-----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, VVrDiDRVhNNIBySJVtYONY0W6QntOghHuQqRtyxUguFUItAMe5xHe29iNWo/kqTY 6X0+xlckvHl/XkC/D0CrwA== 0000800459-01-500014.txt : 20010917 0000800459-01-500014.hdr.sgml : 20010917 ACCESSION NUMBER: 0000800459-01-500014 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARMAN INTERNATIONAL INDUSTRIES INC /DE/ CENTRAL INDEX KEY: 0000800459 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 112534306 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09764 FILM NUMBER: 1737519 BUSINESS ADDRESS: STREET 1: 1101 PENNSYLVANIA AVENUE N W STREET 2: STE 1010 CITY: WASHINGTON STATE: DC ZIP: 20004 BUSINESS PHONE: 2023931101 MAIL ADDRESS: STREET 1: 1101 PENNSYLVANIA AVENUE NW STREET 2: SUITE 1010 CITY: WASHINGTON STATE: DC ZIP: 20004 10-K405 1 a10k01.txt ANNUAL REPORT ON FORM 10-K 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 June 30, 2001 Commission file number 1-9764 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED (Exact name of Registrant as specified in its charter) Delaware 11-2534306 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1101 Pennsylvania Ave., N.W., Ste. 1010, Washington, D.C. 20004 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (202) 393-1101 Securities registered pursuant Name of each Exchange on to section 12(b) of the Act: which registered: Common Stock, par value $.01 per share New York Stock (Title of class) Exchange, Inc. Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No. The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of August 31, 2001, was $1,231,621,301. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 32,083,847 shares of Common Stock, par value $.01 per share, as of August 31, 2001. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended June 30, 2001, are incorporated by reference in Part I, Item 1, and Part II, Items 5, 7 and 8. Portions of the Registrant's definitive Proxy Statement relating to the 2001 Annual Meeting of Stockholders are incorporated by reference in Part III, Items 10 (as related to Directors), 11, 12, and 13. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of the 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 Page 1 of 167 THIS PAGE LEFT BLANK INTENTIONALLY 2 TABLE OF CONTENTS Page PART I Item 1. Business.................................. 5 Item 2. Properties................................ 23 Item 3. Legal Proceedings......................... 24 Item 4. Submission of Matters to a Vote of Security Holders....................... 24 Executive Officers of the Registrant... 25 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................ 27 Item 6. Selected Financial Data................... 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 28 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......... 28 Item 8. Consolidated Financial Statements and Supplementary Data................. 29 Item 9. Disagreements on Accounting and Financial Disclosure................... 29 PART III Item 10. Directors and Executive Officers of the Registrant......................... 25 Item 11. Executive Compensation.................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management....... 29 Item 13. Certain Relationships and Related Transactions........................... 29 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 29 List of Financial Statements and Financial Statement Schedules.......... 33 Independent Auditor's Report........... 35 Index to Exhibits...................... 39 3 THIS PAGE LEFT BLANK INTENTIONALLY 4 PART I ITEM 1. BUSINESS General Business Harman International Industries, Incorporated (together with its subsidiaries, "Harman" or the "Company"), a Delaware corporation formed in 1980, is a worldwide leader in the manufacture of high-quality high-fidelity audio products targeted at the consumer and professional audio markets. For almost 50 years, the Company and its predecessors have been leaders and innovators in creating loudspeakers and electronic audio products that deliver superior sound. Harman is also a global leader in the development and application of infotainment systems for the automotive industry. The Company believes that its JBL, Infinity, Harman Kardon, Mark Levinson, and Becker brand names are well-known worldwide for premium quality and performance. The Company has developed, both internally and through a series of strategic acquisitions, a broad range of product offerings sold under renowned brand names in its principal markets. The objective of the Company's development efforts has been to secure engineering, manufacturing and marketing leadership and to strengthen the Company's ability to provide total audio system solutions to its customers. The Company's businesses are organized by the end-user markets they serve. The Consumer Systems Group manufactures loudspeakers and electronics for high fidelity audio reproduction in the home, in vehicles and with computers. The Professional Group manufactures loudspeakers and electronics used by audio professionals in concert hall, recording, broadcast and cinema applications. Harman's primary manufacturing facilities are located in California, Indiana, Utah, Kentucky, Germany, the United Kingdom, Denmark, Mexico, France, Austria, and Hungary. 5 Consumer Systems Group The Consumer Systems Group manufactures loudspeakers and electronics for high fidelity audio reproduction in the home, in vehicles and with computers. These products are marketed under brand names including JBL, Infinity, Harman Kardon, Lexicon, Becker, Mark Levinson, Proceed, Revel and AudioAccess. The Company believes that it has the preeminent portfolio of brand names and range of product offerings in the consumer audio market, and that the JBL, Infinity and Harman Kardon brands are recognized throughout the world for superior sound quality and good value. High-end products bearing the Lexicon, Mark Levinson, Proceed and Revel brands are acclaimed for their superior build quality and state-of-the-art sound reproduction. The Consumer Systems Group offers premium, branded audio systems to retail automobile purchasers through OEM supply agreements with DaimlerChrysler, BMW, Toyota, Lexus, Mitsubishi, Porsche, Land Rover, Saab, Peugeot and Ferrari, complemented by non-branded loudspeaker supply agreements with other automakers including Audi, Volvo, VW, Ford, Renault and Fiat. The Consumer Systems Group primarily supplies car audio, video and navigation systems products separately. However, the Company has received purchase commitments for integrated systems to be installed in 2002 and 2003 model year vehicles from Mercedes-Benz, Audi, BMW, and Porsche in Europe. These integrated systems manage functions like car audio, video and navigation, which are provided by the Company and manage functions like climate control, telecommunications, and internet access, which will be provided by third parties. DaimlerChrysler, the Company's largest automotive OEM customer, offers Infinity branded car audio systems in the majority of its, Chrysler, Dodge, and Jeep lines. Mitsubishi also offers Infinity branded car audio systems. Harman/Becker head units and navigation systems, and non-branded loudspeaker systems manufactured by Harman/Becker Automotive Electronic Systems GmbH, are installed in a substantial number of DaimlerChrysler's Mercedes-Benz automobiles. Becker also supplies head units, navigation systems and other electronics to BMW and Porsche. Toyota, Peugeot and Hyundai offer JBL branded audio systems. BMW and Saab offer Harman Kardon systems. High-end Mark Levinson audio systems are offered by Lexus. The loss of, or a material decrease or delay in purchasing the Company's products by, any of the Company's significant customers could have a 6 material adverse effect on the results of operations of the Company. Sales of the Company's audio products through automakers are dependent on automobile industry sales and automobile purchasers' willingness to pay for the option of a premium branded automotive audio system. The Consumer Systems Group offers branded audio systems to personal computer users through OEM supply agreements with Dell, Compaq, Apple, and IBM. Beginning in October 2002 the Company will also offer branded audio systems to Legend, a computer manufacturer in China. These audio systems provide high-quality sound and thus enhance the appeal and capability of the personal computer as an entertainment device. The JBL, Infinity and Harman Kardon brand names are all employed in this market. The Company participates in a variety of ways including design, manufacture, brand name licensing, and direct sourcing. The Company believes the maturation and broadened acceptance of DVD and digital television will provide growth opportunities for its consumer brands. In addition to the contribution of its Proceed and Harman Kardon DVD machines, the Company expects DVD and digital television to stimulate loudspeaker sales due to increased customer traffic in audio/video dealers' stores and the improved audio quality potential of DVD and digital television compared to the current analog audio/video and digital audio technologies. Sales expectations are dependent, to a substantial extent, on discretionary spending by consumers, which may be affected by general economic conditions. The Company believes excellent growth opportunities are available in the automotive OEM channel through increases in per-vehicle content through the provision of integrated infotainment systems, higher penetration levels within existing models, increases in the number of models offering the Company's audio systems, supply agreements with additional automakers and with new hardware and software licensing agreements. The Company has recently received major new business from DaimlerChrysler AG's Mercedes-Benz for integrated infotainment systems for 2002 and 2003 model year vehicles. Professional Group The Company's Professional Group designs, manufactures and markets products in all significant segments of the professional audio market, offering complete systems solutions to professional installations and users around the world. The Professional Group includes JBL Professional, Soundcraft, Crown, DOD, Digitech, dbx, AKG, BSS, and Studer. 7 The Professional Group is uniquely equipped to provide turnkey systems solutions for professional audio applications that offer the customer improved performance, ease of installation and reduced cost. Professional installations of Harman products include stadiums, opera houses, concert halls, recording studios, broadcast studios, theaters, houses of worship, cinemas and touring performing artists. Sound systems incorporating components manufactured by JBL, Crown, Lexicon, AKG, Studer and Soundcraft are in use around the world in such places as the Experience Music Project in Seattle, the Great Hall of the People in Beijing, China, the Royal Danish Theater in Copenhagen and Abbey Road Studio and the Millennium Dome in England. The Company's professional equipment is used on tour by performing artists throughout the world. The principal market segments served by the Professional Group are sound reinforcement, musical instrument support, and recording and broadcast. JBL Professional is a leader in the sound reinforcement and cinema markets. JBL serves customers such as Cineplex Odeon and United Artist Theaters in the cinema market. Stadiums, concert halls, houses of worship and major concert tours rely on sound reinforcement products from the Professional Group, such as JBL loudspeakers, JBL, Crown and BSS amplifiers, BSS loudspeaker system management products, AKG microphones, DOD and dbx signal processing equipment, and Soundcraft mixing consoles, to produce high quality sound. AKG is a renowned manufacturer of high-quality microphones and headphones. AKG serves certain OEM markets in addition to its professional audio activities. AKG's expertise in the design and manufacture of miniature transducers for special microphone applications has led to market opportunities in the mobile telecommunications equipment and hands-free automotive communications markets. AKG manufactures the earpiece and mouthpiece transducer capsules for mobile telephone manufacturers including Nokia, Kyocera, Ericsson and Sony. AKG also manufactures miniature transducers for hands-free communications applications in Mercedes-Benz automobiles and General Motors' automobiles which are equipped with the OnStar system. Professional customers in the recording and broadcast market include radio and television stations, recording studios, postproduction houses, digital edit suites, and home studios. Customers in these markets, including AMS Westfunk Radio, Abbey Road Studios and The Hit Factory, are primarily served by Studer, JBL, Crown, Lexicon, Soundcraft and AKG. 8 JBL, Crown, DOD, Lexicon and Digitech serve the music instrument support segment of the professional audio market. JBL manufactures and markets loudspeakers, monitors and amplifiers. Crown manufactures professional amplifiers. DOD and Digitech sell sound effects and other signal processors, portable mixing consoles and guitar amplifiers. Music instrument support products are sold through music retail stores such as Guitar Center and Sam Ash. Operating and Geographic Segment Information Financial information about operating and geographic segments required to be included hereunder is incorporated by reference to Note 9 of Notes to Consolidated Financial Statements contained in the Company's Annual Report to Shareholders for the fiscal year ended June 30, 2001. Description of Business The Company's business is conducted through its wholly owned subsidiaries which include:
Name Principal products - --------------------------------------- ------------------------------ AKG Acoustics GmbH Professional electronics Harman Becker Automotive Systems S.A. de C.V. Automotive OEM loudspeakers Crown Audio, Inc. Professional electronics Harman Becker Automotive Automotive OEM and automotive Systems GmbH aftermarket electronics Harman Becker Automotive Automotive OEM loudspeakers Systems KFT Harman Becker Automotive Systems, Inc. OEM loudspeakers and aftermarket electronics Harman Consumer International, SNC Consumer home and automotive electronics Harman Consumer Manufacturing A/S Components, cabinets and loudspeaker systems Harman Music Group, Incorporated Professional electronics
9
Name Principal products - --------------------------------------- -------------------------------- Harman Audio de Mexico, S.A. de C.V. Consumer loudspeakers Harman International Industries, Limited Automotive OEM loudspeakers and electronics and professional audio products Harman Kardon, Incorporated Consumer home and automotive electronics Infinity Systems, Inc. Consumer home and automotive loudspeakers and electronics JBL Incorporated Consumer, professional and automotive loudspeakers and electronics Lexicon, Incorporated Consumer and professional electronics Madrigal Audio Laboratories, Inc. Consumer electronics Studer Professional Audio AG Professional audio equipment
Markets for Products Based on its knowledge of the audio industry, the Company believes that retail sales of consumer and professional products will show modest growth in fiscal 2002. The transition from analog to digital audio technology has changed music recording and reproduction and has led to the development of a new generation of consumer and professional audio products, including software-driven audio systems with integrated digital architecture that permits communication among all components. This transition has unsettled markets due to customer confusion and hesitancy, causing modest sales growth in both markets. Management believes that the new digital technologies and standards will continue to stabilize and Harman's market position will help the Company to capitalize on the release of pent-up demand as confusion and hesitancy abate. Until recently, Multimedia audio systems has been a growth market for Harman. The global PC market has been characterized by robust growth averaging 15 percent on an annualized basis. However, the domestic PC market declined 3.5 percent in the fourth quarter of last year, and PC sales remain soft. The Company has developed branded audio systems for 10 personal computers marketed by Apple, Dell, Compaq and IBM. The Company also produces branded aftermarket audio systems for multimedia applications. The Company believes that sales of personal computers equipped with multimedia capabilities will continue to be soft. The Company believes excellent growth opportunities exist within the automotive audio market to increase sales by increasing per-vehicle content through the sale of integrated infotainment systems, increasing product penetration in platforms currently supplied on an OEM basis, expanding the number of automobile models offering our systems, adding new OEM partners and the licensing of our automotive multimedia hardware and software products. Harman/Becker's radio and navigation system products complement the Company's JBL, Infinity, Mark Levinson, and Harman Kardon automotive audio programs and enable the Company to offer fully-integrated multimedia systems through its automobile manufacturing partners. The Company has received commitments for integrated infotainment systems from Mercedes-Benz, BMW, Audi, and Porsche. These integrated systems manage functions including car audio, video and navigation, which are provided by the Company and manage functions like climate control, telecommunications, and internet access, which would be provided by third parties. The Company believes that it may receive additional commitments from other leading automaker manufacturers. The professional audio markets served by the Company include sound reinforcement, music instrument support and broadcast and recording. The sound reinforcement market includes theaters (cinema and live performance), stadiums, concert halls, and houses of worship. The music instrument support market provides portable digital signal processing components, guitar amplifiers and portable loudspeaker systems used by touring performers. The broadcast and recording market includes radio and television stations and recording studios. Much of the professional audio market is undergoing a transition from analog to digital audio technology, and the Company is well-equipped for this evolutionary period with the engineering and marketing expertise of JBL, Crown, Lexicon, Soundcraft, Studer, Harman Music Group and AKG. Products The Company designs, manufactures and markets worldwide a broad range of high-quality, high-fidelity audio loudspeakers and electronics for the consumer audio market (in the home, in vehicles and with computers) 11 and the professional audio market (sound reinforcement, broadcast and recording, and musical instrument support). CONSUMER PRODUCTS. The Company manufactures loudspeakers under the JBL, Infinity and Revel brand names for the consumer market. These loudspeaker lines include models designed for two-channel stereo and multi-channel surround sound applications in the home in a wide range of choices, including floorstanding, bookshelf, powered, low frequency, in-wall, wireless and all-weather, in styles and finishes ranging from high gloss lacquers to genuine wood veneers. The JBL and Infinity product lines also include car loudspeakers, amplifiers and crossovers sold in the aftermarket. The Company manufactures a broad range of consumer audio electronics. The Company's Harman Kardon home electronics line includes audio- video receivers featuring Dolby Digital and DTS surround sound processing capabilities and multi-channel amplifiers, multi-disc DVD players and CD recorders. Madrigal designs and manufactures high-end electronics, including amplifiers, pre-amplifiers, digital signal processors, compact disc players and transports, DVD transports, amplifiers and surround sound processors. Madrigal markets its products under the renowned Mark Levinson and Proceed brand names. AudioAccess, Madrigal Imaging and Revel are also part of the Madrigal Group. AudioAccess products provide in-home, multi-source, multi-zone sound system controls, serving home theater and multi-room applications. Revel loudspeaker systems are designed to complement the superior performance of Madrigal's electronic brands for both music and home theater applications. Madrigal Imaging completes the Group's home theater range, offering high-end video projection products. Lexicon is a leader in the design and manufacture of high-quality home theater surround sound processors and amplifiers. Lexicon was a pioneer in the development of digital signal processors for the professional audio market and uses their professional audio expertise to enhance products sold to consumers. JBL, Infinity and Harman Kardon branded premium audio systems are offered with personal computers manufactured by Compaq, IBM, Dell and Apple, respectively. Harman participates in this market through design and brand name licensing as well as direct sourcing. These audio systems 12 provide high-quality sound and thus enhance the appeal and capability of the personal computer as an entertainment device. Harman is a leading global manufacturer of premium branded automotive audio systems offered by automakers as an option to their customers. In its offering of loudspeakers, head units, amplifiers and infotainment systems through automobile manufacturers, the Company leverages its expertise in the design and manufacture of high-quality loudspeakers, radios and other electronics, as well as the reputation for quality associated with its JBL, Infinity, Harman Kardon, Mark Levinson and Becker brand names. Harman engineers are engaged by the automobile manufacturers early in the vehicle cabin design process to develop systems that optimize acoustic performance and minimize weight and space requirements. Harman has developed the technical competencies to offer multimedia systems to automobile manufacturers incorporating audio, video, navigation, telematics, internet access, security and cabin quieting. The Company currently primarily supplies car audio, video and navigation systems products separately. However, the Company has received new commitments for integrated infotainment systems to be installed in 2002 and 2003 model year vehicles from Mercedes-Benz, BMW, Audi, and Porsche. The Company's Infinity-branded car audio systems are offered by DaimlerChrysler's Chrysler, Dodge and Jeep lines as well as by Mitsubishi. Toyota, Peugeot and Hyundai offer JBL-branded audio systems. BMW, Jaguar and Saab offer Harman Kardon branded systems. Mark Levinson systems are offered by Lexus. Harman/Becker supplies head units, navigation systems and other electronics to DaimlerChrysler, BMW, Audi, Porsche and Renault. PROFESSIONAL PRODUCTS. The Company designs, manufactures and markets products in all significant segments of the professional audio market, offering complete systems solutions to professional installations and users around the world. The Professional Group includes many of the most respected names in the industry including JBL Professional, Soundcraft, Crown, Lexicon, DOD, Digitech, AKG, BSS, dbx, and Studer. Professional installations of Harman products include stadiums, opera houses, concert halls, recording studios, broadcast studios, theaters, houses of worship, cinemas and touring performing artists. 