. The amounts involved, which totaled $3,518,000 ($2,181,000 after taxes), or $0.12 per share, relate to portions of 1995 and 1996. Because the irregularities which relate to 1995 were not material to 1995 results, the 1995 financial statements were not restated; the first, second, and third quarters of 1996 have been restated, and the cumulative effect of the 1995 misstatements is reflected in the restated financial statements for the three months ended March 31, 1996. In response to this employee misconduct, the Company conducted an investigation of this matter involving outside legal counsel and the Company's independent accountants, terminated the employment of the individuals involved, and executed a review of the internal control system at the division. In addition, as a result of the sale of the Company's Nordco subsidiary, the Company has also restated 1996 and 1995 consolidated financial statements to reflect Nordco as a discontinued operation. The following is a summary of the unuadited quarterly results of operations for 1996 and 1995 (dollars in thousands, except per share date):
Quarter Ended ----------------------------------- March 31 June 30 September 30 ---------- --------- ------------ 1996 (Previously Reported) Net sales.......................... $78,737 $ 80,590 $ 74,086 Gross Profit....................... $31,580 $ 32,724 $ 29,283 Income from continuing operations.. $17,991 $ 6,968 $ 7,912 Net income......................... $18,421 $ 7,622 $ 8,270 Earnings per common share: Continuing operations........... $ .98 $ .37 $ .42 Net Income...................... $ 1.00 $ .41 $ .44
Quarter Ended -------------------------------------------------------- (As Restated) (As Restated) (As Restated) March 31 June 30 September 30 December 31 Full Year ------------- ------------- ------------ ------------ --------- 1996 (As Restated) Net sales.......................... $78,737 $80,590 $ 74,086 $ 70,123 $303,536 Gross profit....................... $30,151 $32,113 $ 28,670 $ 23,192 $114,126 Income from continuing operations.. $16,829 $ 6,454 $ 7,407 $ 1,286 $ 31,976 Net income......................... $17,259 $ 7,108 $ 7,765 $ 9,704 $ 41,836 Earnings per common share: Continuing operations........... $ .92 $ .34 $ .39 $ .07 $ 1.71 Net income...................... $ .94 $ .38 $ .41 $ .52 $ 2.24 1995 Net sales.......................... $65,592 $60,860 $ 59,886 $ 69,026 $255,364 Gross profit....................... $26,438 $24,659 $ 23,451 $ 26,535 $101,083 Income (loss) from continuing operations...................... $10,022 $ 9,720 $(76,773) $ 4,048 $(52,983) Net income (loss).................. $10,815 $10,723 $(77,845) $ 4,183 $(52,124) Earnings (loss) per common share: Continuing operations........... $ .54 $ .53 $ (4.11) $ .22 $ (2.87) Net income (loss)............... $ .58 $ .58 $ (4.17) $ .23 $ (2.83)
CONTINUING OPERATIONS Fourth Quarter - 1996 The Company recorded a charge of $900,000 related to the expensing of the purchase accounting write-up of Gilbert inventory. The Company also recorded an income tax benefit of $342,000 related to this charge. The Company recognized a restructuring charge of $2,368,000, net of tax, relating primarily to the write-off of inventory for exiting product lines. The Company recorded a $1,414,000 charge, net of tax, for asset write- downs and other reserves. Third Quarter - 1996 The Company recorded a $590,000 gain, net of tax, on its sale of its 45% interest in O/E/N India Ltd. First Quarter - 1996 The Company recorded an after-tax charge of $706,000 for certain amounts capitalized which should have been expensed in 1995. The Company recorded a $12,741,000, net of tax, gain on its sale of 49% interest in Video 44 (WSNS-TV Channel 44). The Company recorded a $1,178,000 charge, net of tax, for asset write- downs and other reserves. Fourth Quarter - 1995 The Company recorded a charge of $1,500,000 related to the expensing of the purchase accounting write-up of Lasertron inventory. The Company also recorded an income tax benefit of $585,000 related to this charge. Third Quarter - 1995 The Company recorded a charge of $80,872,000 related to purchased in- process research and development in connection with the Lasertron acquisition. The Company recorded a charge of $500,000 related to the expensing of the purchase accounting write-up of Lasertron inventory. The Company also recorded an income tax benefit of $195,000 related to this charge. DISCONTINUED OPERATIONS Fourth Quarter - 1996 The Company recorded a gain of $9,367,000 on the sale of Nordco. EXTRAORDINARY CHARGE Fourth Quarter - 1996 The Company recorded an extraordinary charge of $949,000, net of taxes, related to the early extinguishment of debt. Third Quarter - 1995 The Company recorded an extraordinary charge of $1,610,000, net of taxes and minority interest, related to the early extinguishment of debt at Gilbert and Connector. 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 For information with respect to the executive officers of the registrant, see "Executive Officers of the Registrant" in Part I of this report. For information with respect to the Directors of the registrant, see "Election of Directors" in the Proxy Statement, incorporated herein by reference, to be filed no later than March 31, 1997 for the Annual Meeting of Stockholders to be held on April 16, 1997. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Compensation of Executive Officers" and "Compensation of Directors" in the Proxy Statement to be filed no later than March 31, 1997 for the Annual Meeting of Stockholders to be held on April 16, 1997 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Proxy Statement to be filed no later than March 31, 1997 for the Annual Meeting of Stockholders to be held on April 16, 1997 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Proxy Statement to be filed no later than March 31, 1997 for the Annual Meeting of Stockholders to be held on April 16, 1997 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement to be filed no later than March 31, 1997 for the Annual Meeting of Stockholders to be held on April 16, 1997 is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of the report: 1. Financial Statements Consolidated balance sheet at December 31, 1996 and 1995 Consolidated statement of operations for the years ended December 31, 1996, 1995 and 1994 Consolidated statement of stockholders' equity for the years ended December 31, 1996, 1995 and 1994 Consolidated statement of cash flows for the years ended December 31, 1996, 1995 and 1994 Notes to consolidated financial statements 2. Schedule II -- Valuation and qualifying accounts All other schedules have been omitted since the information is either not applicable, not required or is included in the financial statements or notes thereto. 3. Exhibit Index (2)(a) Amended and Restated Management Stockholders Agreement dated as of November 15, 1996 by and among Gilbert Engineering Co., Inc., Connector Holding Company, and each of Robert A. Spann, Bruce B. Gullekson, Daniel H. Franklin and Robert D. Hayward, filed as Exhibit 2.1 to the Company's Form 8-K dated November 22, 1996, is incorporated herein by this reference. (3)(a) Restated Certificate of Incorporation of Oak Industries Inc. dated October 28, 1980; Certificate of Amendment of Restated Certificate of Incorporation dated May 1, 1981; Certificate of Amendment of Restated Certificate of Incorporation, as Amended dated August 14, 1985; Certificate of Amendment of Restated Certificate of Incorporation, as Amended dated September 30, 1986; Certificate of Amendment of Certificate of Incorporation, as Amended dated July 15, 1987; Certificate of Amendment of Certificate of Incorporation, as Amended dated June 3, 1992; and Certificate of Amendment of Restated Certificate of Incorporation, as Amended dated May 7, 1993 all filed as Exhibit 3.1 to the Company's Amendment No. 1 to Form S-3 dated November 24, 1993 are incorporated herein by this reference. (3)(b) Certificate of Designation dated December 21, 1995, filed as Exhibit 2 to the Company's Form 8-K dated December 27, 1995 is incorporated herein by this reference. (3)(c) Bylaws of Oak Industries Inc. as amended through December 7, 1995, filed as Exhibit 3 to the Company's Form 10-K dated March 21, 1996 is incorporated herein by this reference. (4)(a) Rights Agreement dated as of December 7, 1995, between Oak Industries Inc. and Bank of Boston as Rights Agent, filed as Exhibit 1 to the Company's Form 8-K dated December 27, 1995 is incorporated herein by this reference. (10)(a) 1982 Incentive Stock Option Plan filed as Exhibit (A) to the Company's 1982 Proxy Statement is incorporated herin by this reference. (10)(b) 1986 Stock Option and Restricted Stock Plan for Executive and Key Employees of Oak Industries Inc. filed as Annex III to the Proxy Statement dated February 14, 1986 for a Special Meeting of Stockholders is incorporated herein by this reference. (10)(c) 1988 Stock Option Plan for Non-Employee Directors of Oak Industries Inc. filed as Exhibit A to the Company's Proxy Statement in connection with 1988 Annual Meeting of Stockholders filed with the Commission on April 6, 1988 is incorporated herein by this reference. (10)(d) 1992 Stock Option and Restricted Stock Plan, as amended effective as of December 5, 1996, filed herewith. (10)(e) Oak Industries Inc. Non-Qualified Stock Option Plan, filed as Exhibit 10(e) to the Company's 1992 Annual Report on Form 10-K dated March 15, 1993 is incorporated herein by this reference. (10)(f) 1995 Stock Option and Restricted Stock Plan, as amended effective as of December 5, 1996, filed herewith. (10)(g) Lasertron Inc. 1982 Incentive Stock Option Plan and 1992 Stock Option Plan filed as Exhibit 10.1 and 10.2 to Form S-8 dated September 21, 1995, are