13 Sound systems incorporating components manufactured by JBL, Crown, AKG, Studer and Soundcraft are in use around the world in such places as the Experience Music Project in Seattle, the Great Hall of the People in Beijing, China, the Royal Danish Theater in Copenhagen and Abbey Road Studio and the Millennium Dome in England. Harman professional equipment is used on tour by performing artists throughout the world. The professional market has advanced rapidly and is heavily involved in digital technology. Management believes that Harman's Professional Group is a leader in this market. The Professional Group derives value from its ability to share research and development, engineering talent and other digital resources among its divisions. Soundcraft, Studer, Crown, Lexicon and Harman Music Group each have substantial digital resources and work together to achieve common goals by sharing resources and technical expertise. The Professional Group's loudspeaker products are well-known for high quality and superior sound. The JBL Professional portfolio of products includes studio monitors, loudspeaker systems, power amplifiers, sound reinforcement systems, bi-radial horns, theater systems, surround systems and industrial loudspeakers. The Company is a leading manufacturer and marketer of audio electronics equipment for professional use. Such products are marketed on a worldwide basis under various trade names, including Soundcraft, Crown, Lexicon, DOD, Digitech, AKG, BSS, dbx and Studer, and are often sold in conjunction with the Company's professional loudspeakers. The Soundcraft lines of high-quality sound mixing consoles extend from automated multi-track consoles for master recording studios to compact professional mixers for personal recording and home studios. Soundcraft products span four main market areas: sound reinforcement, recording studios, broadcast studios and musical instrument dealers. The Harman Music Group product line is marketed under the DOD, dbx, and DigiTech brand names, and is sold primarily to professional audio and musical instrument dealers. Harman Music Group products include signal processing equipment, equalizers, mixers and special effects devices. AKG is a leading manufacturer of high-quality microphones and headphones. The AKG product line includes microphones, audio headphones, surround-sound headphones and other professional audio 14 products marketed under the AKG brand name. AKG has leveraged its engineering and manufacturing expertise to enter the telecommunications market, supplying miniature transducers to mobile phone makers Nokia, Ericsson, Kyocera and Sony, as well as the automotive hands-free communications market, supplying microphone arrays to Mercedes-Benz and General Motors. Crown is a leading professional amplifier manufacturer based in Elkhart, Indiana. Crown enhances the Company's ability to provide complete systems solutions to the professional audio market. Lexicon digital signal processing products are used in live sound applications and in recording studios to produce sound effects and refine final mixes. Studer Professional Audio is recognized for the high quality and reliability of its professional products, which include analog and digital tape recorders, mixing consoles, switching systems, digital audio workstations, professional compact disc players and recorders and turnkey broadcasting studio installations. Manufacturing The Company believes that its manufacturing capabilities are essential to maintaining and improving product quality and performance. The Company manufactures most of the products that it sells other than certain Harman Kardon electronic components. The Company also manufactures certain products for other loudspeaker companies on an OEM basis. The Company's loudspeaker manufacturing capabilities include the production of its own high-gloss lacquer and wooden veneer loudspeaker enclosures, wire milling, voice coil winding and the use of computer controlled lathes and other machine tools to produce its many precision components. The Company's high degree of manufacturing integration enables it to maintain consistent quality levels, resulting in reliable, high-performance products. The Company capitalizes on opportunities to transfer technology and materials developments across product lines to maximize the utility of engineering, design, development and procurement resources. The Company's principal domestic manufacturing facility in Northridge, California, manufactures JBL and Infinity loudspeakers and audio 15 electronics for home, car and professional applications. The Company manufactures loudspeakers and assembles sound systems for the OEM automotive market in Martinsville, Indiana. Harman Music Group manufactures professional electronics products at its facility in Salt Lake City, Utah. Lexicon manufactures consumer and professional electronics products at its Bedford, Massachusetts facility. Madrigal manufactures consumer electronics at its Middletown, Connecticut facility and Crown International manufactures professional amplifiers at its Elkhart, Indiana facility. The Company's newest manufacturing facilities are located in Franklin, Kentucky and Tijuana, Mexico. The Kentucky facility manufactures automotive audio systems for Toyota and the Tijuana, Mexico facility manufactures loudspeaker cabinets for JBL and Infinity. The Company has a strong manufacturing presence in Europe. European automotive loudspeaker and electronics manufacturing includes the production of loudspeakers and amplifiers in the United Kingdom, Germany, Sweden, France and Hungary. Infotainment systems, car radios, navigation systems, amplifiers and other electronics are manufactured in Germany. The Company's Harman Consumer Manufacturing A/S subsidiary manufactures cabinet enclosures and assembles complete JBL and Infinity loudspeakers in Denmark. European professional electronics manufacturing includes Soundcraft in the United Kingdom (mixing consoles), Studer in Switzerland (professional recording and broadcast equipment) and AKG in Austria (microphones and headphones). Marketing and Distribution The Company's products are sold domestically and internationally in the consumer and professional audio markets. The consumer market for audio entertainment systems consists of home, car, and multimedia. The professional market includes a wide range of professional uses, including live music applications, recording facilities, entertainment venues such as concert halls, stadiums and movie theaters, broadcast facilities and music instrument support. The Company primarily markets its home and automotive aftermarket audio products through audio and audio-video specialty stores and certain audio-video chain stores, such as Circuit City and Best Buy in North America and MediaMarkt in Europe. The Company enjoys broad distribution of its products and selects dealers who emphasize high-quality audio systems and who are knowledgeable about the features and capabilities of audio products. Sales and marketing activities for these 16 products include dealer education programs, point-of-sale displays, participation in consumer audio trade shows, comprehensive product literature and mass-media advertising. The Company markets its OEM audio products through automobile and personal computer manufacturers and dealers. Automobile manufacturers offering Harman systems include DaimlerChrysler, Toyota, Lexus, Peugeot, Hyundai, BMW, Mitsubishi, Volkswagen, Volvo, Audi, Jaguar, Porsche, Range Rover and Saab. Personal computer OEM customers include Apple, Dell, Compaq and IBM. Sales and marketing activities for these products include dealer education programs, point-of-sale displays, participation in consumer audio trade shows and mass-media advertising. The Company's professional audio products are marketed worldwide through professional sound equipment dealers, including sound system contractors that directly assist major users. The Company's sales and marketing group for its professional products is separate and independent from its consumer product sales group. Professional audio sales and marketing activities include dealer education programs, point-of-sale displays, participation in professional audio trade shows and professional audio media advertising. Suppliers Products designed by Harman Kardon are manufactured by several suppliers. The loss of any one of these suppliers would not have a material impact on the consolidated earnings or consolidated financial position of the Company. The Company utilizes certain third-party suppliers to manufacture personal computer audio systems sold to personal computer manufacturers. Production difficulties at these third-party suppliers could have a material impact on the consolidated earnings of the Company until an alternate supplier is found. The Company uses externally-sourced microchips in many of its products. A significant disruption in our microchip supply chain and an inability to obtain alternative sources would have a material impact on the consolidated sales and earnings of the Company. 17 Trademarks and Patents The Company markets its products under numerous trademarks and logos, including JBL, Infinity, Harman Kardon, Citation, Crown, Audax, Becker, Soundcraft, Spirit, DOD, DigiTech, Lexicon, AKG, Studer, BSS, Sound- Web, dbx, AudioAccess, Mark Levinson, Madrigal Imaging, Proceed, Revel, VMAx, EON, Harman, Control, Compositions, and C-Audio. These trademarks and logos are registered or otherwise protected in substantially all major industrialized countries. The Company's registrations cover use of its trademarks and logos in connection with various applicable products, such as loudspeakers, speaker systems, speaker system components and other electrical and electronic devices. As of June 30, 2001, the Company held approximately 408 United States and foreign patents covering various products, product designs and circuits, and had approximately 362 patent applications pending around the world. The Company vigorously protects and enforces its trademark and patent rights. Seasonality The Company experiences seasonal fluctuations in sales and earnings. The first fiscal quarter is the weakest due to the automotive model changeovers and the July and August holidays in Europe. Variations in seasonal demands among end-user markets may cause operating results to vary from quarter to quarter. Customers Sales to DaimlerChrysler for fiscal year 2001 accounted for 20.5% of the Company's consolidated net sales. The loss of sales to DaimlerChrysler would have a material adverse effect on the consolidated sales, earnings and financial position of the Company. Backlog Orders Because the Company's practice is to maintain sufficient inventories of finished goods to fill orders promptly, the level of backlog is not considered to be an important index of future performance. The Company's backlog was approximately $21.2 million at June 30, 2001. 18 Warranties Harman warrants its home products to be free from defects in materials and workmanship for a period ranging from 90 days to five years from the date of purchase, depending on the product. The warranty is a limited warranty, and it imposes certain shipping costs on the customer and excludes deficiencies in appearance except for those evident when the product is delivered. Harman dealers normally perform warranty service for loudspeakers in the field, using parts supplied on an exchange basis by the Company. Warranties in international markets are generally similar to those in the domestic market, although claims arising under these warranties are the responsibility of the distributor. Competition In general, the audio industry is fragmented and competitive with many manufacturers, large and small, domestic and international, offering audio products that vary widely in price and quality and are distributed through a variety of channels. Consumer products are offered through various channels including audio specialty stores, discount stores, department stores, mail order firms and internet merchants. Consumer products are also offered as OEM options on automobiles and personal computers through the automotive and computer dealer channels. Professional products are offered through music instrument retailers, professional audio dealers, contractors and installers and on a contract bid basis. The Company concentrates on the higher-quality, higher-priced segments of the audio market. The Company believes that it currently has a significant share of the consumer market for loudspeakers (home, automotive and computer), primarily as a result of the strength of its brand names. JBL and Infinity are two of the most recognized loudspeaker brands in the world. The development of our high-end loudspeaker brand, Revel, over the past few years, has extended our market position and complemented our Mark Levinson and Proceed high-end electronics lines. The Company competes based upon its strong brand names, the breadth of its product lines, and its comprehensive marketing, engineering and manufacturing resources. The Company's principal competitors in the consumer loudspeaker market include Bose, Boston Acoustics, B&W, KEF, Celestion, Paradigm, Klipsch, Cambridge SoundWorks and Polk Audio. 19 Competition in the consumer electronic components segment remains intense, with this market dominated by large Asian competitors. The short life cycle of products and a need for continuous design and development efforts characterize this segment. The Company's competitive strategy is to compete in the upper segments of this market and to continue to emphasize the Company's ability to provide systems solutions to customers, including a combination of loudspeakers and electronics products, providing integrated surround sound and home theater systems. Principal electronics competitors for Harman Kardon include Marantz, Kenwood, Sony, Denon, Onkyo, Nakamichi, Pioneer and Yamaha. The Company competes in the high-end consumer electronics market with the Mark Levinson, Lexicon and Proceed brands. Principal competitors include Krell, McIntosh, Audio Research, Meridian, Linn and Accuphase. In the personal computer audio market, the Company's Harman Kardon, JBL and Infinity brand names are attached to the premium audio systems offered by Apple and Dell, Compaq and IBM, respectively. These audio systems are provided through licensing and sourcing arrangements. Principal competitors in this segment include Boston Acoustics, Creative Labs, Altec-Lansing and LabTec. In OEM automotive audio, the Company's principal competitors include Bose, Pioneer and Foster Electric in the loudspeaker systems segment and Alpine, Bosch, Panasonic, Siemens, Delphi, Visteon and Mannesman in the electronics segment. The Company is the only supplier of branded loudspeaker systems for Chrysler, Jeep and Mitsubishi automobiles in the United States, and also supplies branded loudspeaker systems to Toyota, Lexus, BMW, Saab and Peugeot. The Company also supplies non-branded loudspeaker systems to Chrysler, Mercedes-Benz, Volkswagen, Audi, Volvo, Ford of Europe and Fiat. The Company is a primary supplier of radio head units to Mercedes-Benz, BMW and Porsche, and also supplies TV tuners, navigation systems and other electronics to Mercedes-Benz, Porsche and Renault. The Company competes based upon the strength of its brand name recognition and the quality of its products together with its technical expertise in designing loudspeaker systems, electronics, navigation systems, man-machine interfaces and complete multimedia systems to fit the acoustic properties of each automobile model. The market for professional sound systems is highly competitive. The Company has historically held a leading market position in the professional loudspeaker market and has complemented its professional 20 loudspeaker line by adding digital professional electronics products and broadcast and recording equipment. The Company competes using its ability to provide systems solutions to meet the complete audio requirements of its professional customers. Harman offers products for most professional audio applications. The Company competes in the sound reinforcement market with many of its brand names, including JBL Professional, AKG, Crown, Soundcraft, and BSS. Principal competitors in sound reinforcement include the Electro Voice division of Telex, Eastern Acoustic Works/Mackie, QSC, Sennheiser, Tannoy, Peavey, Shure, Audio Technica, Fender, Sony and Yamaha. The Professional Group competes in the broadcast and recording areas with its Studer, AKG, Soundcraft, and Lexicon brands. Principal recording and broadcast competitors include Sony, Yamaha, Neve, Sennheiser, Denon, SSL, Shure, Tascam, Alesis and Audio Technica. In the Music Instrument area, competitors for the Company's JBL, DOD, Digitech, dbx, Lexicon, and Spirit products include Yamaha, Peavey, Rane, Roland, Alesis, Marshall, Fender, Sony, Mackie and T.C. Electronics. The Professional Group also competes in the industrial and architectural sound market. Competitors within this market include Siemens, Peavey, and Tannoy. Environmental Matters The Company is subject to various federal, state, local and international environmental laws and regulations, including those governing the use, discharge and disposal of hazardous materials. The Company's manufacturing facilities are believed to be in substantial compliance with current laws and regulations. The cost of compliance with current laws and regulations has not been, and is not expected to be, material. The Company has been named as a "potentially responsible party" with respect to the disposal of hazardous wastes at four hazardous waste sites. In addition, there are other sites to which the Company has sent hazardous wastes which the Company believes are currently under regulatory scrutiny. It is possible that additional environmental issues may arise in the future which the Company cannot now predict. Although ultimate liability cannot be determined with respect to the sites mentioned above, and applicable law provides that a potentially responsible party at any site may be held jointly and severally liable for the total cost of remediation, 21 the Company believes, based upon internal investigations and information made available to the Company with regard to its potential liability at these sites, that its proportionate share of the costs related to the investigation and remedial work at these sites will not exceed $100,000. Research and Development The Company's expenditures for research and development were $88.7 million, $76.2 million and $76.0 million for the fiscal years ending June 30, 2001, 2000 and 1999, respectively. Number of Employees As of June 30, 2001, the Company had 10,676 full-time employees, including 3,671 domestic employees and 7,005 international employees, compared to 9,807 total employees at June 30, 2000. The increase in headcount from June 30, 2000, to June 30, 2001, was primarily due to the construction of two new manufacturing facilities in Kentucky and Tijuana, Mexico and increased manufacturing staffing in our European automotive electronics operations. Disclosures about Segments and Related Information Disclosures about segments and related information to be filed hereunder is incorporated by reference to Note 9 of Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (Effects of Inflation and Exchange Rates) on pages 35 and 36 and 17 through 21, respectively, in the Company's Annual Report to Shareholders for the fiscal year ended June 30, 2001. Forward-Looking Statements Except for the historical information contained herein, the matters discussed herein contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements, including, without limitation, the effect of economic conditions, product demand, currency exchange rates, labor disputes, competitive products and other risks detailed herein and in the Company's other filings with the Securities and Exchange Commission. 22 ITEM 2. PROPERTIES
The Company's principal activities are conducted at the facilities described in the following table. Square Owned or Percentage Location Footage Leased Utilization Division - ----------------------- --------- ---------- ------------ ----------------- Northridge, California 596,000 Leased 94% JBL, Infinity, Harman Kardon, JBL Professional, Harman Becker & Multimedia Ittersbach, Germany 550,000 Owned 80% Harman/Becker 17,000 Leased 100% Worth-Schaitt, Germany 377,500 Owned 80% Harman Becker Martinsville, Indiana 206,000 Owned 100% Harman Becker 40,000 Leased Ringkobing, Denmark 228,000 Owned 90% Harman Consumer 16,000 Leased 90% Manufacturing A/S Straubing, Germany 230,000 Owned 95% Harman/Becker Elkhart, Indiana 222,700 Owned 100% Crown Intl. 7,000 Leased 100% Tijuana, Mexico 194,000 Leased 100% JBL, Infinity Potters Bar, UK 160,000 Leased 100% Soundcraft, Dar, BSS And C-Audio Chateau du Loir, France 151,000 Owned 100% Harman/Becker, JBL, Infinity, Harman Kardon Vienna, Austria 129,000 Leased 100% AKG Juarez, Mexico 125,000 Leased 70% Audio Latina Sandy, Utah 122,000 Leased 100% Digitech, DOD, dbx Franklin, KY 110,000 Leased 100% Harman/Becker
23 The company considers its properties to be suitable and adequate for its present needs. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in a lawsuit entitled Bose Corporation v. JBL, Inc., and Infinity Systems, Inc., United States District Court, District of Massachusetts. In this case, Bose sued JBL and Infinity for infringement of a U.S. patent owned by Bose relating to the use of elliptical ports in loudspeaker cabinets On September 1, 2000, the trial court issued a judgment in favor of Bose in the amount of $5.7 million. In addition, the court initially issued a permanent injunction prohibiting JBL and Infinity from the manufacture and sale of loudspeakers in the United States utilizing elliptical ports. The judgment was increased to $7.2 million, plus interest, to account for sales for the five months preceding the trial court's judgment and for sales made from JBL and Infinity inventory between September 27, 2000 and November 26, 2000 as permitted by the trial court's September 27, 2000 modification of its permanent injunction. Management believes the trial court erred in its ruling and is appealing the decision, and that the Company should be successful in its appeal. However, if the Company is unsuccessful in its appeal and must pay $7.2 million plus interest in accordance with the trial court's judgment, this would have a material adverse effect on the results of operations in the period in which the award would be required to be paid. There are various other legal claims pending against the Company, but in the opinion of management, liabilities, if any, arising from such claims will not have a material effect upon the consolidated financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 24 EXECUTIVE OFFICERS OF THE REGISTRANT
Age at Name August 1, 2001 Position - --------------------- ------------------ ------------------------------- Sidney Harman 82 Executive Chairman and Chairman of the Board of Directors Bernard A. Girod 59 Vice Chairman of the Board of Directors and Chief Executive Officer Gregory P. Stapleton 54 President, Chief Operating Officer and Director of the Company Frank Meredith 44 Executive Vice President and Chief Financial Officer William S. Palin 58 Vice President - Controller Sandra B. Robinson 42 Vice President - Financial Operations Edwin C. Summers 54 Vice President and General Counsel Floyd E. Toole 55 Vice President - Acoustics