incorporated herein by this reference. (10)(h) Credit Agreement dated as of November 1, 1996 among Oak Industries Inc., the lenders from time to time party thereto and the Chase Manhattan Bank, as administrative agent and issuing bank, filed as Exhibit 10 to Form 10-Q dated November 14, 1996, is incorporated herein by this reference. (10)(i) Form of Severance Agreement dated as of May 1, 1996 by and between the Company and each of William S. Antle III, Francis J. Lunger, Coleman S. Hicks and Pamela F. Lenehan, filed as Exhibit 10.1 to the Company's Form 10-Q dated July 19, 1996, is incorporated herein by this reference. (10)(j) Oak Industries Inc. Severance Plan dated as of May 1, 1996, filed as Exhibit 10.2 to the Company's Form 10-Q dated July 19, 1996, is incorporated herein by this reference. (10)(k) Agreement to Purchase NST Venture Interest and Capital Stock by and among the Stockholders of Harriscope of Chicago, Inc., and National Subscription Television of Chicago Inc. as the Sellers and Telemundo of Chicago, Inc. as Buyer dated as of November 8, 1995 and filed as Exhibit 1.1 to Form 8-K dated March 6, 1996, is incorporated herein by this reference. (10)(l) Stock Purchase Agreement by and among Harper-Wyman Company, as Seller, Oak Industries Inc., NHC Corp. as Buyer, and Nordco Inc. dated as of October 9, 1996 and filed as Exhibit 1.1 to Form 8-K dated October 16, 1996, is incorporated herein by this reference. (11) Statement regarding computation of per share earnings, filed herewith. (13) 1996 Annual Report to be provided no later than March 31, 1997 for the information of the Commission and not deemed "filed" as a part of the filing. (21) Subsidiaries of the Company, filed herewith. (27) Financial Data Schedule (Submitted only to the Securities and Exchange Commission in electronic format for its information only). (b) Reports on Form 8-K: A report on Form 8-K was filed on October 16, 1996 regarding the Company's sale of Nordco. A report on Form 8-K was filed on November 15, 1996 related to the Company's purchase of 20% of the outstanding common stock of Connector Holding Company ("Connector") pursuant to the terms of a Stockholders Agreement dated December 22, 1992 by and among the Company, Connector, and each of Tyler Capital Fund, L.P., Tyler Massachusetts L.P., Tyler International, L.P. - II, BCIP Associates, BCIP Trust Associates, L.P. and Bain Venture Capital. As a result of the purchase, Connector is now a wholly-owned subsidiary of the Company. This Form 8-K includes certain pro forma financial information required pursuant to Article 11 of Regulation S-X. A report on Form 8-K was filed on November 22, 1996 in connection with the purchase made by Connector of one-half of the shares of Gilbert Engineering Co., Inc. ("Gilbert"), held by members of Gilbert management. CONSENT OF INDEPENDENT ACCOUNTANTS TO INCORPORATION BY REFERENCE INTO FORM S-8 FILING We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File Nos. 33-14708, 2-71969, 33-32104, 2-83639, 33- 53012, and 33-58878) of Oak Industries Inc. of our report dated January 31, 1997 appearing on page 21 of this Form 10-K. PRICE WATERHOUSE LLP Boston, Massachusetts March 5, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OAK INDUSTRIES INC. Dated: February 28, 1997 By WILLIAM S. ANTLE III (William S. Antle III) Chairman of the Board, President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE ---- ----- ---- WILLIAM S. ANTLE III President and Februry 28, 1997 (William S. Antle III) Chief Executive Officer (Principal Executive Officer) FRANCIS J. LUNGER Senior Vice President February 28, 1997 (Francis J. Lunger) and Chief Financial Officer (Principal Financial Officer) RODERICK M. HILLS Vice Chairman of February 28, 1997 (Roderick M. Hills) the Board DANIEL W. DERBES Director February 28, 1997 (Daniel W. Derbes) GEORGE W. LEISZ Director February 28, 1997 (George W. Leisz) GILBERT E. MATTHEWS Director February 28, 1997 (Gilbert E. Matthews) CHRISTOPHER H.B. MILLS Director February 28, 1997 (Christopher H.B. Mills) ELLIOT L. RICHARDSON Director February 28, 1997 (Elliot L. Richardson) BETH BRONNER Director February 28, 1997 (Beth Bronner)
OAK INDUSTRIES INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1996, 1995 and 1994 (Dollars in thousands) ALLOWANCE FOR LOSSES IN COLLECTION
1996 1995 1994 ------ ------ ------ Balance, beginning of year............. $ 1,573 $ 1,056 $ 892 Provision charged to selling, general, and administrative expenses......................... 812 324 426 Recoveries of accounts previously written off...................... 3 20 10 Less write-off of uncollectible accounts......................... (58) (157) (314) Acquisition of businesses............. -- 330 42 ------- ------- ------- Balance, end of year.................. $ 2,330 $ 1,573 $ 1,056 ======= ======= =======
EX-11 2 COMPUTATION OF NET INCOME PER SHARE OAK INDUSTRIES INC. EXHIBIT 11 COMPUTATION OF NET INCOME (LOSS) PER SHARE (Dollars in thousands, except per share data)
1996 1995 1994 ------ ------ ------ EARNINGS: Income (loss) from continuing operations................ $ 31,976 $ (52,983) $ 41,041 Income from discontinued opeations, net of tax.......... 1,442 2,469 1,405 Gain on sale of discontinued operations, net of tax..... 9,367 -- -- ----------- ----------- ----------- Net income (loss) before extraordinary charge........... 42,785 (50,514) 42,446 Extraordinary charge for early extinguishment of debt... (949) (1,610) -- ----------- ----------- ----------- Net income (loss)....................................... $ 41,836 $ (52,124) $ 42,446 =========== =========== =========== SHARES: Weighted average number of common shares outstanding.... 18,042,561 17,520,228 17,281,718 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method).............................................. 786,905 902,786 963,652 Windfall tax benefit on non-qualified options........... (145,185) -- -- Additional dilutive effect of outstanding warrants (as determined by the application of the treasury stock method)........................................ -- -- 138,972 ----------- ----------- ----------- Weighted average number of common shares outstanding as adjusted.......................................... 18,684,281 18,423,014 18,384,342 =========== =========== =========== EARNINGS PER COMMON SHARE: Income (loss) per common share: Continuing operations................................ $ 1.71 $ (2.87) $ 2.23 Discontinued operations.............................. .08 .13 .08 Gain on sale of discontinued operation............... .50 -- -- ------------ ----------- ----------- Net income (loss) before extraordinary charge........ 2.29 (2.74) 2.31 Extraordinary charge................................. (.05) (.09) -- ------------ ----------- ----------- Net income (loss)...................................... $ 2.24 $ (2.83) $ 2.31 ============ =========== ===========
1 EX-21 3 SUBSIDIARIES OAK INDUSTRIES INC. EXHIBIT 21 SUBSIDIARIES
Jurisdiction in which Incorporated Ownership or Organized Percentage ------------ ------------ Cabel-Con A/S..................................... Denmark 100 (1) Cabel-Con, Inc. (USA)............................. Arizona 100 (1) Connector Holding Company......................... Delaware 100 Croven Crystals Ltd............................... Ontario, Canada 100 (2)(3) Electronic Technologies Inc....................... Delaware 100 Gilbert Engineering Co., Inc...................... Delaware 85 (4) Gilbert Engineering France, S.A................... France 100 (1) Harper-Wyman Company.............................. Delaware 100 (16) Harper-Wyman International Inc.................... Delaware 100 (5) Harper-Mex S.A. de C.V............................ Mexico 100 (6) H.E.S. International, Inc......................... Kansas 100 (7) Industrias McCoy de Venezuela S.A. de C.V......... Venezuela 100 (8) Lasertron, Inc.................................... Massachusetts 100 Lasertron Shanghai Ltd............................ China 100 (19) McCoy (Cayman) Ltd................................ Cayman Islands 50 (9) McCoy International Holding Company............... Delaware 100 (10) National Subscription Television of Chicago Inc... Illinois 100 (11) Oak Communications Inc............................ Delaware 100 Oak Crystal (Cayman) Ltd.......................... Cayman Islands 100 (12) Oak Crystal Inc................................... Delaware 100 (13) Oak Enclosures Inc................................ Delaware 100 Oak Investment Corporation........................ Delaware 100 (16) Oak Omega Inc..................................... Delaware 100 (14) Oak Overseas Manufacturing Corporation............ Delaware 100 Oak Systems Inc................................... Delaware 100 (15) OakGrigsby Inc.................................... Delaware 100 SGI de Mexico, S.A. de C.V........................ Mexico 100 (16) Societe d'Appareillages Electroniques, S.A........ France 100 (17) Wuhan Telecommunications Devices.................. China 50 (18) (1) Owned by Gilbert Engineering Co., Inc. (2) Owned by Electronic Technologies Inc. (3) Doing business as Oak Frequency Control Group. (4) 92.5% owned by Connector Holding Company. (5) Owned by Harper-Wyman Company. (6) Owned by Harper-Wyman International Inc. (7) Owned by Oak Enclosures Inc. (8) Owned by McCoy (Cayman) Ltd. (9) 50% owned by Oak Crystal (Cayman) Ltd. (10) 50% owned by Electronic Technologies Inc. and 50% owned by Oak Crystal Inc. (11) Owned by Oak Systems Inc. (12) Owned by Oak Omega Inc. (13) Doing business as Oak Frequency Control Group, McCoy, and OFC. (14) Owned by Oak Crystal Inc. (15) Owned by Oak Investment Corporation. (16) Owned by OakGrigsby Inc. (17) Owned by Gilbert Engineering, France, S.A. (18) 50% owned by Lasertron, Inc. (19) Owned by Lasertron, Inc.
EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS Dec-31-1996 Dec-31-1996 6,116 0 42,532 2,330 53,355 124,524 143,400 78,374 374,285 45,505 0 184 0 0 171,539 374,285 303,536 303,536 189,410 189,410 0 0 5,767 62,012 22,764 31,976 10,809 (949) 0 41,836 2.24 2.24
EX-10 5 1995 STOCK OPTION PLAN OAK INDUSTRIES INC. 1995 STOCK OPTION AND RESTRICTED STOCK PLAN As amended through December 5, 1996 OAK INDUSTRIES INC., a corporation organized under the laws of the State of Delaware, hereby adopts this 1995 Stock Option and Restricted Stock Plan. The purposes of this Plan are as follows: 1. To further the growth, development and financial success of the Company by providing additional incentives to certain of its executive and other key Employees who have been or will be given responsibility for the management or administration of the Company's business affairs, and to its non-employee Directors by assisting them to become owners of capital stock of the Company and thus to benefit directly from its growth, development and financial success; and 2. To enable the Company to obtain and retain the services of the type of individuals considered essential to the long-range success of the Company by providing and offering them an opportunity to become owners of capital stock of the Company. ARTICLE I DEFINITIONS Whenever the following terms are used in this Plan, they shall have the meaning specified below unless the context clearly indicates to the contrary. The masculine pronoun shall include the feminine and neuter and the singular shall include the plural, where the context so indicates. Section 1.1 - Board "Board" shall mean the Board of Directors of the Company. Section 1.2 - Code "Code" shall mean the Internal Revenue Code of 1986, as amended. Section 1.3 - Committee "Committee" shall mean the Compensation Committee of the Board, appointed as provided in Section 9.1. "Committee" shall also mean the Chief Executive Officer of the Company, so long as such individual is also a Director, solely in connection with grants, from time to time, of Options to purchase not more than 10,000 shares each of the Company's Stock, to Employees who are not executive officers for the purpose of Section 16 of the Securities Exchange Act of 1934, as amended. Section 1.4 - Company "Company" shall mean Oak Industries Inc. In addition, "Company" shall mean any corporation assuming, or issuing new employee stock options in substitution for, Options outstanding under the Plan, in a transaction to which Section 424(a) of the Code applies. Section 1.5 - Director "Director" shall mean a member of the Board. Section 1.6 - Employee "Employee" shall mean any employee (as defined in accordance with the Regulations and Revenue Rulings then applicable under Section 3401(c) of the Code) of the Company, or of any corporation which is then a Parent Corporation or a Subsidiary, whether such employee is so employed at the time this Plan is adopted or becomes so employed subsequent to the adoption of this Plan. Section 1.7 - Fair Market Value "Fair Market Value" of a share of the Stock for purposes of the Plan, of a given date, shall be: (i) the closing price of a share of the Stock on the principal exchange on which shares of the Stock are then trading, if any, on such date, or, if shares were not traded on such date, then on the next preceding trading day during which a sale occurred; (ii) if such Stock is not traded on an exchange but is quoted on NASDAQ or a successor quotation system, (1) the last sales price (if the Stock is then listed as a National Market Issue under the NASD National Market System), or (2) the mean between the closing representative bid and asked prices (in all other cases) for the Stock on such date as reported by NASDAQ or such successor quotation system; or (iii) if such Stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the mean between the closing bid and asked prices for the Stock on such date as determined in good faith by the Committee; or (iv) if the Stock is not publicly traded, the fair market value established by the Committee acting in good faith. Section 1.8 - Incentive Stock Option "Incentive Stock Option" shall mean an Option which qualifies under Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. In the event that an Option is not designated by the Committee, it shall be an Incentive Stock Option. Section 1.9 - Non-Qualified Option "Non-Qualified Option" shall mean an Option which is not an Incentive Stock Option and which is designated as a Non-Qualified Option by the Committee. Section 1.10 - Officer "Officer" shall mean an officer of the Company, any Parent Corporation or any Subsidiary. Section 1.11 - Option "Option" shall mean an option to purchase Stock of the Company, granted under the Plan. "Option" includes both Incentive Stock Options and Non- Qualified Options. Section 1.12 - Optionee "Optionee" shall mean an Employee or a Director to whom an Option is granted under the Plan. Section 1.13 - Parent Corporation "Parent Corporation" shall mean any corporation in an unbroken chain of corporations ending with the Company if each of the corporations other than the Company then owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Section 1.14 - Plan "Plan" shall mean this 1995 Stock Option and Restricted Stock Plan of Oak Industries Inc. Section 1.15 - Restricted Stock "Restricted Stock" shall mean Stock of the Company issued pursuant to Article VII of the Plan. Section 1.16 - Restricted Stockholder "Restricted Stockholder" shall mean an Employee or a Director to whom Restricted Stock has been issued under the Plan. Section 1.17 - Secretary "Secretary" shall mean the Secretary of the Company. Section 1.18 - Securities Act "Securities Act" shall mean the Securities Act of 1933, as amended. Section 1.19 - Stock "Stock" shall mean shares of the Company's common stock, $.01 par value. Section 1.20 - Stock Appreciation Right "Stock Appreciation Right" shall mean a stock appreciation right granted under the Plan. Section 1.21 - Subsidiary "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Section 1.22 - Termination of Employment "Termination of Employment" shall mean the time when the employee- employer relationship between the Employee and the Company, a Parent Corporation or a Subsidiary is terminated for any reason, including, but not by way of limitation, a termination by resignation, discharge, death or retirement, but excluding terminations where there is a simultaneous reemployment by the Company, a Parent Corporation or a Subsidiary. Without limiting its discretion under Section 9.2, the Committee shall determine the effect of all other matters and questions relating to Termination of Employment resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Terminations of Employment; provided, however, that, with respect to Incentive Stock Options, a leave of absence shall constitute a Termination of Employment if, and to the extent that, such leave of absence interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. ARTICLE II SHARES SUBJECT TO PLAN Section 2.1 - Shares Subject to Plan The shares of stock which may be awarded under the Plan shall be shares of the Company's $0.01 par value common stock. Shares delivered under the Plan shall be authorized but unissued Stock or, if the Committee so decides in its sole discretion, previously issued Stock acquired by the Company and held in its treasury. The aggregate number of such shares which may be delivered pursuant to the Plan shall not exceed 2,000,000. The aggregate number of shares which may be awarded as Restricted Stock under the Plan shall not exceed 200,000. The maximum number of shares for which Options may be granted to any individual over the life of the Plan shall be 1,000,000. The maximum number of shares subject to Stock Appreciation Rights granted to any individual over the life of the plan shall likewise be 1,000,000. The per- individual limitations described in this paragraph shall be construed and applied consistent with the rules and regulations under Section 162(m) of the Code. Section 2.2 - Unexercised Options If any Option expires or is canceled without having been fully exercised, the number of shares subject to such Option but as to which such Option was not exercised prior to its expiration or cancellation may again be optioned hereunder, subject to the limitations of Section 2.1. Section 2.3 - Exercised Stock Appreciation Rights To the extent that a Stock Appreciation Right shall have been exercised for cash, the number of shares subject to the related Option, or portion thereof, may again be optioned hereunder, subject to the limitations of Section 2.1. To the extent that a Stock Appreciation Right shall have been exercised for Stock, the number of shares actually issued shall be counted against the maximum number of shares which may be delivered pursuant to the Plan and the balance of the shares subject to the related Option, or portion thereof, may again be optioned hereunder, subject to the limitations of Section 2.1. Section 2.4 - Forfeited Restricted Stock Any shares of Restricted Stock forfeited to the Company pursuant to the restrictions thereon may again be optioned or issued as Restricted Stock hereunder, subject to the limitations of Section 2.1. Section 2.5 - Changes in Company's Shares In the event that the outstanding shares of Stock are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend or combination of shares, appropriate adjustments shall be made by the Committee in the number and kind of shares subject to Options, Stock Appreciation Rights and Restricted Stock then outstanding or subsequently granted under the Plan, including but not limited to adjustments of the limitations in Section 2.1 on the maximum number and kind of shares which may be issued under the Plan. ARTICLE III GRANTING OF OPTIONS Section 3.1 - Eligibility Any non-employee Director of the Company, or any executive or other key Employee of the Company or of any corporation which is then a Parent Corporation or a Subsidiary shall be eligible to be granted Options, subject to Section 3.2. Section 3.2 - Qualification of Incentive Stock Option Incentive Stock Options shall be granted only to Employees. Section 3.3 - Granting of Options to Executive or Key Employees (a) The Committee shall from time to time, in its absolute discretion: (i) Determine which Employees are executive or key employees and select from among the executive or key employees (including those to whom Options and/or Stock Appreciation Rights have been previously granted and/or Restricted Stock has previously been issued under the Plan) such of them as in its opinion should be granted Options; and (ii) Determine the number of shares to be subject to such Options granted to such selected executive or key Employees, and determine whether such Options are to be Incentive Stock Options or Non-Qualified Options; and (iii) Determine the terms and conditions of such Options, consistent with the Plan. (b) Upon the selection of an Employee to be granted an Option, the Committee shall instruct the Secretary to issue such Option and may impose such conditions on the grant of such Option as it deems appropriate. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Employee that the Employee surrender for cancellation some or all of the unexercised Options which have been previously granted to such Optionee. An Option the grant of which is conditioned upon such surrender may have an option price lower (or higher) than the option price of the surrendered Option, may cover the same number of shares (or fewer or greater) as the surrendered Option, may contain such other terms as the Committee deems appropriate and shall be exercisable in accordance with its terms, without regard to the number of shares, price, option period or any other term or condition of the surrendered Option. Section 3.4 - Granting of Options to Non-Employee Directors Each Director who is not an employee shall be granted Options under the following formula: (a) (i) Each current Director shall be granted an Option as of the date of the approval of the Plan by the Board, and shall be granted additional Options on the first and second anniversaries of such date (or on the next preceding business day in the event either of such anniversaries is not a business day). Each such Option shall permit such Director to acquire 2,500 shares at an exercise price equal to the Fair Market Value per share on the date of such grant and shall become exercisable in three installments: 34 percent on the first anniversary of such grant, 33 percent on the second anniversary and 33 percent on the third anniversary. (ii) Each current Director shall also be granted an Option as of the date of the approval of the Plan by the Committee pursuant to which such Director may acquire 10,000 shares at an exercise price equal to the Fair Market Value per share on such date, such option to become exercisable in three installments: 34 percent on the first anniversary of such grant, 33 percent on the second anniversary and 33 percent on the third anniversary. (b) (i) Each Director newly elected after the approval of the Plan by the Company's shareholders and who is not an Employee shall be granted an Option on the first business day following such Director's election, and shall be granted additional Options on the first and second anniversaries of such date (or on the next preceding business day in the case either of such anniversaries is not a business day). Each such Option shall permit such Director to acquire 2,500 shares at an exercise price equal to the Fair Market Value per share on the date of each such grant and shall become exercisable in three installments: 34 percent on the first anniversary of such grant, 33 percent on the second anniversary and 33 percent on the third anniversary. (ii) Each such newly elected Director shall also be granted an Option as of the first business day following such Director's election pursuant to which such Director may acquire 10,000 shares at an exercise price equal to Fair Market Value as of the date of such grant, such Option to become exercisable in three installments: 34 percent on the first anniversary of such grant, 33 percent on the second anniversary and 33 percent on the third anniversary. ARTICLE IV TERMS OF OPTIONS Section 4.1 - Option Agreement Each Option shall be evidenced by a written stock option agreement, which shall be executed by the Optionee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with the Plan. Stock option agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to qualify such Options as "incentive stock options" under Section 422 of the Code. Section 4.2 - Option Price The price of the shares subject to each Option shall be set by the Committee; provided, however, that the price per share shall not be less than 100 percent of the Fair Market Value of such shares on the date such Option is granted; provided, further, that, in the case of an Incentive Stock Option, the price per share shall not be less than 110 percent of the Fair Market Value of such shares on the date such Option is granted in the case of an individual then owning (within the meaning of Section 424(d) of the Code) more than 10 percent of the total combined voting power of all classes of stock of the Company, any Subsidiary or any Parent Corporation. Section 4.3 - Commencement of Exercisability Options shall become exercisable at such times and in such installments (which may be cumulative) as the Committee shall provide in the terms of each individual Option; provided, however, that by a resolution adopted after an Option is granted the Committee may, on such terms and conditions as it may determine to be appropriate accelerate the time at which such Option or any portion thereof may be exercised. Section 4.4 - Expiration of Options The Committee shall provide, either at the time of the grant or any time thereafter, in the terms of each individual Option, when such Option expires and becomes unexercisable; and (without limiting the generality of the foregoing) the Committee may provide in the terms of individual Options that said Options expire immediately upon a Termination of Employment for any reason. Section 4.5 - Employment Nothing in this Plan or in any stock option agreement hereunder shall confer upon any Optionee any right to continue in the employ of the Company, any Parent Corporation or any Subsidiary or shall interfere with or restrict in any way the rights of the Company, its Parent Corporations and its Subsidiaries, which are hereby expressly reserved, to discharge any Optionee at any time for any reason whatsoever, with or without cause. Section 4.6 - Merger, Consolidation, Acquisition, Liquidation or Dissolution In the event of the merger or consolidation of the Company with or into another corporation as a result of which the Company's stock is no longer outstanding, the acquisition by another corporation or person of all or substantially all of the Company's assets or 50 percent or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company, all outstanding Options shall become immediately exercisable on the 45th day prior to the proposed effective date of any such merger, consolidation, acquisition, liquidation or dissolution. Upon the consummation of such merger, consolidation or sale of assets all outstanding Options shall terminate unless the Committee shall have arranged that the surviving or acquiring corporation or an affiliate of that corporation grant to participants replacement Options, which in the case of incentive options shall satisfy, in the determination of the Committee, the requirements of Section 424(a) of the Code. ARTICLE V EXERCISE OF OPTIONS Section 5.1 - Person Eligible to Exercise During the lifetime of the Optionee, only the Optionee may exercise an Option granted to such Optionee, or any portion thereof. After the death of the Optionee, any exercisable portion of any Option may, prior to the time when such portion becomes unexercisable, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. Section 5.2 - Partial Exercise At any time and from time to time prior to the time when any exercisable Option or exercisable portion thereof becomes unexercisable, such Option or portion thereof may be exercised in whole or in part; provided, however, that the Company shall not be required to issue fractional shares and the Committee may, by the terms of the Option, require any partial exercise to be with respect to a specified minimum number of shares. Section 5.3 - Manner of Exercise An exercisable Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or the Secretary's office of all of the following prior to the time when such Option or such portion becomes unexercisable under Section 4.4: (a) Notice in writing signed by the Optionee or other person then entitled to exercise such Option or portion, stating that such Option or portion is exercised, such notice complying with all applicable rules established by the Committee; and (b) Full payment: (i) (in cash or by check) for the shares with respect to which such Option or portion is thereby exercised; or (ii) With the consent of the Committee, shares of the Stock owned by the Optionee (which in the case of Stock acquired from the Company, shall have been held for at least six months) duly endorsed for transfer to the Company with a Fair Market Value (as determined under Section 4.2), on the date of delivery equal to the aggregate Option price of the shares with respect to which such Option or portion is thereby exercised; or (iii) With the consent of the Committee, a full recourse promissory note bearing interest (at a rate at least sufficient to preclude the imputation of interest under the Code or any successor provision) and payable upon such terms as may be prescribed by the Committee. The Committee may also prescribe the form of such note and the security to be given for such note. No Option may, however, be exercised by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law; or (iv) Any combination of the consideration provided in the foregoing subsections (i), (ii) and (iii); provided, that if the Stock delivered upon exercise of the Option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock shall be paid other than with a personal check or promissory note of the person exercising the option; or (v) By delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price; and (c) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars; and (d) In the event that the Option or portion thereof shall be exercised pursuant to Section 5.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option or portion thereof. Section 5.4 - Conditions to Issuance of Stock Certificates The Company shall not be required to issue or deliver any certificate or certificates for shares of Stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which the Stock is then listed; and (b) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The payment to the Company of all amounts which it, any Parent Corporation or any Subsidiary is required to withhold under federal, state or local law in connection with the exercise of the Option. If permitted by the Committee, either at the time of the grant of the Option or at the time of exercise, the participant may elect at such time and in such manner as the Committee may prescribe, to satisfy such withholding obligation by (i) delivering to the Company Stock owned by such individual having a Fair Market Value equal to such withholding obligation, or (ii) requesting that the Company withhold from the shares of Stock to be delivered upon exercise of such Option a number of shares of Stock having a Fair Market Value equal to such withholding obligation; and (e) The lapse of such reasonable period of time following the exercise of the Option as the Committee may establish from time to time for reasons of administrative convenience. Section 5.5 - Rights as Shareholders The holders of Options shall not be, nor have any of the rights or privileges of, shareholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders. Section 5.6 - Transfer Restrictions Except as expressly provided therein, an Option granted under the Plan is personal to the Optionee, is not transferable by the Optionee in any manner other than by will or the laws of descent and distribution. The Committee, in its absolute discretion, may impose such other restrictions on the transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective stock option agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Employee to give the Company prompt notice of any disposition of shares of Stock, acquired by exercise of an Incentive Stock Option, within two years from the date of granting such Option or one year after the transfer of such shares to such Employee. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirement to give prompt notice of disposition. ARTICLE VI STOCK APPRECIATION RIGHTS Section 6.1 - Grant of Stock Appreciation Rights A Stock Appreciation Right may be granted to any Employee who receives a grant of an Option under the Plan. A Stock Appreciation Right may be granted in connection and simultaneously with the grant of an Option or with respect to a previously granted Option. A Stock Appreciation Right shall be subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose, including the following: (a) A Stock Appreciation Right shall be related to a particular Option and shall be exercisable only to the extent the related Option is exercisable. (b) A Stock Appreciation Right shall be granted to the Optionee to the maximum extent of 100 percent of the number of shares subject to the simultaneously or previously granted Option. (c) A Stock Appreciation Right shall entitle the Optionee (or other person entitled to exercise the Option pursuant to Section 5.1) to surrender unexercised a portion of the Option to which the Stock Appreciation Right relates to the Company and to receive from the Company in exchange therefor an amount payable in cash or, in the discretion of the Committee, shares of the Stock, determined by multiplying the lesser of (i) the difference obtained by subtracting the Option exercise price per share of the Stock subject to the related Option from the Fair Market Value (as determinable under Section 4.2) of a share of the Stock on the date of exercise of the Stock Appreciation Right, or (ii) twice the Option exercise price per share of the Stock subject to the related Option, by the number of shares of Stock subject to the related Option with respect to which the Stock Appreciation Right shall have been exercised. ARTICLE VII ISSUANCE OF RESTRICTED STOCK Section 7.1 - Eligibility Any executive or other key Employee of the Company or of any corporation which is then a Parent Corporation or a Subsidiary shall be eligible to be issued Restricted Stock. Section 7.2 - Issuance of Restricted Stock (a) The Committee shall from time to time, in its absolute discretion: (i) Determine which Employees are executive or key Employees and select from among the executive or key Employees (including those to whom Options and/or Stock Appreciation Rights have been previously granted and/or Restricted Stock has been previously issued) such of them as in its opinion should be issued Restricted Stock; and (ii) Determine the number of shares of Restricted Stock to be issued to such selected executive or key Employees, and (iii) Determine the terms and conditions applicable to such Restricted Stock, consistent with the Plan. (b) Shares issued as Restricted Stock may be either previously authorized but unissued shares or issued shares which have been reacquired by the Company. Legal consideration, but no cash payment, will be required for each issuance of Restricted Stock. (c) Upon the selection of an executive or key Employee to be issued Restricted Stock, the Committee shall instruct the Secretary to issue such Restricted Stock and may impose such conditions on the issue of such Restricted Stock as it deems appropriate. Restricted Stock may not be issued by the Committee to executive or key Employees who are then Directors or Officers of the Company unless such issuance has been recommended by the Committee. Such recommendation shall be in writing and shall specify the Directors or Officers to whom such issuance is recommended and the recommended number of shares of Restricted Stock to be issued. ARTICLE VIII TERMS OF RESTRICTED STOCK Section 8.1 - Restricted Stock Agreement Restricted Stock shall be issued only pursuant to a written restricted stock agreement, which shall be executed by the Restricted Stockholder and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with the Plan. Section 8.2 - Employment Nothing in this Plan or in any Restricted Stock Agreement hereunder shall confer upon any Restricted Stockholder any right to continue in the employ of the Company, any Parent Corporation or any Subsidiary or shall interfere with or restrict in any way the rights of the Company, its Parent Corporations and its Subsidiaries, which are hereby expressly reserved, to discharge any Restricted Stockholder at any time for any reason whatsoever, with or without cause. Section 8.3 - Rights as Shareholders Upon delivery of the shares of Restricted Stock to the escrow holder pursuant to Section 8.7, the Restricted Stockholder shall have all the rights of a stockholder with respect to said shares, subject to the restrictions in such Restricted Shareholder's restricted stock agreement, including the right to vote the shares and to receive all dividends or other distributions paid or made with respect to the shares. Section 8.4 - Restrictions All shares of Restricted Stock issued under this Plan (including any shares received by holders thereof as a result of stock dividends, stock splits or any other forms of recapitalization) shall be subject to such restrictions as the Committee shall provide in the terms of each individual Restricted Stock Agreement; provided, however, that by a resolution adopted after the Restricted Stock is issued, the Committee may, on such terms and conditions as it may determine to be appropriate and subject to Section 10.3, remove any or all of the restrictions imposed by the terms of the Restricted Stock Agreement. All restrictions imposed pursuant to this Section 8.4 shall expire within ten years of the date of issuance. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Section 8.5 - Forfeiture of Restricted Stock The Committee shall provide in the terms of each individual restricted stock agreement that the Restricted Stock then subject to restrictions under the restricted stock agreement be forfeited by the Restricted Stockholder back to the Company immediately upon a Termination of Employment for any reason; provided, however, that provision may be made that no such forfeiture shall occur in the event of a Termination of Employment because of the Employee's normal retirement, death, total disability or early retirement with the consent of the Committee. Section 8.6 - Merger, Consolidation, Acquisition, Liquidation or Dissolution Upon the merger or consolidation of the Company with or into another corporation, as a result of which the Company's stock is no longer outstanding, the acquisition by another corporation or person of all or substantially all of the Company's assets or 50 percent or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company, the Committee may determine, at its sole discretion, that the restrictions imposed under the Restricted Stock Agreement on some or all shares of Restricted Stock shall immediately expire and/or that some or all of such shares shall cease to be subject to forfeiture under Section 8.5. Section 8.7 - Escrow The Secretary or such other escrow holder as the Committee may appoint shall retain physical custody of the certificates representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement expire or shall have been removed; provided, however, that in no event shall any Restricted Stockholder retain physical custody of any certificates representing Restricted Stock issued to such Restricted Shareholder. Section 8.8 - Legend In order to enforce the restrictions imposed upon shares of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under restricted stock agreements, which legend or legends shall make appropriate reference to the conditions imposed thereby. ARTICLE IX ADMINISTRATION Section 9.1 - Committee The Committee shall consist of at least two Directors, provided that the Committee shall consist of one Director solely when it is the Chief Executive Officer of the Company acting pursuant to such individual's authority to grant Options not to exceed 10,000 shares each of the Company's Stock to Employees who are not executive officers for the purposes of Section 16 of the Securities Exchange Act of 1934, as amended. Section 9.2 - Duties and Powers of Committee It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan, the Options, the Stock Appreciation Rights and the Restricted Stock and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. Any such interpretations and rules in regard to Incentive Stock Options shall be consistent with the basic purpose of the Plan to grant "incentive stock options" within the meaning of Section 422 of the Code. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan. Section 9.3 - Majority Rule The Committee shall act by a majority of its members in office. The Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Committee. Section 9.4 - Compensation; Professional Assistance; Good Faith Actions Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities incurred by members of the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company, Officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Optionees, holders of Stock Appreciation Rights and Restricted Stockholders, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, the Options, the Stock Appreciation Rights or the Restricted Stock and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. ARTICLE X OTHER PROVISIONS Section 10.1 - Options, Stock Appreciation Rights and Restricted Stock Not Transferable No Option, Stock Appreciation Right or Restricted Stock or interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Optionee or the Restricted Stockholder, as the case may be, or his or her successors in interest, or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this Section 10.1 shall prevent transfers by will or by the applicable laws of descent and distribution. Section 10.2 - Amendment, Suspension or Termination of the Plan The Committee may at any time discontinue making grants under the Plan. With the consent of the holder, the Committee may at any time cancel an existing grant in whole or in part and grant another award for such number of shares as the Committee specifies. The Committee may at any time or times amend the Plan or any outstanding grant for the purpose of satisfying the requirements of Section 422 of the Code or of any changes in applicable laws or regulations or for any other purpose that may at the time be permitted by law, or may at any time terminate the Plan as to further grants, but no such amendment shall adversely affect the rights of any holder (without such person's consent) of any Option, Stock Appreciation Right or Restricted Stock previously granted. No Option or Stock Appreciation Right may be granted and no Restricted Stock may be issued during any period of suspension nor after termination of the Plan, and in no event may any Option or Stock Appreciation Right be granted or any Restricted Stock issued under this Plan after the first to occur of the following events: (a) The expiration of ten years from the date the Plan is adopted; or (b) The expiration of ten years from the date the Plan is approved by the Company's shareholders under Section 10.3. Section 10.3 - Approval of Plan by Shareholders This Plan will be submitted for approval of the Company's shareholders within 12 months after the date of the Board's initial adoption of the Plan. Options and Stock Appreciation Rights may be granted and Restricted Stock may be issued prior to such shareholder approval; provided, however, that such Options and Stock Appreciation Rights shall not be exercisable prior to the time when the Plan is approved by the shareholders; provided, further, that if such approval has not been obtained at the end of said 12- month period, all Options and Stock Appreciation Rights previously granted and all Restricted Stock previously issued under the Plan shall thereupon be canceled and become null and void. Section 10.4 - Effect of Plan Upon Other Option and Compensation Plans The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company, any Parent Corporation or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company, any Parent Corporation or any Subsidiary (a) to establish any other forms of incentives or compensation for employees of the Company, any Parent Corporation or any Subsidiary, or (b) to grant or assume options or to issue Restricted Stock otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of Options or the issuance of Restricted Stock in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm of association. Section 10.5 - Titles Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. EX-10 6 1992 STOCK OPTION PLAN OAK INDUSTRIES INC. 1992 STOCK OPTION AND RESTRICTED STOCK PLAN As amended through December 5, 1996 OAK INDUSTRIES INC., a corporation organized under the laws of the State of Delaware, hereby adopts this 1992 Stock Option and Restricted Stock Plan. The purposes of this Plan are as follows: 1. To further the growth, development and financial success of the Company by providing additional incentives to certain of its executive and other key Employees who have been or will be given responsibility for the management or administration of the Company's business affairs, and to its non-employee Directors by assisting them to become owners of capital stock of the Company