Officers are elected annually by the Board of Directors and hold office at the pleasure of the Board of Directors until the next annual selection of officers or until their successors are elected and qualified. Sidney Harman, Ph.D., the Company's founder, was named Executive Chairman in July 2000. Dr. Harman has been Chairman of the Board, Chief Executive Officer and a Director of the Company since the Com- pany's founding in 1980. From 1977 to 1979, Dr. Harman was the Under Secretary of Commerce of the United States. From 1962 to 1977, Dr. Harman was an officer and director of the predecessor of the Company. Bernard A. Girod was named Vice Chairman and Chief Executive Officer in July 2000. Mr. Girod has been Chief Executive Officer since November 1998 and a Director of the Company since 1993. From March 1994 to November 1998, Mr. Girod served as President of the Company. From November 1992 to November 1998, Mr. Girod served as Secretary of the Company. From March 1993 to November 1998 Mr. Girod served as Chief Operating Officer of the Company. From September 1986 to 25 August 1995, Mr. Girod served as Chief Financial Officer of the Company. From September 1979 to September 1986, Mr. Girod was the Vice President and General Manager of Permacel, a subsidiary of Avery Dennison and Vice President of Planning and Business Development for Avery Dennison. From 1977 to 1979, Mr. Girod was the Chief Financial Officer of the predecessor of the Company. Gregory P. Stapleton was named President and Chief Operating Officer in July 2000. Mr. Stapleton has been a Director of the Company since November 1997 and the Chief Operating Officer since November 1998. From October 1997 to November 1998, Mr. Stapleton served as President of the Harman OEM Group. Prior to his association with the Company, Mr. Stapleton was Senior Vice President of General Electric Venture Capital Corporation from January 1986 to September 1987, and was General Manager, Industrial Products Section, Factory Automation Products Division, of General Electric Corporation from October 1982 through December 1985. Frank Meredith was named Executive Vice President and Chief Financial Officer in July 2000. Mr. Meredith has been the Chief Financial Officer of the Company since February 1997 and Secretary of the Company since November 1998. Mr. Meredith served as Vice President, General Counsel and Assistant Secretary of the Company from July 1992 to June 1998. Prior to that time, Mr. Meredith held other positions within the Company since May 1985. Prior to joining the Company, Mr. Meredith was employed by the accounting firm Touche Ross & Co. William S. Palin has been Vice President - Controller of the Company since March 1994. Prior to joining the Company, Mr. Palin was a partner of MacHardy Palin & Co. from January 1982 to March 1994. From July 1978 to January 1982, Mr. Palin served as an officer of two of the Company's international subsidiaries. Sandra B. Robinson has been Vice President - Financial Operations since November 1992. Prior to that time, Ms. Robinson was Director of Corporate Accounting and has been employed by the Company since December 1984. Edwin C. Summers has been Vice President and General Counsel of the Company since July 1998. Prior to that time, Mr. Summers was Vice President, General Counsel and Secretary of First Alliance Corporation from 1996. From 1991 to 1995, Mr. Summers was Senior Vice President, General Counsel and Secretary of Transamerica Finance Group. 26 Floyd E. Toole, Ph.D., joined the Company as Vice President - Acoustics in November 1991. Prior to joining the Company, Dr. Toole spent 25 years, most recently as Senior Research Officer, with the National Research Council of Canada's Acoustics and Signal Processing Group, where he developed psychoacoustic- optimized techniques for improving loudspeaker performance. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by Part II, Item 5 is incorporated by reference to the Company's Annual Report to Shareholders for the fiscal year ended June 30, 2001 (Shareholder Information on page 40). ITEM 6. SELECTED FINANCIAL DATA Five-Year Summary (in thousands, except per share data, for the fiscal years ended June 30)
2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- Net sales $ 1,716,547 $ 1,677,939 $ 1,500,135 $ 1,513,255 $ 1,474,094 Operating income 71,228 121,722 38,663 100,325 101,973 Income before taxes 45,099 102,829 14,447 75,707 77,901 Net income 32,364 72,838 11,723 50,243 54,832 Diluted EPS 0.96 2.06 0.32 1.33 1.45 Total assets 1,162,385 1,137,505 1,065,755 1,130,684 1,014,254 Total debt 368,760 277,324 311,575 333,640 306,150 Shareholders' equity 422,942 486,333 468,187 511,899 466,762 Dividends per share 0.10 0.10 0.10 0.10 0.10
Per-share data has been restated to reflect the two-for-one stock split effective August 2000. 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Part II, Item 7 is incorporated by reference to the Company's Annual Report to Shareholders for the fiscal year ended June 30, 2001 (Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 17 through 21). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Securities and Exchange Commission requires that registrants include information about potential effects of changes in interest rates and currency exchange rates in their financial statements. The qualitative information required by Part II, Item 7A is incorporated by reference to pages 21 and 13 of the Company's Annual Report to Shareholders for the fiscal year ended June 30, 2001 (Effects of Inflation and Currency Exchange Rates and Footnote 13, Derivatives, respectively). The Company's exposure to interest rate changes is primarily related to its variable rate debt. To assess exposure to interest rate changes, the Company has performed a sensitivity analysis assuming a hypothetical 100 basis point increase in interest rates across all maturities. This analysis indicates that such market movements would reduce fiscal 2002 net income, based on June 2001 positions, by approximately $1.4 million. Based on June 2000 positions, the effect on fiscal 2001 net income of such an increase in interest rates was estimated to be $0.7 million. The Company and its subsidiaries' net unhedged exposure in assets and liabilities denominated in currencies other than their relevant functional currencies as of June 30, 2001 and 2000 was not material to the consolidated financial position of the Company. Actual gains and losses in the future may differ materially from the hypothetical gains and losses discussed above based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and the Company's actual exposure and hedges. 28 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Part II, Item 8 is incorporated by reference to the Company's Annual Report to Shareholders for the fiscal year ended June 30, 2001 (Consolidated Financial Statements on pages 24 through 39). ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III With the exception of information relating to the executive officers of the Company which is provided in Part I hereof, all information required by Part III (Items 10, 11, 12, and 13) of Form 10-K, including the information required by Items 404 and 405 of Regulation S-K, is incorporated by reference to the Company's definitive Proxy Statement relating to the 2001 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) 1. Financial statements required to be filed hereunder are indexed on page 33 hereof. 2. Financial statement schedules required to be filed hereunder are indexed on page 33 hereof. 3. The exhibits required to be filed hereunder are indexed on pages 39 through 47 hereof. 29 THIS PAGE LEFT BLANK INTENTIONALLY 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant): HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED By: (Signature and Title) /s/ Bernard A. Girdod ------------------------------------- Bernard A. Girod, Vice Chairman and Chief Executive Officer Date: September 14, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Sidney Harman Executive Chairman and September 14, 2001 - ----------------------------- Chairman of the Board --------------------- Sidney Harman of Directors /s/ Bernard A. Girod Vice Chairman, Chief September 14, 2001 - ----------------------------- Executive Officer and --------------------- Bernard A. Girod Director /s/ Gregory P. Stapleton President, Chief Operating September 14, 2001 - ----------------------------- Officer and Director --------------------- Gregory P. Stapleton /s/ Frank Meredith Executive Vice President September 14, 2001 - ----------------------------- and Chief Financial -------------------- Frank Meredith Officer (Principal Accounting Officer) /s/ Shirley M. Hufstedler Director September 14, 2001 - ----------------------------- -------------------- Shirley M. Hufstedler /s/ Ann McLaughlin Korologos Director September 14, 2001 - ----------------------------- -------------------- Ann McLaughlin Korologos /s/ Edward H. Meyer Director September 14, 2001 - ------------------------- -------------------- Edward H. Meyer /s/ Stanley A. Weiss Director September 14, 2001 - ------------------------- -------------------- Stanley A. Weiss
31 THIS PAGE LEFT BLANK INTENTIONALLY 32 LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Index to Item 14(a)
Page Reference ------------------------------------- Annual Report to Form 10-K Shareholders ------------------------------------- Consolidated Financial Data (pages 24 through 40 of the 2001 Annual Report to Shareholders herein incorporated by reference as Exhibit 13.1): Financial Table of Contents ................................................... 16 Independent Auditor's Reports .......................... 35 ................. 23 Consolidated Balance Sheets as of June 30, 2001 and 2000 .................................................... 24 Consolidated Statements of Operations for the years ended June 30, 2001, 2000 and 1999 ............................................. 25 Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999 .............................................. 26 Consolidated Statements of Shareholders' Equity for the years ended June 30, 2001, 2000 and 1999 ....................................................... 27 Notes to Consolidated Financial Statements .................................... 28 Schedules for the years ended June 30, 2001, 2000 and 1999: II Valuation and Qualifying Accounts and Reserves ............................. 37
All other schedules have been omitted because they are not applicable, not required, or the information has been otherwise supplied in the financial statements or notes to the financial statements. 33 THIS PAGE LEFT BLANK INTENTIONALLY 34 INDEPENDENT AUDITOR'S REPORT ON SCHEDULE - ---------------------------------------- The Board of Directors Harman International Industries, Incorporated Under the date of August 10, 2001, we reported on the consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of operations, cash flows and shareholders' equity for each of the years in the three year period ended June 30, 2001, as contained in the 2001 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year ended June 30, 2001. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Los Angeles, California August 10, 2001 35 THIS PAGE LEFT BLANK INTENTIONALLY 36 Schedule II HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED Valuation and Qualifying Accounts and Reserves Years Ended June 30, 2001, 2000 and 1999 ($000's omitted)
- -------------------------------------------------------------------------------------- Charged Balance at Charged to To Other Balance Beginning Costs and Accounts Deductions at End Classification of Period Expenses Describe Describe of Period - -------------------------------------------------------------------------------------- Year Ended June 30, 1999 Allowance for doubtful accounts $ 10,072 $ 2,662 $ (129) (1) $ 3,873 (2) $ 8,732 Inventory reserves $ 38,575 $ 28,023 (4)$(1,167) (1) $ 25,315 (3) $ 40,116 Year Ended June 30, 2000 Allowance for doubtful accounts $ 8,732 $ 6,902 $ (394)(1)$ 3,480 (2)$ 11,760 Inventory reserves $ 40,116 $ 32,611 (4) $ 775 (1)$ 33,278 (3)$ 40,224 Year Ended June 30, 2001 Allowance for doubtful accounts $ 11,760 $ 2,721 $ (824) (1)$ 2,200 (2)$ 11,457 Inventory reserves $ 40,224 $ 18,416 (4) $(2,268) (1)$ 17,737 (3)$ 38,635
(1) Net effect of acquisitions, dispositions and foreign currency translation. (2) Deductions for accounts receivable written off net of recoveries. (3) Deductions for scrapping and markdowns. (4) Includes net change in intercompany profit elimination. 37 THIS PAGE LEFT BLANK INTENTIONALLY 38 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED INDEX TO EXHIBITS The following exhibits are filed as part of this report. Where such filing is made by incorporation by reference to a previously filed statement or report, such statement or report is identified in parenthesis. There are omitted from the exhibits filed with this Annual Report on Form 10-K certain promissory notes and other instruments and agreements with respect to long-term debt of the Company, none of which authorizes securities in a total amount that exceeds 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Company hereby agrees to file with the Securities and Exchange Commission copies of all such omitted promissory notes and other instruments and agreements as the Commission requests.
Exhibit Page No. Description No. 3.1, 4.1 Restated Certificate of Incorporation filed with the Delaware Secretary of State on October 7, 1986, as amended by the Certificates of Amendment filed with the Delaware Secretary of State on November 13, 1986, November 9, 1993 and on December 14, 2000 ................................... 49 3.2,4.5 By-Laws of Harman International Industries, Incorporated, as amended December 13, 1999. (Filed as Exhibit 3.2,4.5 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ................ IBR 4.2 Rights Agreement (including a Form of Certificate of Designation of Series A Junior Participating Preferred Stock as Exhibit A thereto, a Form Right Certificate as Exhibit B thereto and a Summary of Rights to Purchase of Preferred Stock as Exhibit C thereto) (Incorporated by reference to the Form 8-A filed by the Company on December 16, 1999) .................... IBR
39 INDEX TO EXHIBITS (cont.)
Exhibit Page No. Description No. 4.3 Certificate of Designation of Series A Junior Participating Preferred Stock of Harman International Industries, Incorporated, dated January 11, 2000. (Filed as Exhibit 4.3 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ........................................ IBR 10.1 Lease dated as of June 18, 1987 between Harman International Industries Business Campus Joint Venture and JBL Inc., as amended. (Filed as Exhibit 10.1 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1987 (File No. 0-15147), and hereby incorporated by reference) ................ IBR 10.2 Guaranty dated as of June 18, 1987 by Harman International Industries, Inc. of Lease dated as of June 18, 1987 between Harman International Industries Business Campus Joint Venture and JBL Inc., as amended. (Filed as Exhibit 10.2 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1987 (File No. 0-15147), and hereby incorporated by reference) ........................... IBR 10.18 Harman International Industries, Inc. 1987 Executive Incentive Plan (adopted December 8, 1987). (Filed as Exhibit 10.18 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1988 (File No. 0-15147), and hereby incorporated by reference) ...... IBR 10.19 Form of Incentive Stock Option Agreement under the 1987 Executive Incentive Plan. (Filed as Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1988 (File No. 0-15147), and hereby incorporated by reference) ................ IBR
40 INDEX TO EXHIBITS (cont.)
Exhibit Page No. Description No. 10.20 Form of Non-Qualified Stock Option Agreement under the 1987 Executive Incentive Plan. (Filed as Exhibit 10.20 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1988 (File No. 0-15147), and hereby incorporated by reference) ...... IBR 10.21 Form of Non-Qualified Stock Option Agreement with non-officer directors. (Filed as Exhibit 10.21 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1988 (File No. 0-15147), and hereby incorporated by reference) .................... IBR 10.23 Lease Agreement dated April 28, 1988, by and between Harman International Business Campus Joint Venture and Harman Electronics, Inc. (Filed as Exhibit 10.23 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1988 (File No. 0-15147), and hereby incorporated by reference) ........................................... IBR 10.26 Harman International Industries, Incorporated Retirement Savings Plan, Amended and Restated effective as of June 27, 2000 ........................ 106 10.27 Amended and Restated Harman International Industries, Incorporated Supplemental Executive Retirement Plan dated October 1, 1999. (Filed as Exhibit 10.27 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ....... IBR 10.30 Form of Restricted Stock Agreement. (Filed as Exhibit 10.30 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1989 (File No. 0-15147), and hereby incorporated by reference) ...... IBR
41 INDEX TO EXHIBITS (cont.)
Exhibit Page No. Description No. 10.40 Harman International Industries, Incorporated 1992 Incentive Plan, as amended. (Filed as Exhibit B to the Company's Definitive Proxy Statement filed on September 15, 1999 (File No. 1-9764), and hereby incorporated by reference) ................... IBR 10.41 Form of Incentive Stock Option Agreement under the 1992 Incentive Plan. (Filed as Exhibit 10.41 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) .......................... IBR 10.42 Form of Non-Qualified Stock Option Agreement under the 1992 Incentive Plan. (Filed as Exhibit 10.42 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ....................................... IBR 10.43 Form of Restricted Stock Agreement under the 1992 Incentive Plan. (Filed as Exhibit 10.43 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) .......................... IBR 10.44 Form of Non-Qualified Stock Option Agreement for Non-Officer Directors under the 1992 Incentive Plan. (Filed as Exhibit 10.44 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ...... IBR 10.45 Harman International Industries, Inc. Deferred Compensation Plan, effective June 1, 1997. (Filed on Form S-8 Registration Statement on June 9, 1997 (Reg. No. 333-28793), and hereby incorporated by reference). IBR
42 INDEX TO EXHIBITS (cont.)
Exhibit Page No. Description No. 10.46 First Amendment to Harman International Industries, Inc. Deferred Compensation Plan dated October 1, 1999. (Filed as Exhibit 10.46 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ........................................ IBR 10.53 Multi-Currency, Multi-Option Credit Agreement dated September 30, 1994, among Harman International Industries, Incorporated, the Subsidiary Borrowers and Subsidiary Guarantors, and the Several Lenders named therein with Chemical Securities, Inc., as Arranger, NationsBank of North Carolina, N.A., as Co-Agent and Chemical Bank, as Administrative Agent. (Filed as Exhibit 10.53 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 1-9764), and hereby incorporated by reference) .......................................... IBR 10.54 First Amendment dated February 15, 1995, to the Multi-Currency, Multi-Option Credit Agreement dated September 30, 1994. (Filed as Exhibit 10.54 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (File No. 1-9764), and hereby incorporated by reference) ................... IBR 10.55 Second Amendment dated November 9, 1995, to the Multi-Currency, Multi-Option Credit Agreement dated September 30, 1994. (Filed as Exhibit 10.55 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 (File No. 1-9764), and hereby incorporated by reference) ................... IBR
43 INDEX TO EXHIBITS (cont.)
Exhibit Page No. Description No. 10.57 First Amendment to the Lease Agreement by and between Harman International Business Campus Joint Venture and Harman Electronics, Inc. dated October 1995. (Filed as Exhibit 10.57 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (File No. 1-9764), and hereby incorporated by reference) .......................... IBR 10.58 First Amendment to the Lease Agreement by and between Harman International Business Campus Joint Venture and JBL, Inc. dated October 1995. (Filed as Exhibit 10.58 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (File No. 1-9764), and hereby incorporated by reference) .......................................... IBR 10.59 Fourth Amendment dated June 6, 1997, to the Multi-Currency, Multi-Option Credit Agreement dated September 30, 1994. (Filed as Exhibit 10.59 to the Annual Report on Form 10-K for the fiscal year ended June 30, 1997 (File No. 1-9764), and hereby incorporated by reference) ............... IBR 10.61 Amended and Restated Credit Agreement, dated July 5, 2000, among Harman International Industries, Incorporated, Becker Holding GmbH, The Several Lenders from Time to Time Party Thereto and Commerzbank Aktiengesellschaft. (Filed As Exhibit 10.61 to the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ...... IBR 10.65 Employment Agreement between the Company and William Palin dated April 4, 2001. (Filed as Exhibit 10.69 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-9764), and hereby incorporated by reference) ...... IBR
44 INDEX TO EXHIBITS (cont.)
Exhibit Page No. Description No. 10.66 Form of Non-Qualified Stock Option Agreement between the Company and certain executive officers of the Company dated August 11, 1998. (Filed as Exhibit 10.66 to the Annual Report on Form 10-K for the year ended June 30, 1999 (File No. 1-9764), and hereby incorporated by reference) ...... IBR 10.67 Equipment Financing Agreement between the Company and State Street Bank and Trust dated September 30, 1999. (Filed as Exhibit 10.67 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 1-9764), and hereby incorporated by reference) ...... IBR 10.68 Participation Agreement among the Company, State Street Bank and Trust, Four Winds Funding Corporation, Commerzbank, Bank of Tokyo - Mitsubishi Trust Company and BTM Capital dated September 30, 1999. (Filed as Exhibit 10.68 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 1-9764), and hereby incorporated by reference) ..... IBR 10.69 Harman International Industries, Incorporated, Key Executive Officers Incentive Plan. (Filed as Exhibit A to the Definitive Proxy Statement on Form 14-A for the year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ...................................... IBR 10.70 Fifth Amendment dated July 17, 2000 to the Multi-Currency, Multi-Option Credit Agreement dated September 30, 1994. (Filed as Exhibit 10.70 to the Annual Report on Form 10-K for the year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) .............. IBR
45 INDEX TO EXHIBITS (cont.)
Exhibit Page No. Description No. 10.71 Form of Severance Agreement between the Company and each of Sidney Harman, Bernard Girod, Gregory Stapleton and Frank Meredith. (Filed as Exhibit 10.71 to the Annual Report on Form 10-K for the year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ..................................... IBR 10.72 Benefit Agreement under the Supplemental Executive Retirement Plan between Bernard A. Girod and Harman International Industries, Inc., dated June 22, 2001. (Filed as Exhibit 10.72 to the Annual Report on Form 10-K for the year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ............. IBR 10.73 Benefit Agreement under the Supplemental Executive Retirement Plan between Gregory Stapleton and Harman International Industries, Inc., dated June 20, 2001. (Filed as Exhibit 10.73 to the Annual Report on Form 10-K for the year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ............. IBR 10.74 Benefit Agreement under the Supplemental Executive Retirement Plan between Frank Meredith and Harman International Industries, Inc., dated June 21, 2000. (Filed as Exhibit 10.74 to the Annual Report on Form 10-K for the year ended June 30, 2000 (File No. 1-9764), and hereby incorporated by reference) ............. IBR 13.1 Pages 17 through inside back cover of Harman International Industries, Incorporated Annual Report to Shareholders for the fiscal year ended June 30, 2001 ...................................... 130
46 INDEX TO EXHIBITS (cont.)
Exhibit Page No. Description No. 21.1 Subsidiaries of the Company ........................ 158 23.1 Consent of Independent Auditors .................... 164
47 THIS PAGE LEFT BLANK INTENTIONALLY 48 EXHIBIT 3.1, 4.1 49 THIS PAGE LEFT BLANK INTENTIONALLY 50 EXHIBIT 10.26 73 THIS PAGE LEFT BLANK INTENTIONALLY 74 EXHIBIT 13.1 130 THIS PAGE LEFT BLANK INTENTIONALLY 131 EXHIBIT 21.1 158 THIS PAGE LEFT BLANK INTENTIONALLY 159 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED LIST OF SUBSIDIARIES
Subsidiary Jurisdiction - ------------------------------------ ---------------------------- AKG Acoustics GmbH Republic of Austria Audax Industries SNC France Becker of North America, Inc. Delaware Becker Service und Verwaltungs GmbH Germany BSS Audio United Kingdom Crown Audio, Inc. Delaware Becker Automotive (Pty) Ltd. South Africa Harman Audio de Mexico S.A. de C.V. Mexico Harman de Mexico S.A. de C.V. Mexico Harman Audio Outlet, Inc. Delaware Harman Becker Automotive Systems Germany (Becker Division) GmbH Harman Becker Automotive Systems Germany Holding GmbH Harman Becker Automotive Systems Delaware (Kentucky), Inc. Harman Becker Automotive Systems Delaware (Wisconsin), Inc. Harman Becker Automotive Systems Germany (Straubing Division) GmbH Harman Becker Automotive Systems, Inc. Delaware
160 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED LIST OF SUBSIDIARIES
Subsidiary Jurisdiction - ------------------------------ ------------------------ Harman Becker Automotive Systems KFT Hungary Harman Becker Automotive Systems S.A. de C.V. Mexico Harman Belgium N.V. Kingdom of Belgium Harman Consumer Manufacturing A/S Denmark Harman Consumer Nederland B.V. Netherlands Harman Consumer International SNC France Harman Enterprises, Inc. Delaware Harman France SNC France Harman Holding A/S Denmark Harman Industries SNC France Harman International Industries Limited United Kingdom Harman International Singapore Pte. Ltd. Singapore Harman Investment Company, Inc. Delaware Harman-Kardon, Incorporated Delaware Harman Music Group, Incorporated Delaware Harman Pro GmbH Germany Harman Pro North America, Inc. Delaware Harman (Suzhou) Electronics Co. Ltd. China
161 HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED LIST OF SUBSIDIARIES
Subsidiary Jurisdiction - ------------------------- ----------------------- Harman UK Limited United Kingdom Infinity Systems, Inc. California Innovative Systems GmbH Navigation-Multimedia Germany JBL Incorporated Delaware Lexicon, Incorporated Massachusetts Madrigal Audio Laboratories, Inc. Delaware Soundcraft Electronics United Kingdom Studer Austria GmbH Austria Studer USA, Inc. Delaware Studer Canada Limited Canada Studer Deutschland GmbH Germany Studer Digitec S.A. France Studer Japan Ltd. Japan Studer Professional Audio AG Switzerland Studer U.K. United Kingdom
162 THIS PAGE LEFT BLANK INTENTIONALLY 163 EXHIBIT 23.1 164 THIS PAGE LEFT BLANK INTENTIONALLY 165 CONSENT OF INDEPENDENT AUDITOR - --------------------------------------------------- The Board of Directors Harman International Industries, Incorporated: We consent to incorporation by reference in the Registration Statements Nos. 33-20559, 33-28973, 33-36388, 33-60234, 33-60236, 33-59605, 333- 02197, 333-28793 and 333-32673 on Form S-8 and 333-21021 on Form S- 3 of Harman International Industries, Incorporated of our reports dated August 10, 2001, relating to the consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of operations, cash flows and shareholders' equity and related schedule for each of the years in the three year period ended June 30, 2001, which reports appear in the June 30, 2001 annual report on Form 10-K of Harman International Industries, Incorporated. /s/ KPMG LLP Los Angeles, California September 14, 2001 166 THIS PAGE LEFT BLANK INTENTIONALLY 167 EX-3 3 a10kex31.txt EXHIBIT 3.1,4.1 RESTATED CERTIFICATE OF INCORP RESTATED CERTIFICATE OF INCORPORATION OF HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: (1) The Corporation's present name is HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED. (2) The date of filing of the Corporation's original certificate of incorporation with the Secretary of State of Delaware was January 31, 1980. (3) The Corporation was originally incorporated under the name HARCO INDUSTRIES, INC. (4) This Restated Certificate of Incorporation has been duly proposed by resolution of the Board of Directors of the Corporation and has been duly adopted by the stockholders of the Corporation in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. (5) The certificate of incorporation of the Corporation, including amendments set forth herein but not separately filed, is restated and integrated to read in full as follows: First: The name of the Corporation is HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED. Second: The registered office of the Corporation in the State of Delaware is located at 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. Third: The purpose of the Corporation is to engage in the design, development, manufacture and distribution of audio and video system components and to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. Fourth: (a) The total number of shares of capital stock which the Corporation is authorized to issue is 20,000,000 shares, consisting of 5,000,000 shares of Preferred Stock, of the par value $0.01 per share (the "Preferred Stock"), and 15,000,000 shares of Common Stock of the par value $0. 01 per share (the "Common Stock"). (b) A holder of Common Stock shall, except as may otherwise provided in accordance with subparagraph (c) hereof, be entitled to one (1) vote on each matter submitted to a vote at a meeting of stockholders for each share of Common Stock held of record by such holder as of the record date for such meeting. (c) The Preferred Stock may be issued in one or more series. The Board of Directors is hereby authorized to issue the shares of Preferred Stock in such series and to fix from time to time before issuance the number of shares to be included in any series and the designation, relative powers, preferences and rights and qualifications, limitations or restrictions of all shares of such series. The authority of the Board of Directors with respect to each series shall include, without limiting the generality of the foregoing, the determination of any or all of the following: (i) the number of shares of any series and the designation to distinguish the shares of such series from the shares of all other series; (ii) the voting powers, if any, and whether such voting powers are full or limited, in such series; (iii) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; (iv) whether dividends, if any, shall be cumulative or noncumulative, the dividend rate of such series, and the dates and preferences of dividends on such series; (v) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation; (vi) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock, or any other security, of the Corporation or any other corporation, and price or prices or the rates of exchange applicable thereto; (vii) the right, if any, to subscribe for or to purchase any securities of the Corporation or any other corporation; (viii) the provisions, if any, of a sinking fund applicable to such series; and (ix) any other relative, participating, optional or other special powers, preferences, rights, qualifications, limitations or restrictions thereof; all as shall be determined from time to time by the Board of Directors and shall be stated in said resolution or resolutions providing for the issuance of such Preferred Stock (a "Preferred Stock Designation"). (d) Except as may be provided in this Restated Certificate of Incorporation or by the Board of Directors in any Preferred Stock Designation, or as otherwise 2 required by law, the Common Stock shall have the exclusive right to vote for the election of Directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote or consent. Fifth: In furtherance of, and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized and empowered adopt, amend or repeal the By-Laws of the Corporation; provided, however, that the By-Laws adopted by the Board of Directors under the powers hereby conferred may be amended or repealed, or a provision inconsistent therewith adopted, by the Board of Directors or by the stockholders, having voting power with respect thereto, except that any provision of the By-Laws which is to the same effect as Articles Fifth, Seventh and Eighth of this Restated Certificate of Incorporation shall not be amended or repealed, nor shall any provision inconsistent with such By-Laws be adopted, without the affirmative vote of the holders of at least 80 percent of the combined voting power of all shares of the Corporation entitled to vote generally in the election of Directors, voting together as a single class. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80 percent of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to, or adopt amend or repeal any provision inconsistent with, this Article Fifth. Sixth: The stockholders and Board of Directors of the Corporation shall have power to hold their meetings and to have one or more offices of the Corporation within or without the State of Delaware, and to keep the books of the Corporation within or without the State of Delaware at such place or places as may from time to time be designated by the Board of Directors. Seventh: After October 15, 1986, no action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken by written consent without a meeting. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80 percent of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article Seventh. Eighth: Section 1. Number, Election and Terms of Directors. Subject to the rights, if any, of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional Directors under specified circumstances, the number of the Directors of the Corporation shall be fixed from time to time by or pursuant to the By-Laws of the Corporation. The Directors, other than those who may be elected by the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, shall be classified with respect to the time for which they severally hold office into three classes, as nearly their equal in number as possible, as shall be provided in the manner specified in the By-Laws of the Corporation. At or before the annual meeting of the stockholders to be held in 1986, one class shall be originally elected for a term expiring at the annual meeting of stockholders to be held in 1987, another class shall be originally elected for a term expiring at the annual meeting of the stockholders to be held in 3 1988, and another class shall be originally elected for a term expiring at the annual meeting of stockholders to be held in 1989, with the members of each class to hold office until their successors are elected and qualified. Commencing with the annual meeting of the stockholders of the Corporation to be held in 1987, Directors of each class the term of which shall then expire shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their successors are elected and qualified. Section 2. Stockholder Nomination of Director Candidates. Advance notice of stockholder nominations for the election of Directors shall be given in the manner provided in the By-Laws of the Corporation. Section 3. Newly Created Directorships and Vacancies. Subject to the rights, if any, of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect Directors under specified circumstances, newly created directorships resulting from any increase in the number of Directors and any vacancies, on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled only by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor shall have been elected and qualified. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of an incumbent Director. Section 4. Removal. Subject to the rights, if any, of the holders of any class or series of stock having preference over the Common Stock as to dividends or upon liquidation to elect additional Directors under specified circumstances, any Director may be removed from office only for cause and by the affirmative vote of the holders of at least 80 percent of the combined voting power of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of Directors, voting together as a single class. Section 5. Amendment, Repeal or Alteration. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80 percent of the combined voting power of the outstanding shares of the capital stock of the Corporation entitled to vote in the election of Directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article Eighth. Ninth: Section 1. Applicability of Article. Except as otherwise expressly provide in Section 4 of this Article Ninth, none of the actions or transactions listed below shall be effected by the Corporation, or approved by the Corporation as a stockholder of any majority owned subsidiary of the Corporation if, as of the record date for the determination of the stockholders entitled to vote thereon, any Interested Stockholder (as hereinafter defined) exists, unless the applicable requirements of Sections 3, 4, 5, 6 and 7 of this Article Ninth are fully complied with: 4 (a) Any merger or consolidation of the Corporation or any of its majority owned subsidiaries with (i) any Interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any of its majority owned subsidiaries having an aggregate Fair Market Value (as hereinafter defined) of $10,000,000 or more; or (c) the issuance or transfer by the Corporation or any of its majority owned subsidiaries (in one transaction or a series of transactions) of any securities of the Corporation or any of its majority owned subsidiaries to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $10,000,000 or more; or (d) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or (e) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its majority owned subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation of any majority owned subsidiaries which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder. Section 2. Business Combination. The term "Business Combination" as used in this Article Ninth shall mean any transaction which is referred to in any one or more of subparagraphs (a) through (e) of Section 1 hereof. Section 3. Stockholder Vote Required. The actions and transactions described in Section 1 of this Article Ninth shall have been authorized by the affirmative vote of at least 80 percent of the combined voting power all of the outstanding shares of Voting Stock, voting together as a single class. Section 4. Minimum Price Required. Notwithstanding Section 3 hereof, the 80 percent voting requirement shall not be applicable if: (a) any action or transaction specified in Section 1 hereof is approved by the Corporation's Board of Directors and by a majority of the Disinterested Directors (as hereinafter defined); or 5 (b) in the case of any action or transaction pursuant to which the holders of the capital stock of the Corporation are entitled to receive cash, property, securities or other consideration, the aggregate amount of the cash and the Fair Market Value (as hereinafter defined) of the property, securities or other consideration to be received per share by holders of the capital stock of the Corporation in such action or transaction is not less than the higher of (i) the highest price per share paid by the Interested Stockholder in acquiring any of its holdings of capital stock of the Corporation within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or in the transaction in which it became an Interested Stockholder, whichever is higher, or (ii) the Fair Market Value per share of the applicable class of capital stock of the Corporation on the Announcement Date or on the dates on which the Interested Stockholder became an Interested Stockholder, whichever is greater. (c) The consideration to be received by holders of a particular class of outstanding Voting Stock shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. Section 5. Restrictions on Certain Actions. After becoming an Interested Stockholder and prior to consummation of such action or transaction, (a) such Interested Stockholder shall not have acquired from the Corporation or any of its majority owned subsidiaries any newly issued or treasury shares of capital stock or any newly issued securities convertible into or exchangeable for capital stock of the Corporation or any of its majority owned subsidiaries, directly or indirectly (except upon conversion or exchange of convertible or exchangeable securities acquired by it prior to becoming a Interested Stockholder or as a result of a pro rata stock dividend or stock split or other distribution of stock to all Stockholders pro rata); and (b) such Interested Stockholder shall not have received the benefit directly or indirectly (except proportionately as a stockholder) of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation or any of its majority owned subsidiaries, or made any major changes in the Corporation's or any of its majority owned subsidiaries' businesses or capital structures or reduced the current annual rate of dividends payable on the Corporation's capital sock below the rate in effect immediately prior to the time such Interested Stockholder became a Interested Stockholder. Section 6. Proxy Statement Required. A proxy statement responsive to the requirements of the Securities Exchange Act of 1934, whether or not the Corporation is then subject to such requirements, shall be mailed to the stockholders of the Corporation for the purpose of soliciting stockholder approval of such action or transaction and shall contain at the front thereof, in a prominent place, any recommendations as to the advisability of the action or transaction which the Disinterested Directors may choose to state. 6 Section 7. Certain Definitions. For the purpose of this Article Ninth, (a) The term "Interested Stockholder" shall mean any person (including any Affiliate thereof) other than the Corporation or any of its subsidiaries and other than any profit sharing, employee stock ownership or other employee benefit plan of the Corporation or any of its subsidiaries or any trustee of or fiduciary with respect to any such plan when acting in such capacity who or which owns beneficially or controls, directly or indirectly, 20 percent or more of the outstanding shares of Voting Stock of the Corporation. (b) A person shall be a "beneficial owner" of any Voting Stock: (i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (ii) which such person or any of its Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or has the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliate or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. (c) For the purposes of determining whether a person is an Interested Stockholder pursuant to subparagraph (a) hereof, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of subparagraph (b) hereof but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, exchange rights, warrants or options, or otherwise. (d) The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1986. (e) The term "Disinterested Director" shall mean any member of the Board (i) who was a director on the Base Date, or (ii) who is unaffiliated with the Interested Stockholder and who was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, or (iii) any successor of a Disinterested Director if such successor is unaffiliated with the Interested Stockholder and if such successor was recommended or elected to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board. (f) The term "Fair Market Value" shall mean: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange Listed 7 Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sale price (or, if unavailable, bid quotation) with respect to a share of such stock during the 30-day period preceding the date in question or the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in good faith. (g) The term "Voting Stock" shall mean the Common Stock but not (unless and to the extent provided to the contrary in the relevant Preferred Stock Designation) the Preferred Stock. Section 8. Determination by the Board of Directors. The Board of Directors of the Corporation shall have the power and duty to determine for the purposes of this Article Ninth, on the basis of information then known to the Board of Directors, whether (a) any Interested Stockholder exists or is an Affiliate or an Associate of another, and (b) any proposed transaction constitutes a transaction specified in Section 1 of this Article Ninth. Any such determination by the Board of Directors shall be conclusive and binding for all purposes. Section 9. Alteration, Amendment or Repeal. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80 percent of all of combined voting power the outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend, repeal, or adopt any provision inconsistent with, this Article Ninth. Tenth: To the full extent permitted by the General Corporation Law of the State of Delaware (including the amendments thereto effective July 1, 1986) or any other applicable laws as presently or hereafter in effect, no Director of the Corporation shall be personally liable to the Corporation or its stockholders for or with respect to any acts or omissions in the performance of his or her duties as a Director of the Corporation. No amendment to or repeal of this Article TENTH shall apply to or have any effect on the liability or alleged liability of any Director of the Corporation for or with respect to any acts or omissions of such Director occurring prior to such amendment. Eleventh: Elections of directors need not be by written ballot unless the Bylaws of the Corporation so provide. Twelfth: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, including in a Preferred Stock Designation, in the manner now or hereafter prescribed by applicable law and this Restated Certificate of Incorporation, including any applicable Preferred Stock Designation, and all rights conferred upon stockholders herein are created subject to this reservation. 8 IN WITNESS WHEREOF, HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED has caused this Restated Certificate of Incorporation to be signed under penalties of perjury by Donald J. Esters, its President, and attested by Jane Harman, its Secretary, as of this 6th day of October, 1986. HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED By:/s/ Sidney Harman Dr. Sidney Harman Chairman of the Board Attest: /s/ Jane Harman Jane Harman Secretary 9 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED _________________________________________________________ Harman International Industries, Incorporated, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that the amendments to the Restated Certificate of Incorporation of the Corporation set forth below were duly adopted in accordance with Section 242 of the General Corporation Law of the State of Delaware: 1. That Articles FIFTH, SEVENTH, EIGHTH and NINTH of the Restated Certificate of Incorporation be amended to decrease the percentage vote of the stockholders required to authorize or effect any of the actions or transactions described in said Articles from an 80 percent majority to a two-thirds majority, so that as amended said Articles shall read in their entirety as follows: "FIFTH: In furtherance of, and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized and empowered adopt, amend or repeal the By-Laws of the Corporation: provided, however, that the By-laws adopted by the Board of Directors under the powers hereby conferred may be amended or repealed, or a provision inconsistent therewith adopted, by the Board of Directors or by the stockholders, having voting power with respect thereto, except that any provision of the By-Laws which is to the same effect as Articles Fifth, Seventh and Eighth of this Restated Certificate of Incorporation shall not be amended or repealed, nor shall any provision inconsistent with such By-Laws be adopted, without the affirmative vote of the holders of at least two-thirds of the combined voting power of all shares of the Corporation entitled to vote generally in the election of Directors, voting together as a single class. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least two-thirds of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to, or adopt amend or repeal any provision inconsistent with, this Article Fifth." "SEVENTH: After October 15, 1986, no action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken by written consent without a meeting. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least two-thirds of the combined voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article Seventh." "EIGHTH: Section 1. Number, Election and Terms of Directors. Subject to the rights, if any, of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional Directors under specified circumstances, the number of the Directors of the Corporation shall be fixed from time to time by or pursuant to the By-Laws of the Corporation. The Directors, other than those who may be elected by the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, shall be classified with respect to the time for which they severally hold office into three classes, as nearly their equal in number as possible, as shall be provided in the manner specified in the By-Laws of the Corporation. At or before the annual meeting of the stockholders to be held in 1986, one class shall be originally elected for a term expiring at the annual meeting of stockholders to be held in 1987, another class shall be originally elected for a term expiring at the annual meeting of the stockholders to be held in 1988, and another class shall be originally elected for a term expiring at the annual meeting of stockholders to be held in 1989, with the members of each class to hold office until their successors are elected and qualified. Commencing with the annual meeting of the stockholders of the Corporation to be held in 1987, Directors of each class the term of which shall then expire shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their successors are elected and qualified. Section 2. Stockholder Nomination of Director Candidates. Advance notice of stockholder nominations for the election of Directors shall be given in the manner provided in the By-Laws of the Corporation. Section 3. Newly Created Directorships and Vacancies. Subject to the rights, if any, of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect Directors under specified circumstances, newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled only by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor shall have been elected and qualified. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of an incumbent Director. Section 4. Removal. Subject to the rights, if any, of the holders of any 2 class or series of stock having preference over the Common Stock as to dividends or upon liquidation to elect additional Directors under specified circumstances, any Director may be removed from office only for cause and by the affirmative vote of the holders of at least two-thirds of the combined voting power of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of Directors, voting together as a single class. Section 5. Amendment, Repeal or Alteration. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least two-thirds of the combined voting power of the outstanding shares of the capital stock of the Corporation entitled to vote in the election of Directors, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article Eighth." "NINTH: Section 1. Applicability of Article. Except as otherwise expressly provided in Section 4 of this Article Ninth, none of the actions or transactions listed below shall be effected by the Corporation, or approved by the Corporation as a stockholder of any majority owned subsidiary of the Corporation if, as of the record date for the determination of the stockholders entitled to vote thereon, any Interested Stockholder (as hereinafter defined) exists, unless the applicable requirements of Sections 3, 4, 5, 6 and 7 of this Article Ninth are fully complied with: (a) Any merger or consolidation of the Corporation or any of its majority owned subsidiaries with (i) any interested Stockholder (as hereinafter defined) or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any of its majority owned subsidiaries having an aggregate Fair Market Value (as hereinafter defined) of $10,000,000 or more; or (c) the issuance or transfer by the Corporation or any of its majority owned subsidiaries (in one transaction or a series of transactions) of any securities of the Corporation or any of its majority owned subsidiaries to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $10,000,000 or more; or 3 (d) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or (e) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its majority owned subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation of any majority owned subsidiaries which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder. Section 2. Business Combination. The term "Business Combination" as used in this Article Ninth shall mean any transaction which is referred to in any one or more of subparagraphs (a) through (e) of Section 1 hereof. Section 3. Stockholder Vote Required. The actions and transactions described in Section 1 of this Article Ninth shall have been authorized by the affirmative vote of at Least two-thirds of the combined voting power all of the outstanding shares of Voting Stock, voting together as a single class. Section 4. Minimum Price Required. Notwithstanding Section 3 hereof, the two-thirds majority voting requirement shall not be applicable if: (a) any action or transaction specified in Section 1 hereof is approved by the Corporation's Board of Directors and by a majority of the Disinterested Directors (as hereinafter defined) ; or (b) in the case of any action or transaction pursuant to which the holders of the capital stock of the Corporation are entitled to receive cash, property, securities or other consideration, the aggregate amount of the cash and the Fair Market Value (as hereinafter defined) of the property, securities or other consideration to be received per share by holders of the capital stock of the Corporation in such action or transaction is not less than the higher of (i) the highest price per share paid by the Interested Stockholder in acquiring any of its holdings of capital stock of the Corporation within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or in the transaction in which it became an Interested Stockholder, whichever is higher, or (ii) the Fair Market Value per share of the applicable class of capital stock of the Corporation on the Announcement Date or on the 4 dates on which the Interested Stockholder became an Interested Stockholder, whichever is greater. (c) The consideration to be received by holders of a particular class or outstanding Voting Stock shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. Section 5. Restrictions on Certain Actions. After becoming an Interested Stockholder and prior to consummation of such action or transaction, (a) such Interested Stockholder shall not have acquired from the Corporation or any of its majority owned subsidiaries any newly issued or treasury shares of capital stock or any newly issued securities convertible into or exchangeable for capital stock of the Corporation or any of its majority owned subsidiaries, directly or indirectly (except upon conversion or exchange of convertible or exchangeable securities acquired by it prior to becoming a Interested Stockholder or as a result of a pro rata stock dividend or stock split or other distribution of stock to all Stockholders pro rata); and (b) such Interested Stockholder shall not have received the benefit directly or indirectly (except proportionately as a stockholder) of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation or any of its majority owned subsidiaries, or made any major changes in the Corporation's or, any of its majority owned subsidiaries businesses or capital structures or reduced the current annual rate of dividends payable on the Corporation's capital stock below the rate in effect immediately prior to the time such Interested Stockholder became a Interested Stockholder. Section 6. Proxy Statement Required. A proxy statement responsive to the requirements of the Securities Exchange Act of 1934, whether or not the Corporation is then subject to such requirements, shall be mailed to the stockholders of the Corporation for the purpose of soliciting stockholder approval of such action or transaction and shall contain at the front thereof, in a prominent place, any recommendations as to the advisability of the action or transaction which the Disinterested Directors may choose to state. Section 7. Certain Definitions. For the purpose of this Article Ninth, (a) The term "Interested Stockholder" shall mean any person (including any Affiliate thereof) other than the Corporation or any of its subsidiaries and other than any profit sharing, employee stock ownership or other employee benefit plan of the Corporation or any of its subsidiaries or any trustee of or fiduciary with respect to any such plan when acting in such 5 capacity who or which owns beneficially or controls, directly or indirectly, 20 percent or more of the outstanding shares of Voting Stock of the Corporation. (b) A person shall be a "beneficial owner" of any Voting Stock: (i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (ii) which such person or any of its Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or has the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. (c) For the purposes of determining whether a person is an Interested Stockholder pursuant to subparagraph (a) hereof, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of subparagraph (b) hereof but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, exchange rights, warrants or options, or otherwise. (d) The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule l2b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1986. (e) The term "Disinterested Director" shall mean any member of the Board (i) who was a director on the Base Date, or (ii) who is unaffiliated with the Interested Stockholder and who was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, or (iii) any successor of a Disinterested Director if such successor is unaffiliated with the Interested Stockholder and if such successor was recommended or elected to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board. (f) The term "Fair Market Value" shall mean: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding 6 the date in question of a share of such stock on the Composite Tape for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sale Price (or, if unavailable, bid quotation) with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in good faith. (g) The term "Voting Stock" shall mean the Common Stock but not (unless and to the extent provided to the contrary in the relevant Preferred Stock Designation) the Preferred Stock. Section 8. Determination by the Board of Directors. The Board of Directors of the Corporation shall have the power and duty to determine for the purposes of this Article Ninth, on the basis of information then know, to the Board of Directors, whether (a) any interested Stockholder exists or is an Affiliate or an Associate of another, and (b) any proposed transaction constitutes a transaction specified in Section 1 of this Article Ninth. Any such determination by the Board of Directors shall be conclusive and binding for all purposes. Section 9. Alteration, Amendment or Repeal. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least two-thirds of all of combined voting power the outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend, repeal, or adopt any provision inconsistent with, this Article Ninth." 7 IN WITNESS WHEREOF, Harman International Industries, Incorporated has caused this certificate to be signed by Dr. Sidney Harman, its Chairman of the Board and Chief Executive Officer, and attested by Jane Harman, its Secretary, this 12th day of November, 1986. HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED By: /s/ Sidney Harman Dr. Sidney Harman Chairman of the Board and Chief Executive Officer [CORPORATE SEAL] ATTEST: /s/ Jane Harman Jane Harman Secretary 8 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED Harman International Industries, Incorporated (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Corporation pursuant to a unanimous written action in lieu of a meeting pursuant to Section 141(f) of the General Corporation Law of the State of Delaware, adopted a resolution proposing and declaring advisable the following amendment to the Corporation's restated certificate of incorporation: That Article FOURTH of the Restated Certificate of Incorporation of the Corporation be amended to provide that the total number of shares of capital stock which the Corporation is authorized to issue is 55,000,000 shares, consisting of 5,000,000 shares of Preferred Stock, of the par value $0.01 per share, and 50,000,000 shares of Common Stock of the par value $0.01 per share. Article FOURTH, as amended, will read as follows: FOURTH: (a) The total number of shares of capital stock which the Corporation is authorized to issue is 55,000,000 shares, consisting of 5,000,000 shares of Preferred Stock, of the par value $0.01 per share (the "Preferred Stock"), and 50,000,000 shares of Common Stock of the par value $0.01 per share (the "Common Stock"). (b) A holder of Common Stock shall, except as may otherwise be provided in accordance with subparagraph (c) hereof, be entitled to one (1) vote on each matter submitted to a vote at a meeting of stockholders for each share of Common Stock held of record by such holder as of the record date for such meeting. (c) The Preferred Stock may be issued in one or more series. The Board of Directors is hereby authorized to issue the shares of Preferred Stock in such series and to fix from time to time before issuance the number of shares to be included in any series and the designation, relative powers, preferences and rights and qualifications, limitations or restrictions of all shares of such series. The authority of the Board of Directors with respect to each series shall include, without limiting the generality of the foregoing, the determination of any or all of the following: (i) the number of shares of any series and the designation to distinguish the shares of such series from the shares of all other series; (ii) the voting powers, if any, and whether such voting powers are full or limited, in such series; (iii) the redemption provisions, if any, applicable to such series, including the redemption price or prices to be paid; (iv) whether dividends, if any, shall be cumulative or noncumulative, the dividend rate of such series, and the dates and preferences of dividends on such series; (v) the rights of such series upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation; (vi) the provisions, if any, pursuant to which the shares of such series are convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock, or any other security, of the Corporation or any other corporation, and price or prices or the rates of exchange applicable thereto; (vii) the right, if any, to subscribe for or to purchase any securities of the Corporation or any other corporation; (viii) the provisions, if any, of a sinking fund applicable to such series; and (ix) any other relative, participating, optional or other special powers, preferences, rights, qualifications, limitations or restrictions thereof; 2 all as shall be determined from time to time by the Board of Directors and shall be stated in said resolution or resolutions providing for the issuance of such Preferred Stock (a "Preferred Stock Designation"). (d) Except as may be provided in this Restated Certificate of Incorporation or by the Board of Directors in any Preferred Stock Designation, or as otherwise required by law, the Common Stock shall have the exclusive right to vote for the election of Directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote or consent. SECOND: That upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at an annual meeting of stockholders held on November 9, 1993, a majority of all of the shares entitled to vote at the meeting and a majority of the shares entitled to vote at the meeting as a class voted in favor of such amendment. THIRD: That such amendment has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by, Sandra B. Robinson its Vice President - Financial Operations, and attested by Frank Meredith, its Assistant Secretary, this 9th day of November, 1993. HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED By: /s/ Sandra B. Robinson Sandra B. Robinson Vice President - Financial Operations ATTEST: /s/ Frank Meredith Frank Meredith Assistant Secretary 3 CERTIFICATE OF AMENDMENT OF RESTATED AND AMENDED CERTIFICATE OF INCORPORATION OF HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED Harman International Industries, Incorporated ("Company" or "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of the Company held on August 7, 2000, resolutions were duly adopted proposing and declaring advisable an amendment to the Company's Restated and Amended Certificate of Incorporation. The resolution setting forth the proposed amendment is as follows: RESOLVED, that Article FOURTH, subparagraph (a), of the Company's Restated and Amended Certificate of Incorporation, as filed with the Secretary of State of Delaware, be amended in its entirety to read as follows: (a) The total number of shares of capital stock which the Corporation is authorized to issue is 105,000,000 shares, consisting of 5,000,000 shares of Preferred Stock, of the par value $0.01 per share (the "Preferred Stock"), and 100,000,000 shares of Common Stock, of the par value $0.01 per share (the "Common Stock"). SECOND: That upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at an annual meeting of the stockholders of the Company held on November 9, 2000, a majority of all of the shares entitled to vote at the meeting and a majority of the shares entitled to vote at the meeting as a class voted in favor of such amendment. THIRD: That such amendment has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by Sandra B. Robinson, its Vice President - Financial Operations as of November 9, 2000. HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED By: /s/ Sandra B. Robinson Sandra B. Robinson Vice President - Financial Operations 2 EX-10 4 a10kex1026.txt EXHIBIT 10.26 HII - RETIREMENT SAVINGS PLAN AMENDED & RESTATED HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED RETIREMENT SAVINGS PLAN (Amended and Restated Effective As Of June 27, 2000) HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED RETIREMENT SAVINGS PLAN TABLE OF CONTENTS Page ARTICLE I Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Construction . . . . . . . . . . . . . . . . . . . . . .10 ARTICLE II Service . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2.1 Period of Service. . . . . . . . . . . . . . . . . . . .11 2.2 Period of Eligibility Service. . . . . . . . . . . . . .11 2.3 Hours of Service . . . . . . . . . . . . . . . . . . . .11 2.4 Service to Predecessor Employees . . . . . . . . . . . .12 ARTICLE III Participation . . . . . . . . . . . . . . . . . . . . . . . .13 3.1 Eligibility Requirements . . . . . . . . . . . . . . . .13 3.2 Participant May Name Beneficiary . . . . . . . . . . . .13 3.3 Termination of Participation . . . . . . . . . . . . . .13 3.4 Termination Date . . . . . . . . . . . . . . . . . . . .13 3.5 Restricted Participation . . . . . . . . . . . . . . . .14 3.6 Eligibility upon Reemployment. . . . . . . . . . . . . .14 ARTICLE IV Contributions . . . . . . . . . . . . . . . . . . . . . . . .15 4.1 Employer Contributions . . . . . . . . . . . . . . . . .15 4.2 Payment. . . . . . . . . . . . . . . . . . . . . . . . .16 4.3 Tax-Deferred Contributions . . . . . . . . . . . . . . .16 4.4 Limitations on Contributions for Highly Compensated Employees. . . . . . . . . . . . . . . . . . . . . . . .17 4.5 Distribution of Excess Deferrals, Excess Contributions and Excess Aggregate Contributions . . . . . . . . . . . . .21 4.6 Duties of Funding Agent Regarding Contributions. . . . .24 4.7 Investment Directions. . . . . . . . . . . . . . . . . .24 4.8 Transfers from Other Qualified Plans . . . . . . . . . .24 4.9 Rollover Contributions . . . . . . . . . . . . . . . . .24 4.10 Segregation of Rollovers . . . . . . . . . . . . . . . .24 ARTICLE V Allocations to Participants' Accounts . . . . . . . . . . . .25 5.1 Individual Accounts. . . . . . . . . . . . . . . . . . .25 - i - 5.2 Valuation of Accounts. . . . . . . . . . . . . . . . . .25 5.3 Crediting of Tax-Deferred Contributions. . . . . . . . .25 5.4 Crediting of Employer Contributions. . . . . . . . . . .26 5.5 Limitation on Allocations to Participants. . . . . . . .27 5.6 Accounts in General. . . . . . . . . . . . . . . . . . .28 ARTICLE VI Right to Benefits . . . . . . . . . . . . . . . . . . . . . .29 6.1 Vesting. . . . . . . . . . . . . . . . . . . . . . . . .29 6.2 Forfeitures. . . . . . . . . . . . . . . . . . . . . . .30 6.3 Top Heavy Provisions . . . . . . . . . . . . . . . . . .30 6.4 Persons under Legal or Other Disability. . . . . . . . .31 6.5 Missing Participants or Beneficiaries. . . . . . . . . .31 6.6 Withdrawals Prior to Termination of Employment . . . . .32 6.7 Nature of Participants' Interest . . . . . . . . . . . .33 6.8 Suspension of Benefits. . . . . . . . . . . . . . . . .33 6.9 Application for Benefits . . . . . . . . . . . . . . . .33 6.10 Appeals Procedure. . . . . . . . . . . . . . . . . . . .34 ARTICLE VII Distribution of Benefits. . . . . . . . . . . . . . . . . . .35 7.1 Form of Distribution . . . . . . . . . . . . . . . . . .35 7.2 Protected Options. . . . . . . . . . . . . . . . . . . .35 7.3 Time of Distributions. . . . . . . . . . . . . . . . . .36 7.4 Death Benefit. . . . . . . . . . . . . . . . . . . . . .36 7.5 Direct Rollovers . . . . . . . . . . . . . . . . . . . .36 ARTICLE VIII The Committee . . . . . . . . . . . . . . . . . . . . . . . .38 8.1 Committee. . . . . . . . . . . . . . . . . . . . . . . .38 8.2 Committee Action . . . . . . . . . . . . . . . . . . . .38 8.3 Rights and Duties. . . . . . . . . . . . . . . . . . . .38 8.4 Funding Policy and Method. . . . . . . . . . . . . . . .39 8.5 Transmittal of Information . . . . . . . . . . . . . . .39 8.6 Compensation . . . . . . . . . . . . . . . . . . . . . .39 8.7 Retention of Advisors. . . . . . . . . . . . . . . . . .39 8.8 Allocation and Delegation of Fiduciary Responsibilities. . . . . . . . . . . . . . . . . . . .39 8.9 Indemnification. . . . . . . . . . . . . . . . . . . . .40 8.10 Determinations and Corrections . . . . . . . . . . . . .40 ARTICLE IX Amendment and Termination . . . . . . . . . . . . . . . . . .41 9.1 Amendment by Employer. . . . . . . . . . . . . . . . . .41 9.2 Retroactive Amendments . . . . . . . . . . . . . . . . .41 9.3 Discontinuance or Termination of Plan. . . . . . . . . .41 9.4 Failure to Contribute. . . . . . . . . . . . . . . . . .41 -ii- 9.5 Merger and Consolidation of Plan. . . . . . . . . . . .41 9.6 Substitution of Successor Employer . . . . . . . . . . .41 ARTICLE X Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . .42 10.1 Contributions Not Recoverable. . . . . . . . . . . . . .42 10.2 Employment Rights. . . . . . . . . . . . . . . . . . . .42 10.3 Receipt or Release . . . . . . . . . . . . . . . . . . .42 10.4 Alienation . . . . . . . . . . . . . . . . . . . . . . .42 10.5 Controlling Law. . . . . . . . . . . . . . . . . . . . .43 10.6 Text Prevails over Captions. . . . . . . . . . . . . . .43 10.7 Counterparts . . . . . . . . . . . . . . . . . . . . . .43 10.8 Successors and Assigns . . . . . . . . . . . . . . . . .43 10.9 Military Service . . . . . . . . . . . . . . . . . . . .43 10.10 Electronic Media . . . . . . . . . . . . . . . . . . .43 10.11 Suspension During Conversion . . . . . . . . . . . . .43 ARTICLE XI Participating Employers . . . . . . . . . . . . . . . . . . .44 11.1 Adoption by Affiliated Employers . . . . . . . . . . . .44 11.2 Requirements of Participating Employers. . . . . . . . .44 11.3 Designation of the Employer as Agent . . . . . . . . . .44 11.4 Employee Transfers . . . . . . . . . . . . . . . . . . .44 11.5 Participating Employer Contributions . . . . . . . . . .44 11.6 Amendment. . . . . . . . . . . . . . . . . . . . . . . .44 11.7 Participating Employer Discontinuance. . . . . . . . . .45 11.8 Committee Authority. . . . . . . . . . . . . . . . . . .45 APPENDIX A PROTECTED OPTIONS . . . . . . . . . . . . . . . . . . . . . .46 - iii - HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED RETIREMENT SAVINGS PLAN (Amended and Restated Effective As Of June 27, 2000) Effective June 27, 2000, Harman International Industries, Incorporated, a Delaware corporation with its principal place of business located at Northridge, California, hereby amends and restates the Plan. The Company established the Plan effective April 1, 1989, by merging the following four pre-existing plans: JBL, Incorporated Retirement, Savings and Profit Sharing Plan; Harman-Motive, Inc. Retirement, Savings and Profit Sharing Plan; Pyle Industries Profit Sharing Plan; and United Recording Corporation Retirement, Savings and Profit Sharing Plan. The Plan was subsequently amended and restated effective July 1, 1989 This amendment and restatement supersedes and replaces all prior amendments and restatements of the Plan, and amendments thereto. The provisions of the Plan as so amended and restated shall apply to any participant (1) who is an Employee on or after the Effective Date, or (2) with respect to any Plan provision contained in this amendment and restatement with an effective date earlier than the Effective Date, who is an Employee on or after such effective date. The rights and benefits of any former Employee who terminated employment prior to the effective date of any such applicable provision shall be determined under the Plan as in effect as of such former Employee's date of termination. 