and thus to benefit directly from its growth, development and financial success; and 2. To enable the Company to obtain and retain the services of the type of individuals considered essential to the long-range success of the Company by providing and offering them an opportunity to become owners of capital stock of the Company. ARTICLE I DEFINITIONS Whenever the following terms are used in this Plan, they shall have the meaning specified below unless the context clearly indicates to the contrary. The masculine pronoun shall include the feminine and neuter and the singular shall include the plural, where the context so indicates. Section 1.1 - Board "Board" shall mean the Board of Directors of the Company. Section 1.2 - Code "Code" shall mean the Internal Revenue Code of 1986, as amended. Section 1.3 - Committee "Committee" shall mean the Compensation Committee of the Board, appointed as provided in Section 9.1. "Committee" shall also mean the Chief Executive Officer of the Company, so long as such individual is also a Director, in connection with grants from time to time of Options to purchase not more than 10,000 shares each of the Company's Stock, to Employees who are not executive officers for the purposes of Section 16 of the Securities Exchange Act of 1934, as amended. Section 1.4 - Company "Company" shall mean Oak Industries Inc. In addition, "Company" shall mean any corporation assuming, or issuing new employee stock options in substitution for, Incentive Stock Options, outstanding under the Plan, in a transaction to which Section 424(a) of the Code applies. Section 1.5 - Director "Director" shall mean a member of the Board. Section 1.6 - Employee "Employee" shall mean any employee (as defined in accordance with the Regulations and Revenue Rulings then applicable under Section 3401(c) of the Code) of the Company, or of any corporation which is then a Parent Corporation or a Subsidiary, whether such employee is so employed at the time this Plan is adopted or becomes so employed subsequent to the adoption of this Plan. Section 1.7 - Fair Market Value "Fair Market Value" of a share of the Company's stock for purposes of the Plan, of a given date, shall be: (i) the closing price of a share of the Company's stock on the principal exchange on which shares of the Company's stock are then trading, if any, on such date, or, if shares were not traded on such date, then on the next preceding trading day during which a sale occurred; or (ii) if such stock is not traded on an exchange but is quoted on NASDAQ or a successor quotation system, (1) the last sales price (if the stock is then listed as a National Market Issue under the NASD National Market System), or (2) the mean between the closing representative bid and asked prices (in all other cases) for the stock on such date as reported by NASDAQ or such successor quotation system; or (iii) if such stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the mean between the closing bid and asked prices for the stock on such date as determined in good faith by the Committee; or (iv) if the Company's stock is not publicly traded, the fair market value established by the Committee acting in good faith. Section 1.8 - Incentive Stock Option "Incentive Stock Option" shall mean an Option which qualifies under Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. Section 1.9 - Non-Qualified Option "Non-Qualified Option" shall mean an Option which is not an Incentive Stock Option and which is designated as a Non-Qualified Option by the Committee. Section 1.10 - Officer "Officer" shall mean an officer of the Company, any Parent Corporation or any Subsidiary. Section 1.11 - Option "Option" shall mean an option to purchase capital stock of the Company, granted under the Plan. "Option" includes both Incentive Stock Options and Non-Qualified Options. Section 1.12 - Optionee "Optionee" shall mean an Employee or a Director to whom an Option is granted under the Plan. Section 1.13 - Parent Corporation "Parent Corporation" shall mean any corporation in an unbroken chain of corporations ending with the Company if each of the corporations other than the Company then owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Section 1.14 - Plan "Plan" shall mean this 1992 Stock Option and Restricted Stock Plan of Oak Industries Inc. Section 1.15 - Restricted Stock "Restricted Stock" shall mean capital stock of the Company issued pursuant to Article VII of the Plan. Section 1.16 - Restricted Stockholder "Restricted Stockholder" shall mean an Employee or a Director to whom Restricted Stock has been issued under the Plan. Section 1.17 - Secretary "Secretary" shall mean the Secretary of the Company. Section 1.18 - Securities Act "Securities Act" shall mean the Securities Act of 1933, as amended. Section 1.19 - Stock "Stock" shall mean shares of the Company's Common Stock Section 1.20 - Stock Appreciation Right "Stock Appreciation Right" shall mean a stock appreciation right granted under the Plan. Section 1.21 - Subsidiary "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Section 1.22 - Termination of Employment "Termination of Employment" shall mean the time when the employee-employer relationship between the Optionee and the Company, a Parent Corporation or a Subsidiary is terminated for any reason, including, but not by way of limitation, a termination by resignation, discharge, death or retirement, but excluding terminations where there is a simultaneous reemployment by the Company, a Parent Corporation or a Subsidiary. The Committee, in its absolute discretion, shall determine the effect of all other matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Terminations of Employment; provided, however, that, with respect to Incentive Stock Options, a leave of absence shall constitute a Termination of Employment if, and to the extent that, such leave of absence interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable Regulations and Revenue Rulings under said Section. ARTICLE II SHARES SUBJECT TO PLAN Section 2.1 - Shares Subject to Plan The shares of stock which may be awarded under the Plan shall be shares of the Company's $.01 par value common stock. Shares delivered under the Plan shall be authorized but unissued common stock or, of the Committee so decides in its sole discretion, previously issued common stock acquired by the Company and held in its treasury. The aggregate number of such shares which may be delivered upon exercise of Options shall not exceed 1,000,000. Section 2.2 - Unexercised Options If any Option expires or is canceled without having been fully exercised, the number of shares subject to such Option but as to which such Option was not exercised prior to its expiration or cancellation may again be optioned hereunder, subject to the limitations of Section 2.1. Section 2.3 - Exercised Stock Appreciation Rights To the extent that a Stock Appreciation Right shall have been exercised, the number of shares subject to the related Option, or portion thereof, may again be optioned hereunder, subject to the limitations of Section 2.1. Section 2.4 - Forfeited Restricted Stock Any shares of Restricted Stock forfeited to the Company pursuant to the restrictions thereon may again be optioned or issued as Restricted Stock hereunder, subject to the limitations of Section 2.1, provided that such Restricted Stock may not be reissued if the person who forfeited such stock received economic benefit of such stock. Section 2.5 - Changes in Company's Shares In the event that the outstanding shares of Common Stock of the Company are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend or combination of shares, appropriate adjustments shall be made by the Committee in the number and kind of shares for the purchase of which Options may be granted and in the number and kind of shares of Restricted Stock which may be issued, including adjustments of the limitations in Section 2.1 on the maximum number and kind of shares which may be issued under the Plan on exercise of Options or as Restricted Stock. ARTICLE III GRANTING OF OPTIONS Section 3.1 - Eligibility Any non-employee Director of the Company, or any executive or other key Employee of the Company or of any corporation which is then a Parent Corporation or a Subsidiary shall be eligible to be granted Options, except as provided in Sections 3.3, and 3.4. Section 3.2 - Qualification of Incentive Stock Option No Incentive Stock Option shall be granted unless such Option, when granted, qualifies as an "incentive stock option" under Section 422 of the Code. Section 3.3 - Granting of Options to Executive or Key Employees (a) The Committee shall from time to time, in its absolute discretion: (i) Determine which Employees are executive or key Employees and select from among the executive or key Employees (including those to whom Options and/or Stock Appreciation Rights have been previously granted and/or Restricted Stock has previously been issued under the Plan) such of them as in its opinion should be granted Options; and (ii) Determine the number of shares to be subject to such Options granted to such selected executive or key Employees, and determine whether such Options are to be Incentive Stock Options or Non-Qualified Options; and (iii) Determine the terms and conditions of such Options, consistent with the Plan. (b) Upon the selection of an executive or key Employee to be granted an Option, the Committee shall instruct the Secretary to issue such Option and may impose such conditions on the grant of such Option as it deems appropriate. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Employee that the Employee surrender for cancellation some or all of the unexercised Options which have been previously granted to him. An Option the grant of which is conditioned upon such surrender may have an option price lower (or higher) than the option price of the surrendered Option, may cover the same (or a less or greater) number of shares as the surrendered Option, may contain such other terms as the Committee deems appropriate and shall be exercisable in accordance with its terms, without regard to the number of shares, price, option period or any other term or condition of the surrendered Option. Section 3.4 - Granting of Options to Non-Employee Directors Each current Director who is not an Employee shall be granted an Option pursuant to a formula which equals 4,000 shares of the Company's Common Stock multiplied by the number of fiscal quarters the director has served up to a maximum of 16,000 shares. Such grant shall be effective as of the date of the approval of the Plan by the Board of Directors and shall be exercisable for a period of ten years and one day from the date of the grant. Such options shall become exercisable in three installments, 34 percent on the first anniversary of the grant, 33 percent on the second anniversary and 33 percent on the third anniversary. A newly elected or appointed Director who is not an Employee shall be granted an Option with respect to 4,000 shares on the first business day following his election or appointment and shall be granted an option to acquire 4,000 shares on the first business day of each quarter of the Company's fiscal year until each director reaches a maximum of 16,000 shares. These options shall become exercisable as described above. The above provisions with respect to grants to non-employee directors shall not be amended more than once in any six- month period. ARTICLE IV TERMS OF OPTIONS Section 4.1 - Option Agreement Each Option shall be evidenced by a written Stock Option Agreement, which shall be executed by the Optionee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with the Plan. Stock Option Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to qualify such Options as "incentive stock options" under Section 422 of the Code. Section 4.2 - Option Price The price of the shares subject to each Option shall be set by the Committee; provided, however, that the price per share shall be not less than 100 percent