1 ARTICLE I Definitions 1.1 Definitions. Whenever used herein, the following terms shall have the meanings set forth below, unless a different meaning is clearly required by the context: (a) "Account" shall mean the records, including subaccounts, maintained by or at the direction of the Committee to determine the interest of each Participant in the assets of the Plan and may refer to any or all of the Participant's Tax-Deferred Contributions Account, Rollover Account, and Regular Account (consisting of a Safe Harbor Nonelective Contribution SubAccount to which Safe Harbor Nonelective Contributions are credited, a Basic Contributions SubAccount to which Basic Contributions made to the Plan prior to the Effective Date are credited, a Matching Contributions SubAccount to which Matching Contributions are credited, and a Profit Sharing Contribution SubAccount to which Profit Sharing Contributions are credited). (b) "Affiliated Employer" shall mean the Employer and (i) any corporation which is a member of a controlled group of corporations (as defined in Section 414(b) of the Code) which includes the Employer; (ii) any trade or business (whether or not incorporated) which is under common control (as defined in Section 414(c) of the Code) with the Employer; (iii) any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Section 414(m) of the Code) which includes the Employer; and (iv) any other entity required to be aggregated with the Employer pursuant to regulations under Section 414(o) of the Code. (c) "Anniversary Date" shall mean the last day of each Plan Year, which shall be the date for determining Top Heavy status for the succeeding Plan Year. (d) "Beneficiary" or "Beneficiaries" shall mean the person or persons last designated by a Participant under the Plan to receive the benefits specified hereunder in the event of the Participant's death. A designation of Beneficiary other than the spouse shall be automatically revoked on the marriage or remarriage (other than a common-law marriage) of a Participant. Any designation of a spouse as Beneficiary shall be automatically revoked upon a finalized divorce of a Participant subsequent to the date of filing of the designation of the Beneficiary. If a Participant fails to designate a Beneficiary before his death, or if no designated Beneficiary survives the Participant, Beneficiary shall mean the Participant's spouse or, if no spouse survives or exists, then the Participant's estate. In the event any amount is payable under the Plan to a minor, payment shall be paid to that person's then living parent(s) to act as custodian or, if no parent of that person is then living, to a custodian selected by the Committee to hold the funds for the minor under the Uniform Gifts to Minors Act in effect in the jurisdiction in which the minor resides. (e) "Board of Directors" shall mean the Board of Directors of the Employer or a successor in interest which expressly agrees in writing to continue the Plan as its own. 2 (f) "Break in Employment" shall mean the separation from Service with the Employer and all Affiliated Employers as a result of resignation, discharge, death, disability or retirement. In determining whether and when a Break in Employment has occurred, the following rules shall apply: (i) A Break in Employment shall not occur solely by reason of a leave of absence authorized by the Employer or an Affiliated Employer in accordance with established nondiscriminatory policies or a vacation, military or maternity/paternity leave. (ii) Failure to return to work after the expiration of any leave of absence shall be considered a resignation effective as of the earlier of (1) expiration of such leave of absence, or (2) twelve (12) months following the commencement of such leave of absence, except in the case of maternity or paternity leave where the initial one (1)-year of severance shall not be counted. (iii) A Break in Employment shall not occur solely by reason of a layoff from the Employer or an Affiliated Employer, but a Break in Employment shall occur on the earlier of (1) a refusal by the Employee to return to the employ of the Employer or Related Employer, or (2) twelve (12) months following the commencement of such layoff. (iv) Failure of any Employee on military leave to make application for reemployment within the period of time during which he is entitled to retention of reemployment rights under applicable laws of the United States shall be considered a resignation effective as of the expiration date of such reemployment rights. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. Reference to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (h) "Committee" shall mean the Administrative Committee appointed pursuant to Article VIII of the Plan, which shall be the "named fiduciary" for purposes of ERISA Section 402. (i) "Compensation" shall mean, subject to the limitations herein, any remuneration for services rendered to a Participating Employer paid or payable to the Participant during a Plan Year which is required to be reported as wages on the Participant's Form W-2. Compensation shall also include any remuneration which is not currently includible in the Participant's gross income by reason of the application of Sections 125, 402(e)(3), 402(h)(1)(B), or 403(b) of the Code. However, Compensation shall not include: (i) Reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation, and welfare benefits, including severance benefits other than payments to a terminating Employee in lieu of notice; 3 (ii) Any contributions made by the Employer for or on account of the Employees under this Plan, except for Tax-Deferred Contributions, or under any other employee benefit plan other than any specifically excepted herein; (iii) Except for purposes of Sections 1.1(w), 4.4 and 4.5, any compensation paid or payable by reason of services performed prior to the date the Employee becomes a Participant; (iv) Any compensation paid or payable by reason of services performed after the date the Employee ceases to be a Participant; and (v) Any amounts in excess of the annual dollar limit for such Plan Year. For any Plan Year, the annual dollar limit is $170,000 (in 2000, as adjusted for the cost of living in accordance with Code Section 401(a)(17)(B)). Notwithstanding the above provisions to the contrary, Compensation earned but not paid in a Plan Year may include amounts earned but not paid in a Plan Year because of the timing of pay periods and pay days if such amounts are paid during the first few weeks of the following Plan Year, the amounts are included on a uniform and consistent basis with respect to all similarly situated Employees, and no Compensation is included in more than one Limitation Year. The "family aggregation" rules as applicable to the determination of Compensation under applicable regulations are deleted effective June 27, 1997. (j) "Defined Benefit Plan" shall mean any defined benefit plan (as defined in Section 415(k) of the Code) maintained by the Employer or by any other Related Employer. (k) "Effective Date" shall be June 27, 2000. (l) "Eligible Employee" shall mean an Employee of a Participating Employer who has completed one (1) Period of Eligibility Service and, with respect to Union Eligible Employees attained age eighteen (18), except (A) any Employee who is a member of a collective bargaining unit and who is covered by a collective bargaining agreement, which agreement does not specifically provide for coverage of such Employee under this Plan, provided that retirement benefits were the subject of good faith bargaining between Employee representatives and the Employer, (B) any non-resident alien who has no earned income from sources within the United States, (C) any leased employee, or (D) any foreign-based Employee on temporary assignment to a United States-based location who, during the period of such assignment, continues to receive credits under a retirement or other pension arrangement as an employee of his home-based employer. (m) "Elective Deferrals" or "Tax-Deferred Contributions" shall mean contributions made to the Plan during the Plan Year by the Employer, at the election of the Participant, in lieu of Compensation. 4 (n) "Employee" shall mean a person employed by the Employer, or an Affiliated Employer as a common-law employee, except that, in the case of an Affiliated Employer that is a foreign entity, such person must be an International Employee. "Employee" shall include leased employees within the meaning of Section 414(n)(2) of the Code. Notwithstanding the foregoing, if leased employees constitute less than twenty percent (20%) of the Employer's Non-Highly Compensated work force within the meaning of Section 414(n)(l)(C)(ii) of the Code, the term "Employee" shall not include those leased employees covered by a plan described in Section 414(n)(5) of the Code. In no event shall an "Employee" include any person during the period that such person is designated by a Participating Employer as an independent contractor, regardless of whether the person is reclassified by the Internal Revenue Service as an employee for such period for any tax purpose. (o) "Employer" or "Company" shall mean Harman International Industries, Incorporated, and, if the context so requires, shall also mean a Participating Employer and/or an Affiliated Employer; and any successor of such Employer. (p) "Employment Date" shall mean the later of: (i) The date on which the Employee is first credited with an Hour of Service for the Employer, an Affiliated Employer, or if applicable, a Predecessor Employer; or (ii) His Reemployment Date. (q) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. Reference to a section of ERISA shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes such section. (r) "Fiscal Year" shall mean the taxable year of the Employer beginning on the first day of July and ending on the last day of June. (s) "Fund" shall mean the aggregate of all assets held by the Funding Agent for the Accounts of Participants and their Beneficiaries. (t) "Funding Agent" shall mean the trustee selected by the Board of Directors as a depository for assets accumulated under this Plan, severally or jointly, as the case may be. (u) "Funding Instrument" shall mean the trust and/or insurance contract entered into by the Employer to fund this Plan. (v) "Highly Compensated Employee" shall mean, effective June 27, 1997, any Employee who performs services with respect to the Employer during the Plan Year (the "determination year") and is described in one or more of the following groups: (i) Was at any time with respect to the determination year or the preceding Plan Year (the "lookback year") a five percent (5%) owner as defined under Code Section 416(i)(1); or 5 (ii) For the lookback year, received Compensation from the Employer in excess of the amount in effect for such Plan Year under Code Section 414(q)(1)(B) ($85,000, in 2000, as adjusted from time to time) and was in the Top Paid Group. (iii) For the purposes of paragraph (ii) above, the term "Top Paid Group" shall mean the top twenty percent (20%) of active Employees ranked on the basis of Compensation received from the Employer during the Plan Year. (iv) A former Employee shall be treated as a highly compensated former Employee if such Employee was a Highly Compensated Employee when such Employee separated from service, or such Employee was a Highly Compensated Employee at any time after attaining age fifty-five (55). (v) For the purpose of this Section: A. The term "Compensation" shall have the meaning given such term by Code Section 415(c)(3), as limited by Code Section 401(a)(17). B. Employers aggregated under Code Sections 414(b), (c), (m), (n), or (o) shall be treated as a single Employer. (vi) The determination of who is a Highly Compensated Employee, including the determination of the number and identity of the Employees in the Top Paid Group and the Compensation that is considered, will be made in accordance with Code Section 414(q) and the regulations thereunder except as specifically provided to the contrary in Code Section 401(a)(17). (w) "International Employee" shall mean a citizen of the United States who is (A) employed outside the United States by a Participating Employer, (B) not eligible to receive credits under any other retirement or pension arrangement as an employee of that Participating Employer, and (C) receives wages from that Participating Employer that are not reported on a Form W-2. For all purposes under the Plan, including, without limitation, nondiscrimination testing, Compensation of an International Employee, with respect to any wages that are not reported on a Form W-2, shall mean the value in United States currency of the portion of the wages that would be reported as wages on a Form W-2 if the Participating Employer were a domestic corporation. For purposes of Section 4.3, the conversion into United States currency shall be performed as of the date on which the Tax Deferred Contribution is transmitted to the Trustee. For all other purposes, the conversion shall be made as of the end of the applicable period for which the determination is made. (x) "Key Employee" shall mean each Employee or former Employee (including a Beneficiary of a Key Employee or former Key Employee) who, at any time during the current Plan Year or any of the four (4) immediately preceding Plan Years: 6 (i) is or was an officer of the Employer having an annual compensation greater than fifty percent (50%) of the amount specified under Code Section 415(b)(l)(A) for such year; (ii) is among the ten (10) Employees having an annual compensation from the Employer of more than the limitation in effect for such Year under Code Section 415(c)(1)(A) and owning or considered to own (within the meaning of Code Section 318) both more than a one-half percent (.5%) interest and the largest interests in the Employer; (iii) is an Employee owning (within the meaning of Code Section 318) more than five percent (5%) of the Employer; or (iv) is an Employee receiving more than one hundred fifty thousand dollars ($150,000) of annual compensation from the Employer and owning (within the meaning of Code Section 318) more than one percent (1%) of the Employer. Notwithstanding the foregoing, no more than fifty (50) Employees or, if less, the greater of three (3) or ten percent (10%) (rounded to the next highest integer) of the Employer's Employees shall be treated as officers of the Employer. Compensation for the purpose of this Section shall have the meaning given such term by Code Section 414(q)(7). For the purposes of determining the number of officers under (i) above, Employees described in Code Section 414(q)(8) shall be excluded. For the purposes of (ii) above, if two Employees have the same interest in the Employer, the Employee having the greater annual compensation shall be treated as having the larger interest. (y) "Matching Contribution" shall mean any contribution to the Plan made by the Employer for the Plan Year and allocated to a Participant's Account by reason of the Participant's Elective Deferrals. (z) "Non-Highly Compensated Employee" shall mean an Employee of the Employer who is not a Highly Compensated Employee. (aa) "Non-Key Employee" shall mean each Employee who is not a Key Employee. (bb) "Participant" shall mean any Eligible Employee who participates in the Plan in accordance with Article III, including any former Employee who is receiving or will receive benefits under the Plan. (cc) "Participating Employer" shall mean the Employer and each Affiliated Employer and any such other business entity which, by resolution of its Board of Directors and with the written approval of the Employer, elects to participate in this Plan. As of the Effective Date, the Employer and the following Affiliated Employers were Participating Employers: Epicure Products, Inc. Harman-Kardon, Incorporated 7 Harman-Motive, Inc. Infinity Systems, Inc. JBL Incorporated Audax of America, Inc. (formerly Polydax Speaker Corporation) Harman Music Group, Incorporated (formerly DOD Electronics Corporation) Fosgate, Inc. Lexicon, Incorporated Harman Audio Outlet, Inc. (formerly Harman Outlet Stores, Inc.) Harman Acquisition Corp. (formerly AKG Acoustics, Inc. and Orban, Inc.) Harman- Motive Kentucky, Inc. (formerly, Studer Editech Corp.) Becker of North America, Inc. Harman Enterprises, Inc. Spirit by Soundcraft, Inc. Madrigal Audio Laboratories, Inc. Harman Consumer International A/S (formerly, Harman Consumer Europe A/S Crown Audio, Inc. (formerly, Harman Consumer Manufacturing - El Paso, Inc.) Harman International Singapore PTE LTD Harman Pro North America, Inc. Harman Wisconsin, Inc. For all purposes under the Plan each of the following divisions shall be treated as though it was a separate Participating Employer: Harman Manufacturing Harman Motive - Multimedia Harman Motive - West JBL International JBL Professional (dd) "Period of Separation" shall mean the period of time commencing with the date an Employee incurs a Break in Employment and ending with his Reemployment Date. (ee) "Plan" shall mean the Harman International Industries, Incorporated Retirement Savings Plan as set forth herein. (ff) "Plan Year" shall mean the twelve consecutive month period commencing each June 27, and ending on the following June 26. The Plan Year shall be the "limitation year" for purposes of Code Section 415. (gg) "Predecessor Employer" shall mean any corporation, partnership, or sole proprietorship, or a division thereof, a substantial part of the assets of which was acquired by the Employer either by purchase from, or liquidation, merger or consolidation of or with, such other corporation, partnership, or sole proprietorship, and which the Employer determines, subject to the requirements of Section 414(a) of the Code, shall be treated as a Predecessor Employer for one or more purposes of this Plan. 8 (hh) "Reemployment Date" shall mean the date on which the Employee is first credited with an Hour of Service by the Employer or an Affiliated Employer following a Break in Employment. (ii) "Regular Account" shall mean the Account maintained for each Participant for the deposit of Company contributions. (jj) "Related Plan" shall mean any defined contribution plan (as defined in Section 415(k) of the Code), other than this Plan, maintained by the Employer or by any other Affiliated Employer, including, if applicable, any welfare benefit fund that is defined in Section 419(e) of the Code. (kk) "Rollover Account" shall mean the Account maintained for any Participant to account for a rollover contribution pursuant to Section 4.9. (ll) "Safe Harbor Nonelective Contribution" shall mean the Employer Contribution referred to in Section 4.1(a)(i). (ll) "Tax-Deferred Contributions Account" shall mean a Participant's Account hereunder to which his Tax-Deferred Contributions are allocated. (mm) "Top Heavy" shall mean that the aggregate of the Regular Accounts and Tax-Deferred Contributions Accounts of all Key Employees hereunder and the accrued benefits under any plan which is part of a required or permissive aggregation group, including any amounts distributed to any Participants during the five (5) years ending on the immediately preceding Anniversary Date but excluding any death benefit that exceeds the Actuarially Equivalent present value of accrued benefits existing immediately prior to death and any rollover contribution (or similar transfer) initiated by a Participant and the value of the Regular Account, Tax-Deferred Contributions Account and the accrued benefits under any plan which is part of a required or permissive aggregation group, of each then Non-Key Employee who was previously a Key Employee, exceeds sixty percent (60%) of the aggregate of the Regular Accounts, Tax-Deferred Contributions Accounts and the accrued benefits under any plan which is part of a required or permissive aggregation group, of all Participants (with the same inclusions and exclusions) as of such immediately preceding Anniversary Date. Any account balance or accrued benefit attributable to any individual who has not been an Employee (or received any remuneration for services rendered from the Employer) with respect to this Plan or any other Related Plan at any time during the five (5) years ending on the Anniversary Date shall be disregarded. If an Employee returns to employment with the Employer after such five (5) year period, such Employee's total accrued benefit shall be included in determining the Top Heavy ratio. The determination date, with respect to determining whether the Plan is Top Heavy for a particular Plan Year, shall be the last day of the preceding Plan year, or in the case of the first Plan Year, the last day of such Year. The required aggregation group shall consist of any plans (including terminated plans where required by Section 416(g)(3) of the Code) qualified under Section 401(a) of the Code in which a Key Employee participates or which enables this Plan to meet the requirements of Code 9 Sections 401(a)(4) or 410. The permissive aggregation group shall consist of the required aggregation group plus any other plan to the extent that such plan, when so aggregated, continues to meet the requirements of Sections 401(a)(4) and 410 of the Code. (nn) "Union Eligible Employee" shall mean an Eligible Employee covered by a collective bargaining agreement with a Participating Employer who is an Eligible Employee because such agreement expressly provides for the Employee's participation in the Plan. A Union Eligible Employee shall not be eligible for a profit sharing contribution under Section 4.1(a), but shall be eligible for a discretionary contribution of up to one percent (1%) of compensation, as determined by the Participating Employer employing the Employee in its sole discretion. Any such discretionary contribution shall be allocated to the Union Eligible Employee's Regular Account and otherwise treated under the Plan as a profit sharing contribution. (oo) "Valuation Date" shall mean the daily, monthly, or quarterly date or, in the Committee's discretion, such other dates, on which the Committee may direct the Investment Manager to undertake to provide valuations. (pp) "Special Amount" shall mean an amount contributed by the Company on behalf of Participants as provided in Section 4.3. 1.2 Construction. A pronoun or adjective in the masculine gender includes the feminine gender unless the context clearly indicates otherwise. Where the context admits, words in the plural shall include the singular and the singular shall include the plural. The words "hereof," "herein," "hereunder," and other similar compounds of the word "here" shall mean and refer to the entire Plan and not to any particular provision or section. The Plan and Funding Instrument shall each form a part of the other and the terms shall be used interchangeably. 10 ARTICLE II Service 2.1 Period of Service. "Service" means an Employee's period of employment with the Employer, an Affiliated Employer, or, to the extent the Employer so provides, a Predecessor Employer. "Period of Service" shall mean the time period commencing with the Employee's Employment Date and ending on the date a Break in Employment occurs; provided, however, a Period of Service for these purposes includes a Period of Separation of less than twelve (12) consecutive months. An Employee who separates from Service and later resumes employment with the Employer or an Affiliated Employer following a Period of Separation of twelve (12) consecutive months or longer shall be treated as a new Employee and shall not be entitled to have the Period of Service he completed prior to the Break in Employment aggregated with his Service subsequent to resumption of employment unless: (a) at the time of his Break in Employment he had a vested interest in a benefit hereunder provided by Employer contributions; or (b) the Employee resumes employment before his Period of Separation equals or exceeds sixty (60) consecutive months. If the Employee satisfies either condition, his Period of Service completed prior to his Break in Employment will be aggregated with Service subsequent to resumption of employment. Furthermore, in the case of an absence incurred by an Employee for the purpose of: (i) pregnancy, (ii) birth of a child, (iii) adoption of a child, or (iv) caring for a child immediately following birth or an adoption, the Employee's Period of Separation shall not begin until the second anniversary of the date the Break in Employment occurs, but only the first twelve months following the first day of the absence shall be included in the Employee's Service. 2.2 Period of Eligibility Service. A Period of Eligibility Service shall mean a period of six (6) consecutive months commencing on an Employee's date of employment during which such Employee has completed 500 Hours of Service. If an Employee does not complete 500 Hours of Service during his initial six (6) months of employment with the Employer, but is still employed by the Employer, such Employee shall next commence the 500 Hours of Service eligibility requirement for participation in the Plan during the calendar quarter next commencing after the date of his employment, or each calendar quarter subsequent thereto, until he meets the 500 Hours of Service eligibility requirement for participation in the Plan. Each Period of Eligibility Service subsequent to the Employee's initial six (6) months of employment shall be a six month period commencing as of the first day of the calendar quarter determined pursuant to the preceding sentence. If an Employee completes 500 Hours of Service in any such subsequent six month period, such Employee shall be deemed to have completed a Period of Eligibility Service for the purposes of this Plan. 11 2.3 Hours of Service. "Hours of Service" shall mean the sum of the following hours of Service: (a) Each hour for which an Employee is directly or indirectly paid, or entitled to payment, by the Employer for the performance of duties, plus each hour for which credit is not otherwise given for the performance of duties with respect to which back pay is awarded or agreed to by the Employer, computed without regard to any mitigation of damages and credited to the Plan Year in which the Employee performed the duties or with respect to which the back pay award or agreement pertains; (b) Each hour, up to a maximum of 501 hours for any single continuous period, for which an Employee is directly or indirectly paid, for performance of duties (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, entitled to payment, by the Employer for reasons other than the incapacity (including disability), layoff, jury duty, military duty or leave of absence, excluding any such hours for which payment is made or due under a plan maintained solely for the purpose of complying with the applicable workers' compensation, unemployment compensation or disability insurance laws and state disability payments, or which reimburses an Employee solely for medical or medically related expenses which he has incurred and credited to the applicable Plan Year. Any hours for which back pay is awarded for a period during which no duties are performed shall also be subject to the 501-hour maximum credit for any single continuous period; and (c) Each hour, up to a maximum of 501 hours for any single continuous period, of absence incurred by an Employee for the purpose of: (i) pregnancy, (ii) birth of a child, (iii) adoption of a child, or (iv) caring for a child immediately following birth or an adoption. Such Employee shall be treated as having completed either the number of hours that would have been completed except for such absence or eight (8) Hours of Service for each normal workday where normal work hours are not known. Any hours required to be credited pursuant to this subsection (c) must be credited only in the Plan Year in which the absence begins, if such crediting is necessary to prevent a Break in Employment during such Year or in the following Plan Year. (d) Each other hour for which an Employee must be credited, pursuant to any applicable Federal law. In determining the number of Hours of Service to be credited to an Employee for reasons other than the performance of duties, as well as in determining the Plan Year to which all Hours of Service should be credited, the rules of Section 2530.200b-2(b) and (c) of the Department of Labor regulations shall be followed to the extent such rules are not incorporated in this Plan document. 2.4 Service to Predecessor Employees. An Employee who was employed by either (1) AMEK Technology Group, PLC on the day of its acquisition by AKG Acoustics Limited (an "AMEK Participant"), (2) Oxford International, Ltd. on the day of its acquisition by HARCO Indiana, Inc., or (3) Crown International, Inc. on the day of its acquisition by Crown Audio, Inc. (formerly known, prior to March 23, 2000, as Harman Consumer Manufacturing-El Paso, Inc.) 12 ARTICLE III Participation 3.1 Eligibility Requirements. Any active Employee who participated in the Plan on the Effective Date shall automatically continue as a Participant. Except as otherwise provided in this Article, any other Employee shall be eligible to participate in the Plan as of the first day following the calendar quarter in which he first becomes an Eligible Employee, provided he is an Eligible Employee on such day. Notwithstanding the foregoing, any Employee who was employed by Crown International, Inc. prior to February 2, 2000, and who was eligible to participate in Crown International, Inc.'s retirement savings plan shall be eligible to participate in the Plan effective March 23, 2000. Nothing herein shall be construed to permit an Eligible Employee to commence participation herein prior to the date the entity that employs him becomes a Participating Employer. 3.2 Participant May Name Beneficiary. A Participant may designate, in writing to the Committee, the Beneficiary or Beneficiaries whom he desires to receive the benefits of the Plan in the event of his death. A married Participant may not designate a beneficiary other than his spouse unless: (i) the spouse of the Participant consents in writing to such designation, (ii) the beneficiary designation may not be changed without spousal consent (or the consent of the spouse expressly permits designations by the Participant without any requirement of further consent by the spouse); and (iii) the spouse's consent acknowledges the effect of such election and is witnessed by a plan representative or notary public. The Employer, the Committee and the Funding Agent may rely upon the designation of Beneficiary or Beneficiaries last filed in accordance with the terms of this Agreement. 3.3 Termination of Participation. Active participation in the Plan shall cease on the date the Participant ceases to be an Eligible Employee, but a Participant may not receive any distribution of his benefit under the Plan prior to his Termination Date, except to the extent provided in Section 6.7. 3.4 Termination Date. A Participant's Termination Date shall be the date on which his employment with the Employer is terminated because of the first to occur of the following events: (a) (i) Normal Retirement. The Participant retires or is retired from the employ of the Employer on or after attaining Normal Retirement Age (age sixty-five (65)). (ii) Early Retirement. The Participant retires or is retired from the employ of the Employer on or after attaining age fifty-five (55) and completing a six (6) year Period of Service. (b) Disability Retirement. The Participant is retired from the employ of the Employer because of disability, irrespective of age. A Participant will be considered disabled for purposes of the Plan if, upon suffering any medically determinable physical or mental 14 impairment as a result of sickness, accident or other injury which, in the opinion of a physician approved by the Committee, may be expected to result in death or be of long, continued duration and which renders the Participant incapable of performing the duties of his employment with the Employer. (c) Death. The Participant's death. (d) Resignation or Dismissal. The Participant resigns or is dismissed from the employ of the Employer before retirement in accordance with paragraphs (a) or (b) above and incurs a Break in Employment. (e) Disposition of Assets of Subsidiary. (1) The date the Employer disposes of (A) substantially all of the assets used in a trade or business to a corporation, provided the purchaser is a corporation, (B) effective September 1, 2000, less than substantially all of the assets used in a trade or business, or (C) all of its interest in a subsidiary, to an employer that is not an Affiliated Employer, provided that after such disposition, the Employer continues to maintain the Plan and does not transfer any assets or liabilities of the Plan to the purchaser, other than as a result of a direct rollover. (2) Notwithstanding Section 3.4(e)(1), a distribution shall be permitted on account of a Termination Date described in Sections 3.4(e)(1)(A) and (C) only (A) with respect to a Participant who continues employment with the corporation acquiring such assets or with such subsidiary, (B) if the distribution is made in connection with such disposition, and (C) such distribution is a "lump sum distribution," within the meaning of Code Section 401(k)(10). 3.5 Restricted Participation. If distribution of a Participant's benefits is deferred or otherwise cannot be made for any period, including any period that the Participant continues in the employ of the Employer or an Affiliated Employer, but no longer is an Eligible Employee, no Employer contributions shall be credited to his Regular Account. Any such Participant shall be entitled to re-commence participation in the Plan as of any date he is reemployed as an Eligible Employee. 3.6 Eligibility upon Reemployment. If a former Employee incurs a Break in Employment and is subsequently reemployed as an Eligible Employee, he shall be treated as a new Employee and shall commence participation in this Plan only after satisfying the eligibility requirements set forth in Section 3.1 above following such reemployment, unless he previously completed a Period of Service and is entitled to have his prior Period of Service aggregated under Section 2.1 with Service subsequent to reemployment, in which event he shall be entitled to commence participation in the Plan on his Employment Date. 15 ARTICLE IV Contributions 4.1 Employer Contributions. (a) For each Plan Year, subject to Section 5.4, each Participating Employer shall make the following contributions to the Plan (i) a Safe Harbor Nonelective Contribution in an amount, which when combined with earnings on the Special Amount set forth in Section 4.3, is equal to three percent (3%) of the Compensation of all Participants who are Employees during such Plan Year; (ii) in the discretion of the Board of Directors a Matching Contribution in an amount, reduced by forfeitures of prior Matching Contributions, equal to fifty percent (50%) of the Tax-Deferred Contribution percentage elected pursuant to Section 4.3 by each Participant for each payroll period up to a maximum Tax-Deferred Contribution percentage election of six percent (6%) per payroll period; and (iii) at the discretion of the Board of Directors, a profit sharing (or non-matching) contribution, but not to exceed the dollar balance remaining after subtracting the sum of the total Tax-Deferred Contributions and the Employer contributions made pursuant to Sections 4.1(a)(i) and (ii) from fifteen percent (15%) of the aggregated annual Compensation (after any salary reductions for Tax-Deferred Contributions) of all Participants who are its Employees for such Fiscal Year. In the case of a Participant who was employed by more than one Participating Employer during an applicable period, or who is entitled to an Employer contribution but is not currently employed by a Participating Employer, the Participating Employer's contributions shall be based solely on the Compensation earned by the Participant while employed by such Participating Employer. (b) Notwithstanding the foregoing, the sum of the contribution of the Employer and the Tax-Deferred Contribution for any Fiscal Year shall not exceed an amount equal to fifteen percent (15%) of the total Compensation (after any salary reductions) otherwise paid or accrued to all Participants employed by the Employer for such Year. (c) In no event shall the Employer contribution for any Fiscal Year exceed an amount which the Employer estimates will be deductible under Section 404(a)(3) and, if applicable, Section 404(a)(7) of the Code, and all Employer contributions to the Plan are conditioned on being so deductible. (d) The Employer may, notwithstanding any other provision of this Plan, make all contributions to the Plan without regard to current or accumulated earnings and profits for the taxable year or years ending with or within such Plan Year. Notwithstanding the foregoing, the Plan is designed to be a profit sharing plan for purposes of Sections 401(a), 402, 412 and 417 of the Code. 16 (e) Effective as of the Effective Date, the Plan is intended to satisfy the requirements of Code Section 401(k)(3)(A)(ii) by satisfying the requirements of Code Sections 401(k)(12)(C) and 401(k)(12)(D). 4.2 Payment. All contributions shall be made directly to the Funding Agent and may be made on any date or dates selected by the Employer; provided, however, that the total annual contribution for each Fiscal Year shall be paid, without interest, on or before the date on which the Federal income tax return of the Employer for such Year is due, including any extensions of time obtained for the filing of the return. 4.3 Tax-Deferred Contributions. A Participant may reduce his Compensation and have the Employer contribute on his behalf as a Tax-Deferred Contribution a minimum of one percent (1%) of his Compensation up to a maximum of an amount which, when added to all contributions in excess of the initial one percent (1%), does not exceed fifteen percent (15%) of such Participant's Compensation for the Plan Year. The rate of his Tax-Deferred Contribution shall be determined by the Participant on a form approved by the Committee and filed with the Committee and shall continue unless changed in the manner hereinafter provided. All such contributions shall be calculated in integral percentages of a Participant's Compensation. All Tax-Deferred Contributions shall be made by regular payroll deductions. The Employer shall such contributions from Employer assets as soon as reasonably possible; provided, however, that the Employer must pay over any contributions to the Funding Agent no earlier than the first day of the Plan Year to which such Tax-Deferred Contributions apply and no later than the fifteenth (15th) business day of the month following the date the funds were received or withheld from payroll, subject to any shorter period required by governmental regulations. Any portion of Tax-Deferred Contributions that are contributed by the Employer on behalf of the Participants prior to the date such Tax-Deferred Contribution amount would have been paid to the Participant as wages if it did not constitute a Tax-Deferred Contribution shall be referred to herein as a "Special Amount." Tax-Deferred Contributions shall be allocated to each Participant's Tax-Deferred Contributions Account as provided in Section 5.3. A Participant, by written notice to the Committee delivered no later than thirty (30) days before the last day of any calendar quarter, may elect to change his Compensation reduction rate under this Section 4.3 (but not retroactively) within the limits prescribed herein above. The change in the Participant's contribution rate shall be effective as of the first day of the payroll period coincident with or next following the applicable notice date. A Participant may totally suspend contributions at any time by an election which will be effective as soon as practicable following the date of receipt of such notice by the Committee. Such a Participant may resume Elective Deferrals as of the first day of any payroll period that coincides with or follows the first day of any calendar quarter next following the date contributions were suspended, upon giving the Committee thirty (30) days' advance notice. Notwithstanding any other provision in this Plan, no Employee shall be permitted to make Tax-Deferred Contributions during any calendar year (or other taxable year of the Employee) which are in excess of the amount permitted under Code Section 402(g)(1), as in effect at the beginning of such taxable year. For the purpose of the preceding sentence only, with 17 respect to any taxable year, a Participant's Tax-Deferred Contributions shall be the sum of all Employer contributions made on behalf on such Participant, pursuant to an election to defer under: any Qualified Cash or Deferred Arrangement as described in Code Section 401(k); any simplified employee pension cash or deferred arrangement as described in Code Section 402(h)(1)(B); any eligible deferred compensation plan under Code Section 457; any plan as described under Code Section 501(c)(18); and any Employer contributions made on the behalf of a Participant for the purchase of an annuity contract under Code Section 403(b) to a salary reduction agreement. Notwithstanding the preceding paragraphs, a Participant eligible to receive a Management Compensation Incentive Payment may, by written notice to the Committee delivered not later than thirty (30) days before such payment is to be made, elect that a different reduction rate be applied with respect to such payment. Such election shall be applicable only to the Management Compensation Incentive Payment for the Plan Year during which the election is made. Further, no such election may be made retroactively. In the event no such election is made, Compensation shall be withheld from the Management Compensation Incentive Payment at the rate in effect applicable under the above provisions of this Section. 4.4 Limitations on Contributions for Highly Compensated Employees. For each Plan Year for which the requirements of Code Section 401(k)(12) are not satisfied, Matching Contributions and Tax-Deferred Contributions made on behalf of Highly Compensated Employees in accordance with Sections 4.1 and 4.3 respectively shall be limited with respect to each Plan Year as described in this Section. (a) For the purpose of this Section. (i) "Contribution Percentage" shall mean the ratio (expressed as apercentage) of: A. The sum of the Matching Contributions made on behalf of a Participant to B. The Compensation paid to such Participant. The Contribution Percentage shall be determined subject to the following provisions: C. If one or more Highly Compensated Employees participate in both a cash or deferred arrangement and a plan subject to the Actual Contribution Percentage (ACP) test maintained by the Employer, and as the result of multiple use of the alternative limits, the Aggregate Limit determined in accordance with proposed I.T. Reg. 1.401(m)-2 is exceeded, then the ACP of those Highly Compensated Employees who also participate in a cash or deferred arrangement shall be reduced (beginning with such Highly Compensated Employee whose ACP is the highest) so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage amount is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly 18 Compensated Employees shall be determined after any corrections required to meet the ADP and ACP tests. D. For purposes of this Section, the Contribution Percentage for any Participant who is a Highly Compensated Employee, and who is eligible to have Contribution Percentage amounts allocated to his or her Account under two or more plans subject to Code Section 401(m) that are maintained by the Employer, shall be determined as if the total of such Contribution Percentage amounts were made under each plan. Further, if a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. E. In the event that this Plan satisfies the requirements of Code Sections 401(m), 401(a)(4), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. Other plans may be aggregated with this Plan in order to satisfy Code Section 401(m) only if they have the same Plan Year. F. The "family aggregation" rules as applicable to the determination of the ADP test, ACP test or multiple use test under applicable regulations are deleted from the Plan, effective June 27, 1997. G. For purposes of determining the Contribution Percentage test, Matching Contributions and Qualified Nonelective Contributions will be considered made for a Plan Year if made no later than the end of the twelve (12)-month period beginning on the day after the close of the Plan Year. H. Elective Deferrals may be used in determining the Contribution Percentage amounts so long as the ADP test is met before the Elective Deferrals are used in the ACP test and so long as the ADP test continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test. I. The contribution percentages of all eligible Employees shall be taken into account for the purposes of the ACP test under this Plan. For this purpose, eligible Employees shall include each Employee who would be a Participant under the Plan and eligible to receive an allocation of Employer Contributions hereunder. (ii) "Actual Deferral Percentage" (ADP) shall mean the ratio (expressed as a percentage) of: A. The Tax-Deferred Contributions, Qualified Matching Contributions, and Qualified Nonelective Contributions, if any, made on behalf of a Participant to B. The Compensation paid to such Participant. 