of the fair market value of such shares on the date such Option is granted; provided, further, that, in the case of an Incentive Stock Option, the price per share shall not be less than 110 percent of the fair market value of such shares on the date such Option is granted in the case of an individual then owning (within the meaning of Section 424(d) of the Code) more than 10 percent of the total combined voting power of all classes of stock of the Company, any Subsidiary or any Parent Corporation. Section 4.3 - Commencement of Exercisability (a) Except as the Committee may otherwise provide, no Option may be exercised in whole or in part during the first year after such Option is granted. (b) Subject to the provisions of Sections 4.3(a) and 4.3(c), Options shall become exercisable at such times and in such installments (which may be cumulative) as the Committee shall provide in the terms of each individual Option; provided, however, that by a resolution adopted after an Option is granted the Committee may, on such terms and conditions as it may determine to be appropriate and subject to Sections 4.3(a) and 4.3(c), accelerate the time at which such Option or any portion thereof may be exercised. (c) No portion of an Option which is unexercisable at Termination of Employment shall thereafter become exercisable. Section 4.4 - Expiration of Options (a) No Incentive Stock Option may be exercised to any extent by anyone after the first to occur of the following events: (i) The expiration of ten years from the date the Option was granted; or (ii) In the case of an Optionee owning (within the meaning of Section 424(d) of the Code), at the time the Option was granted, more than 10 percent of the total combined voting power of all classes of stock of the Company, any Subsidiary or any Parent Corporation, the expiration of five years from the date the Option was granted; or (iii) Except in the case of any Optionee who is disabled (within the meaning of Section 22(e)(3) of the Code), the expiration of three months from the date of the Optionee's Termination of Employment for any reason other than such Optionee's death unless the Optionee dies within said three- month period; or (iv) In the case of an Optionee who is disabled (within the meaning of Section 22(e)(3) of the Code), the expiration of one year from the date of the Optionee's Termination of Employment for any reason other than such Optionee's death unless the Optionee dies within said one-year period; or (v) The expiration of one year from the date of the Optionee's death. No Non-Qualified Option may be exercised to any extent by anyone after the expiration of ten years and one day from the date the Option was granted. (b) Subject to the provisions of Section 4.5(a), the Committee shall provide, in the terms of each individual Option, when such Option expires and becomes unexercisable; and (without limiting the generality of the foregoing) the Committee may provide in the terms of individual Options that said Options expire immediately upon a Termination of Employment for any reason. Section 4.5 - Employment Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee any right to continue in the employ of the Company, any Parent Corporation or any Subsidiary or shall interfere with or restrict in any way the rights of the Company, its Parent Corporations and its Subsidiaries, which are hereby expressly reserved, to discharge any Optionee at any time for any reason whatsoever, with or without cause. Section 4.6 - Adjustments in Outstanding Options In the event that the outstanding shares of the stock subject to Options are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which all outstanding Options, or portions thereof then unexercised, shall be exercisable, to the end that after such event the Optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in an outstanding Option shall be made without change in the total price applicable to the Option or the unexercised portion of the Option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in Option price per share; provided, however, that, in the case of Incentive Stock Options, each such adjustment shall be made in such manner as not to constitute a "modification" within the meaning of Section 424(h)(3) of the Code. Any such adjustment made by the Committee shall be final and binding upon all Optionees, the Company and all other interested persons. Section 4.7 - Merger, Consolidation, Acquisition, Liquidation or Dissolution In its absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may provide by the terms of any Option that such Option cannot be exercised after the merger or consolidation of the Company with or into another corporation, the acquisition by another corporation or person of all or substantially all of the Company's assets or 80 percent or more of the Company's then outstanding voting stock or the liquidation or dissolution of the Company; and if the Committee so provides, it may, in its absolute discretion and on such terms and conditions as it deems appropriate, also provide, either by the terms of such Option or by a resolution adopted prior to the occurrence of such merger, consolidation, acquisition, liquidation or dissolution, that, for some period of time prior to such event, such Option shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in Section 4.3(a), Section 4.3(b) and/or any installment provisions of such Option, but subject to Section 4.3(d). This provision shall not apply to options granted to Non- Employee Directors unless the Committee determines that such application would not cause the awards to Non-Employee Directors to fail the tests set forth in Section 16b-3(c)(2)(ii) of the Securities Exchange Act of 1934. ARTICLE V EXERCISE OF OPTIONS Section 5.1 - Person Eligible to Exercise During the lifetime of the Optionee, only he may exercise an Option granted to him, or any portion thereof. After the death of the Optionee, any exercisable portion of any Option may, prior to the time when such portion becomes unexercisable under Section 4.5 or Section 4.8, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. Section 5.2 - Partial Exercise At any time and from time to time prior to the time when any exercisable Option or exercisable portion thereof becomes unexercisable under Section 4.4, such Option or portion thereof may be exercised in whole or in part; provided, however, that the Company shall not be required to issue fractional shares and the Committee may, by the terms of the Option, require any partial exercise to be with respect to a specified minimum number of shares. Section 5.3 - Manner of Exercise An exercisable Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or his office of all of the following prior to the time when such Option or such portion becomes unexercisable under Section 4.4: (a) Notice in writing signed by the Optionee or other person then entitled to exercise such Option or portion, stating that such Option or portion is exercised, such notice complying with all applicable rules established by the Committee; and (b) (i) Full payment (in cash or by check) for the shares with respect to which such Option or portion is thereby exercised; or (ii) With the consent of the committee, shares of the Company's Common Stock owned by the Optionee(which in the case of stock acquired from the Company, shall have been held for at least six months) duly endorsed for transfer to the Company with a fair market value (as determinable under Section 4.2(b)) on the date of delivery equal to the aggregate Option price of the shares with respect to which such Option or portion is thereby exercised; or (iii) With the consent of the Committee, a full recourse promissory note bearing interest (at least such rate as shall then preclude the imputation of interest under the Code or any successor provision) and payable upon such terms as may be prescribed by the Committee. The Committee may also prescribe the form of such note and the security to be given for such note. No Option may, however, be exercised by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law; or (iv) Any combination of the consideration provided in the foregoing subsections (i), (ii) and (iii); provided, that if the stock delivered upon exercise of the option is an original issue of authorized stock, at least so much of the exercise price as represents the par value of such stock shall be paid other than with a personal check or promissory note of the person exercising the option; (v) By delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price; and (c) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars; and (d) In the event that the Option or portion thereof shall be exercised pursuant to Section 5.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option or portion thereof. Section 5.4 - Conditions to Issuance of Stock Certificates The shares of stock issuable and deliverable upon the exercise of an Option, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; and (b) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The payment to the Company of all amounts which it, any Parent Corporation or any Subsidiary is required to withhold under federal, state or local law in connection with the exercise of the Option. If permitted by the Committee, either at the time of the grant of the option or at the time of exercise, the participant may elect at such time and in such manner as the Committee may prescribe, to satisfy such withholding obligation by (i) delivering to the Company stock owned by such individual having a market value equal to such withholding obligation, or (ii) requesting that the Company withhold from the shares of Stock to be delivered upon exercise of such option a number of shares of Stock having a fair market value equal to such withholding obligation; and (e) The lapse of such reasonable period of time following the exercise of the Option as the Committee may establish from time to time for reasons of administrative convenience. Section 5.5 - Rights as Shareholders The holders of Options shall not be, nor have any of the rights or privileges of, shareholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders. Section 5.6 - Transfer Restrictions Except as expressly provided therein, an option granted under the Plan is personal to the Optionee, is not transferable by the Optionee in any manner other than by will, the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code of Title I of the Employee Retirement Income Security Act, or the rules promulgated thereunder. The Committee, in its absolute discretion, may impose such other restrictions on the transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Employee to give the Company prompt notice of any disposition of shares of stock, acquired by exercise of an Incentive Stock Option, within two years from the date of granting such Option or one year after the transfer of such shares to such Employee. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirement to give prompt notice of disposition. ARTICLE VI STOCK APPRECIATION RIGHTS Section 6.1 - Grant of Stock Appreciation Rights A Stock Appreciation Right may be granted to any Employee who receives a grant of an Option under the Plan. A Stock Appreciation Right may be granted in connection and simultaneously with the grant of an Option or with respect to a previously granted Option. A Stock Appreciation Right shall be subject to such terms and conditions not inconsistent with the Plan as the Committee shall impose, including the following: (a) A Stock Appreciation Right shall be related to a particular Option and shall be exercisable only to the extent the related Option is exercisable. (b) A Stock Appreciation Right shall be granted to the Optionee to the maximum extent of 100 percent of the number of shares subject to the simultaneously or previously granted Option. (c) A Stock Appreciation Right shall entitle the Optionee (or other person entitled to exercise the Option pursuant to Section 5.1) to surrender unexercised a portion of the Option to which the Stock Appreciation Right relates to the Company and to receive from the Company in exchange therefor an amount payable in cash or, in the discretion of the Committee, shares of the Company's Common Stock, determined by multiplying the lesser of (i) the difference obtained by subtracting the Option exercise price per share of the Company's Common Stock subject to the related Option from the fair market value (as determinable under Section 4.2(b)) of a share of the Company's Common Stock on the date of exercise of the Stock Appreciation Right, or (ii) twice the Option exercise price per share of the Company's Common Stock subject to the related Option, by the number of shares of stock subject to the related Option with respect to which the Stock Appreciation Right shall have been exercised. ARTICLE VII ISSUANCE OF RESTRICTED STOCK Section 7.1 - Eligibility Any executive or other key Employee of the Company or of any corporation which is then a Parent Corporation or a Subsidiary shall be eligible to be issued Restricted Stock. Section 7.2 - Issuance of Restricted Stock (a) The Committee shall from time to time, in its absolute discretion: (i) Determine which Employees are executive or key Employees and select from among the executive or key Employees (including those to whom Options and/or Stock Appreciation Rights have been previously granted and/or Restricted Stock has been previously issued) such of them as in its opinion should be issued Restricted Stock; and (ii) Determine the number of shares of Restricted Stock to be issued to such selected executive or key Employees; and (iii) Determine the terms and conditions applicable to such Restricted Stock, consistent with the Plan. (b) Shares issued as Restricted Stock may be either previously authorized but unissued shares or issued shares which have been reacquired by the Company. Legal consideration, but no cash payment, will be required for each issuance of Restricted Stock. (c) Upon the selection of an executive or key Employee to be issued Restricted Stock, the Committee shall instruct the Secretary to issue such Restricted Stock and may impose such conditions on the issue of such Restricted Stock as it deems appropriate. Restricted Stock may not be issued by the Committee to executive or key Employees who are then Directors or Officers of the company unless such issuance has been recommended by the Committee. Such recommendation shall be in writing and shall specify the Directors or Officers to whom such issuance is recommended and the recommended number of shares of Restricted Stock to be issued. ARTICLE VIII TERMS OF RESTRICTED STOCK Section 8.1 - Restricted Stock Agreement Restricted Stock shall be issued only pursuant to a written Restricted Stock Agreement, which shall be executed by the Restricted Stockholder and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with the Plan. Section 8.2 - Employment Nothing in this Plan or in any Restricted Stock Agreement hereunder shall confer upon any Restricted Stockholder any right to continue in the employ of the Company, any Parent Corporation or any Subsidiary or shall interfere with or restrict in any way the rights of the Company, its Parent Corporations and its Subsidiaries, which are hereby expressly reserved, to discharge any Restricted Stockholder at any time for any reason whatsoever, with our without cause. Section 8.3 - Rights as Shareholders Upon delivery of the shares of Restricted Stock to the escrow holder pursuant to Section 8.7, the Restricted Stockholder shall have all the rights of a stockholder with respect to said shares, subject to the restrictions in his Restricted Stock Agreement, including the right to vote the shares and to receive all dividends or other distributions paid or made with respect to the shares. Section 8.4 - Restrictions All shares of Restricted Stock issued under this Plan (including any shares received by holders thereof as a result of stock dividends, stock splits or any other forms of recapitalization) shall be subject to such restrictions as the Committee shall provide in the terms of each individual Restricted Stock Agreement; provided, however, that by a resolution adopted after the Restricted Stock is issued, the Committee may, on such terms and conditions as it may determine to be appropriate and subject to Section 10.3, remove any or all of the restrictions imposed by the terms of the Restricted Stock Agreement. All restrictions imposed pursuant to this Section 8.3 shall expire within ten years of the date of issuance. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Section 8.5 - Forfeiture of Restricted Stock The Committee shall provide in the terms of each individual Restricted Stock Agreement that the Restricted Stock then subject to restrictions under the Restricted Stock Agreement be forfeited by the Restricted Stockholder back to the Company immediately upon a Termination of Employment for any reason; provided, however, that provision may be made that no such forfeiture shall occur in the event of a Termination of Employment because of the Employee's normal retirement, death, total disability or early retirement with the consent of the Board. Section 8.6 - Merger, Consolidation, Acquisition, Liquidation or Dissolution Upon the merger or consolidation of the Company with or into another corporation, the acquisition by another corporation or person of all or substantially all of the Company's assets or 80 percent or more of the Company's then outstanding voting stock or the liquidation or dissolution of the Company, the Committee may determine, at its sole discretion, that the restrictions imposed under the Restricted Stock Agreement on some or all shares of Restricted Stock shall immediately expire and/or that some or all of such shares shall cease to be subject to forfeiture under Section 8.5. Section 8.7 - Escrow The Secretary or such other escrow holder as the Committee may appoint shall retain physical custody of the certificates representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement expire or shall have been removed; provided, however, that in no event shall any Restricted Stockholder retain physical custody of any certificates representing Restricted Stock issued to him. Section 8.8 - Legend In order to enforce the restrictions imposed upon shares of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under Restricted Stock Agreements, which legend or legends shall make appropriate reference to the conditions imposed thereby. ARTICLE IX ADMINISTRATION Section 9.1 - Committee The Committee shall consist of at least two directors, provided that the Committee shall consist of one Director when it is the Chief Executive Officer of the Company acting pursuant to such individual's authority to grant Options not to exceed 10,000 shares each of the Company's Stock to Employees who are not executive officers of the Company for the purposes of Section 16 of the Securities Exchange Act of 1934, as amended. Section 9.2 - Duties and Powers of Committee It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan, the Options, the Stock Appreciation Rights and the Restricted Stock and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. Any such interpretations and rules in regard to Incentive Stock Options shall be consistent with the basic purpose of the Plan to grant "incentive stock options" within the meaning of Section 422 of the Code. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan. Section 9.3 - Majority Rule The Committee shall act by a majority of its members in office. The Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Committee. Section 9.4 - Compensation; Professional Assistance; Good Faith Actions Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities incurred by members of the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company, Officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Optionees, Restricted Stockholders, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, the Options, the Stock Appreciation Rights or the Restricted Stock and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. ARTICLE X OTHER PROVISIONS Section 10.1 - Options, Stock Appreciation Rights and Restricted Stock Not Transferable No Option, Stock Appreciation Right or Restricted Stock or interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Optionee or the Restricted Stockholder, as the case may be, or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this Section 10.1 shall prevent transfers by will, by the applicable laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by the Code of Title I of the Employee Retirement Income Security Act, or the rules promulgated thereunder. Section 10.2 - Amendment, Suspension or Termination of the Plan The Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board or the Committee. However, without approval of the Company's shareholders given within 12 months before or after the action by the Board or the Committee, no action of the Committee or Board may, except as provided in Section 2.4, increase any limit imposed in Section 2.1 on the maximum number of shares which may be issued on exercise of Options or as Restricted Stock, modify the eligibility requirements of Section 3.1, amend Section 3.3(c) or Section 7.2(c) to permit the grant of Options or the issuance of Restricted Stock to Officers or Directors of the Company other than upon the written recommendation of the Committee, reduce the minimum option price requirements of Section 4.2(a) or extend the limit imposed in this Section 10.2 on the period during which Options or Stock Appreciation Rights may be granted or Restricted Stock may be issued. Neither the amendment, suspension nor termination of the Plan shall, without the consent of the holder of the Option or Stock Appreciation Right or the Restricted Stockholder, alter or impair any rights or obligations under any Option or Stock Appreciation theretofore granted or Restricted Stock theretofore issued. No Option or Stock Appreciation Right may be granted and no Restricted Stock may be issued during any period of suspension nor after termination of the Plan, and in no event may any Option or Stock Appreciation Right be granted or any Restricted Stock issued under this Plan after the first to occur of the following events: (a) The expiration of ten years from the date the Plan is adopted; or (b) The expiration of ten years from the date the Plan is approved by the Company's shareholders under Section 10.3. Section 10.3 - Approval of Plan by Shareholders This Plan will be submitted for approval of the Company's shareholders within 12 months after the date of the Board's initial adoption of the Plan. Options and Stock Appreciation Rights may be granted and Restricted Stock may be issued prior to such shareholder approval; provided, however, that such Options and Stock Appreciation Rights shall not be exercisable prior to the time when the Plan is approved by the shareholders; provided, further, that if such approval has not been obtained at the end of said 12-month period, all Options and Stock Appreciation Rights previously granted and all Restricted Stock previously issued under the Plan shall thereupon be canceled and become null and void. Section 10.4 - Effect of Plan Upon Other Option and Compensation Plans The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company, any Parent Corporation or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company, any Parent Corporation or any Subsidiary (a) to establish any other forms of incentives or compensation for employees of the Company, any Parent Corporation or any Subsidiary, or (b) to grant or assume options or to issue restricted stock otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options or the issuance of restricted stock in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association. Section 10.5 - Titles Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. -----END PRIVACY-ENHANCED MESSAGE-----