19 The ADP shall be determined subject to the following provisions: (A) The ADP for any Participant who is a Highly Compensated Employee for the Plan Year, and who is eligible to have Elective Deferrals (and Qualified Nonelective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) allocated to his or her Accounts under two or more arrangements described in Code Section 401(k) that are maintained by the Employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Nonelective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two (2) or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. (B) In the event that this Plan satisfies the requirements of Code Section 401(k), 401(a), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the ADP of Employees as if all such plans were a single plan. Other plans may be aggregated with the Plan to satisfy Code Section 401(k) only if they have the same Plan Year. (C) For purposes of determining the ADP test, Elective Deferrals, Qualified Nonelective Contributions and Qualified Matching Contributions shall be taken into account under the ADP test for a Plan Year only if allocated to an Employee as of a date within that Plan Year. For this purpose, such allocation shall not be contingent on participation or performance of services after such date and actual payment to the Fund shall be made before the last day of the twelve (12)-month period immediately following the Plan Year to which such deferrals or contributions relate. (D) The actual deferral percentages of all eligible Employees shall be taken into account for the purposes of the ADP test under this Plan. For this purpose, eligible Employees shall include each Employee who would have been eligible to make an Elective Deferral under the Plan, except that no Elective Deferral was made because such Employee was suspended from making an Elective Deferral due to a distribution, a loan, or the limitations of Code Section 415. (b) Neither the average ACP nor the average ADP (in Plan Years in which the requirements of Code Sections 401(k)(12)(C) and 401(k)(12)(D) are not satisfied) for all Participants who are Highly Compensated Employees for the Plan Year shall exceed the greater of: (i) The average ACP or the average ADP, as applicable, for the Plan Year for all Participants who are Non-Highly Compensated Employees multiplied by 1.25; or (ii) The average ACP or the average ADP, as applicable, for the Plan Year for all Participants who are Non-Highly Compensated Employees multiplied by 2.00, provided such averages for the Highly Compensated Employees do not exceed such averages for 20 Non-Highly Compensated Employees by more than two (2) percentage points, or such lesser amount as the Secretary of the Treasury shall prescribe. Notwithstanding the above, the tests provided for under this Section shall be imposed separately on contributions and deferrals. Except as provided under paragraph (d) below, the Plan shall not test under this Section to meet applicable Code requirements for both contributions and deferrals in the same year. (c) The term "Compensation" shall have the meaning given such term by Code Section 415(c)(3), as limited by Code Section 401(a)(17). (d) If the test described above is used for both contributions and deferrals in the same Plan Year, the Aggregate Limit as defined below shall not be exceeded. (i) The "Aggregate Limit" for the purposes of this Section shall mean the greater of: A. The sum of: (1) One hundred twenty-five percent (125%) of the greater of the Relevant Actual Deferral Percentage or the Relevant Actual Contribution Percentage, and (2) Two (2) percentage points plus the lesser of the Relevant Actual Deferral Percentage or the Relevant Actual Contribution Percentage. In no event, however, shall this amount exceed twice the lesser of the Relevant Actual Deferral Percentage or the Relevant Actual Contribution Percentage; or B. The sum of: (1) One hundred twenty-five percent (125%) of the lesser of the Relevant Actual Deferral percentage or the Relevant Actual Contribution Percentage, and (2) Two (2) percentage points plus the greater of the Relevant Actual Deferral Percentage or the Relevant Actual Contribution Percentage. In no event, however, shall this amount exceed twice the lesser of the Relevant Actual Deferral Percentage or the Relevant Actual Contribution Percentage. (ii) For the purposes of this Section: A. Relevant Actual Deferral Percentage shall mean the ADP of the group of eligible Non-Highly Compensated Employees; and B. Relevant Actual Contribution Percentage shall mean the ACP of the eligible group of Non-Highly Compensated Employees. 21 (e) The determination and treatment of the Contribution Percentage, the Tax-Deferred Contributions and the ADP of a Participant shall at all times satisfy I.T. Reg. 1.401(k)-1, 1.401(m)-1, 1.401(m)-2 and such other requirements as may be required by the Secretary of Treasury. (f) The Committee shall have the responsibility for monitoring compliance with the requirements of this Section and shall have the power to take any steps it deems appropriate to ensure compliance, including limiting the amount of salary reduction permitted for Highly Compensated Employees or designating a portion of the Employer contributions pursuant to Section 4.1(a)(ii) or (iii) on behalf of such Plan Year to be allocated to the Tax-Deferred Contributions Account of Non-Highly Compensated Employees, with such amount to be treated as part of their deferral percentage until such time as the Committee determines that contributions can be made on behalf of the Highly Compensated Employees without violating the requirements of Code Section 401(k). Any remaining balance of the Employer contribution under Section 4.1(a) shall be allocated to all Employees as otherwise provided by the Plan. 4.5 Distribution of Excess Deferrals, Excess Contributions and Excess Aggregate Contributions. The Committee shall determine, as soon as is reasonably possible after the close of each Plan Year, Employer Contributions pursuant to Section 4.1 and Tax-Deferred Contributions pursuant to Section 4.3, if applicable, which will result in Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions for any Participant. In addition, prior to the close of each Plan Year the Committee, upon a determination that the ADP test may not be met for such Plan Year, may direct at any time that an individual Highly Compensated Employee's future Tax-Deferred Contributions be reduced or stopped in order to avoid accumulating Excess Deferrals or Excess Contributions under the Plan. Notwithstanding any other provisions of this Plan, Excess Deferrals, Excess Contributions, Excess Aggregate Contributions and income allocable thereto shall be distributed to Participants as described in this Section. Any Matching Contribution made with respect to an Excess Deferral or an Excess Contribution shall be forfeited. (a) For the purpose of this Section. (i) "Excess Deferrals" shall mean amounts of Elective Deferrals, Qualified Matching Contributions, and Qualified Nonelective Contributions for a calendar year that: A. The Participant requests be distributed pursuant to the claims procedure set forth in Section 4.5(b) below; or B. The Committee determines, pursuant to I.T. Reg. 1.401(k)-1, to be Excess Deferrals. (ii) "Qualified Matching Contributions" and "Qualified Nonelective Contributions" shall mean contributions reclassified for the purpose of meeting the ADP test. Such reclassification shall be permitted only if the following requirements are met: 22 A. Employer Contributions, including those Qualified Nonelective Contributions treated as Elective Deferrals for purposes of the ADP test must satisfy the requirements of Code Section 401(a)(4). B. Employer Contributions, excluding those Qualified Matching Contributions and Qualified Nonelective Contributions treated as Elective Deferrals for purposes of the ADP test, must satisfy the requirements of Code Section 401(a)(4). C. Those Qualified Matching Contributions and Qualified Nonelective Contributions treated as Elective Deferrals for purposes of the ADP test shall not be taken into account for purposes of satisfying the requirements of Code Section 401(m). D. Except as provided in paragraphs (A) and (C), Qualified Matching Contributions and Qualified Nonelective Contributions treated as Elective Deferrals for the purposes of the ADP test shall not be taken into account in determining whether any other contributions or benefits satisfy Code Section 401(a)(4) or in determining whether other matching Employer Contributions meet the requirements of Code Section 401(m). E. Qualified Nonelective Contributions may not be treated as Elective Deferrals if the effect of such treatment is to increase the difference between the ADP for the group of eligible Highly Compensated Employees and the ADP of all other eligible Employees. F. The Qualified Nonelective Contributions must satisfy the requirements of I.T. Reg. 1.401(k)-1(b)(6)(1) for the Plan Year as if such contributions were Elective Deferrals. G. Qualified Matching Contributions and Qualified Nonelective Contributions must be taken into account during the Plan Year in which they are deemed made. (iii) "Excess Contributions" shall mean amounts described in Section 401(k)(8)(B) of the Code. Effective June 27, 1997, the amount of Excess Contributions for a Highly Compensated Employee shall be determined in the following manner: A. First, the Tax-Deferred Contributions of the Highly Compensated Employee with the highest dollar amount of Tax-Deferred Contributions shall be reduced to the extent necessary to satisfy the ADP test or cause such dollar amount to equal the dollar amount of Tax-Deferred Contributions of the Highly Compensated Employee with the next highest dollar amount of Tax-Deferred Contributions. This process shall be repeated until the ADP test is satisfied. B. The amount of Excess Contributions for a Highly Compensated Employee shall then equal the total of Elective Deferrals or other contributions taken into account for the ADP test minus the dollar amount of the Employee's Tax-Deferred Contributions as determined above. 23 (iv) "Excess Aggregate Contributions" shall mean amounts described in Section 401(m)(6)(B) of the Code. Effective June 27, 1997, the amount of Excess Aggregate Contributions for a Highly Compensated Employee shall be determined in the following manner: A. First, the Matching Contributions of the Highly Compensated Employee with the highest dollar amount of Matching Contributions shall be reduced to the extent necessary to satisfy the ACP test or cause such dollar amount to equal the dollar amount of Matching Contributions of the Highly Compensated Employee with the next highest dollar amount of Matching Contributions. This process shall be repeated until the ACP test is satisfied. B. The amount of the Excess Aggregate Contributions for a Highly Compensated Employee shall then equal the total amount of Employer Matching Contributions and other contributions taken into account for the ACP test minus the dollar amount of the Employee's Matching Contributions as determined above. (b) A Participant may determine that deferrals in excess of the limits imposed by Code Section 402(g) have been made. Such Participant may request a distribution of such Excess Deferral amounts by submitting a claim in writing to the Committee no later than March 1, specifying the Participant's Excess Deferral amount for the preceding calendar year. Such claim shall include the Participant's written statement that if such amounts are not distributed, such Excess Deferral amounts, when added to amounts deferred under other plans or arrangements as described in Sections 401(k), 408(k), or 403(b) of the Code, exceed the limit imposed on the Participant by Section 402(g) of the Code for the year in which the deferral occurred. Notwithstanding the above, a Participant shall be deemed to have made the designation for the distribution of Excess Deferrals at any time the Committee determines that the limits of Code Section 402(g) would be exceeded by this Plan or any plan of any Affiliated Employer. (c) Notwithstanding any other provision of the Plan to the contrary: (i) Excess Deferrals and income allocable thereto shall be distributed after the date on which the Plan received the Excess Deferral, but no later than the April 15 following the calendar year during which such Excess Deferral was made. Any such distribution shall be designated by the Plan as a distribution of Excess Deferrals. (ii) A Participant's Excess Contributions and income allocable thereto, shall be distributed to the Participant, if administratively feasible, not later than two and one-half (2-1/2) months following the close of the Plan Year in which such Excess Contributions were made, but in any event, no later than the last day of the Plan Year following the close of the Plan Year in which the Excess Contributions were made. (iii) Any distribution or forfeiture of Excess Aggregate Contributions for any Plan Year shall be made on the basis of the respective portions of such amounts attributable to each Highly Compensated Employee. A Participant's Excess Aggregate Contributions and income allocable thereto shall be distributed to each Participant, if administratively feasible, not 24 later than two and one-half (2-1/2) months following the close of the Plan Year in which such Excess Aggregate Contributions were made, but in any event, no later than the last day of the Plan Year following the close of the Plan Year in which the Excess Aggregate Contributions were made. (d) Excess Contributions distributed under this Section shall first be treated as distributions from the Participant's Tax-Deferred Contributions Account and shall be treated as distributed from the Participant's Regular Account only to the extent such Excess Contributions exceed the balance in the Participant's Tax-Deferred Contributions Account. Excess Aggregate Contributions shall be distributed from the Participant's Tax-Deferred Contributions Account and the Participant's Regular Account in proportion to the Participant's Employer Matching Contributions for the Plan Year. 4.6 Duties of Funding Agent Regarding Contributions. The Funding Agent shall receive all contributions paid by the Employer in cash or other property acceptable to the Funding Agent and shall be accountable for all such contributions, but shall have no duty to collect or enforce payment to it of any contributions to the Fund, nor to determine or verify the accuracy thereof. 4.7 Investment Directions. (a) The Fund shall be divided into such separate investment funds as may be established at the direction of the Committee, which may include, without limitation, a "Company Stock Fund" designed to provide an investment in the common stock of the Employer. Amounts contributed or accepted pursuant to the Plan will be invested and re-invested in the separate investment funds in accordance with the elections of Participants, or their Beneficiaries. Neither the Employer nor any Plan fiduciary shall be liable for any losses which are the direct and necessary result of investment instructions given by such Participants or Beneficiaries. (b) Each Participant, or Beneficiary, will direct the investment and reinvestment of the amounts in and/or subsequently contributed or transferred to the Plan on his behalf among the available investment funds. Investment (and re-investment) directions may be given at least once during any calendar quarter and in such manner, at such times and subject to such conditions as may be prescribed by the Committee (or its designee). In the absence of a properly-transmitted investment direction, the amounts in a Participant's (or Beneficiary's) Accounts will be invested in the investment fund designated for this purpose by the Committee. 4.8 Transfers from Other Qualified Plans. There may be transferred to this Plan all or any of the assets held under any other plan which satisfies the applicable requirements of Sections 401(a) or 403(a) of the Internal Revenue Code, and which is maintained for the benefit of any persons who are or are about to become Participants in this Plan. 4.9 Rollover Contributions. The Funding Agent may accept assets from a person who is or is about to become a Participant in this Plan, provided the assets are in the form of cash and qualify as a rollover contribution within the meaning of Section 402(c)(4) or Section 408(d)(3)(A)(ii) of the Internal Revenue Code. 25 The Committee shall require the Participant to provide reasonable evidence that any such amount meets the above requirements. Failure of the Participant to provide such evidence will preclude the Plan's acceptance of any such amount. 4.10 Segregation of Rollovers. Notwithstanding any other provision hereof, amounts transferred to the Funding Agent of this Plan pursuant to Sections 4.8 and 4.9 shall be accounted for separately and shall be applied solely for the benefit of the Participant on whose behalf such amounts were transferred. Such amounts shall not be applied to provide any accrued benefit provided by this Plan. 26 ARTICLE V Allocations to Participants' Accounts 5.1 Individual Accounts. The Committee shall cause to be established and maintained such accounts or sub-accounts as may be required or useful to account for a Participant's interest in the Plan. 5.2 Valuation of Accounts. (a) The Committee shall determine, or cause to be determined, the net fair market value of the Fund as of each Valuation Date and allocate the net earnings (or losses) of each investment fund in proportion to the amount of each Participant's Account that is invested in each such investment fund. (b) The Special Amount, if any, made by a Participating Employer for the Plan Year pursuant to Section 4.3, shall not participate in the allocation of investment gains, losses, income and deductions of the trust as a whole, but shall be invested separately and all gains, losses, income and deductions attributable to such investment shall be allocated to each Participant's Regular Account on the Anniversary Date of the Plan Year during which such Special Amount was made, in proportion to each Participant's respective amount of Compensation for such Plan Year provided that in order to receive an allocation of the net earnings (or losses) on the Special Amount, a Participant must have completed 1,000 Hours of Service during the Plan Year, unless his employment terminated pursuant to subsection 3.4(a), (b) or (c). 5.3 Crediting of Tax-Deferred Contributions. Tax-Deferred Contributions made by the Employer on behalf of Participants shall be allocated to their Tax-Deferred Contributions Accounts as follows: (a) If the Employer has contributed a Special Amount on behalf of Participants in accordance with Section 4.3, the Special Amount shall be allocated in accordance with (i) through (iv) below. (i) First, a portion of the Special Amount shall be allocated at the end of each payroll period to the Tax-Deferred Contributions Account of each individual who was both an Employee and a Participant on the first day of the Plan Year for which the Special Amount was contributed, in an amount equal to such Participant's Tax-Deferred Contribution for such payroll period; (ii) Second, at the end of each calendar quarter, any Special Amount remaining after the allocation required in Section 5.3(a)(i) through the end of the applicable calendar quarter shall be allocated to the Regular Account of each individual who was both an Employee and a Participant on the first day of the Plan Year for which the Special Amount was contributed, in an amount reduced by forfeitures of prior Matching Contributions equal to such Participant's Matching Contribution for the payroll period as determined pursuant to Section 4.1(a)(ii); 27 (iii) Third, any Special Amount remaining after the allocations required in Sections 5.3(a)(i) and (ii) shall be allocated on the last day of the Plan Year to the Regular Account of each individual who was both an Employee and a Participant on the first day of the Plan Year for which the Special Amount was contributed, in an amount equal to the Qualified Nonelective Contributions and/or Qualified Matching Contributions, if any, made on behalf of the Participant for the Plan Year; and (iv) Finally, any Special Amount remaining after all allocations required in the Plan Year pursuant to Sections 5.3(a)(i), (ii) and (iii) shall be allocated to the Regular Account of each individual who was both an Employee and a Participant on the first day of the Plan Year for which the Special Amount was contributed, as a profit sharing (or non-matching) contribution as provided in Section 4.1(a)(iv) in proportion to each Participant's respective amount of Compensation for such Plan Year. Notwithstanding anything herein to the contrary, the allocation of amounts allocable pursuant to this Section 5.3(a)(iii) shall be shared solely by those individuals who were participants employed in the profit center designated by the transmittal letter accompanying the Employer contribution and who were both Employees and Plan Participants on the first day of the Plan Year for which the Special Amount was contributed. (b) If the Employer has not contributed a Special Amount or such Special Amount has been fully applied on behalf of Participants in accordance with Section 5.3(a), Tax-Deferred Contributions shall be allocated to each Participant's Tax-Deferred Contributions Account as soon as reasonably possible following the date such amounts would have been paid to the Participant as wages if it did not constitute a Tax-Deferred Contribution; provided however, that the Employer must pay over any contributions to the Funding Agent no later than the fifteenth (15th) business day of the month following the date the funds were received or withheld from payroll, subject to any shorter period required by government regulations. 5.4 Crediting of Employer Contributions. (a) A person shall be entitled to share in the Safe Harbor Nonelective Contribution set forth in Section 4.1(a)(i) for a Plan Year if he was both a Participant and an Employee during the Plan Year. As of each Anniversary Date, the Safe Harbor Nonelective Contribution for the Plan Year ending on such Date shall be allocated among and credited to the Safe Harbor Nonelective Contribution SubAccount of the Regular Account of each person entitled to share in such amounts in proportion to each Participant's respective amount of Compensation for such Plan Year. (b) A person shall be entitled to share in the Employer Matching Contributions set forth in Section 4.1(a)(ii) for a Plan Year which occurred during the applicable period, if he is both a Participant and an active Employee on the last day of such period or if his employment terminated pursuant to subsection 3.4(a), (b) or (c), except as otherwise specifically provided herein. As of the end of each calendar quarter, the Employer Matching Contribution, reduced by any forfeitures of prior Matching Contributions for the calendar quarter ending on such Date, shall be allocated among and credited to the Regular Accounts of the persons entitled to share in such amounts in accordance with the matching provisions of Section 4.1(a)(ii). (c) A person shall be entitled to share in the Employer profit sharing contribution set forth in Section 4.1(a)(iii) for a Plan Year which occurred during the applicable period, if 28 (i)(A) he is both a Participant and an active Employee on the last day of such period and (B) is credited with at least 1,000 Hours of Service during such Plan Year, or (ii) his employment terminated pursuant to subsection 3.4(a), (b) or (c) during such Plan Year, except as otherwise specifically provided herein. As of each Anniversary Date, the Employer profit sharing contribution for the Plan Year ending on such Date, reduced by the forfeitures from such Employer profit sharing contributions which occurred during such Year, shall be allocated among and credited to the Profit Sharing Contribution Subaccount of the Regular Account of each person entitled to share in such amounts in proportion to each Participant's respective amount of Compensation for such Plan Year. Notwithstanding anything herein to the contrary, the allocation of amounts allocable pursuant to this Section 5.4(b) shall be shared solely by those Participants employed in the profit center designated by the transmittal letter accompanying the Employer contribution. 5.5 Limitation on Allocations to Participants. Notwithstanding any other provisions of the Plan: (a) The amounts credited to a Participant under the Plan shall not exceed the limitations of Code Section 415(c)(3) and the regulations thereunder, the provisions of which are incorporated by reference. (b) For Plan Years beginning prior to January 1, 2000, in the case of any Participant who participates in both the Plan and a Defined Benefit Plan, any reduction required pursuant to Code Section 415 will be made under the Defined Benefit Plan. For Plan Years beginning on or after January 1, 2000, the combined plan limit provisions of Code Section 415(e) shall not be applicable. (c) Adjustments on Account of Excessive Credits. If it is determined at any time that the amount credited to a Participant's Accounts for any prior Plan Year was in excess of the amount permitted under the limitations of (a) above, the Committee shall charge against the Participant's Accounts an amount or amounts (adjusted to reflect income, expenses, gain or loss of the Fund property attributable to the excess credit or credits) sufficient to permit the remaining credits for such prior Year to satisfy the foregoing limitations and make adjustments in the order provided below. To the extent the excessive credit was an excessive Employer contribution as determined by the Committee, such excessive portion, adjusted as aforesaid, shall be applied to reduce the first contribution or contributions thereafter to be made by the Employer. A reduction of benefits and/or contributions to all Plans, where required under (b) above, shall be accomplished by first reducing the Participant's benefit under any Defined Benefit Plans in which he participated, such reduction to be made first with respect to the Plan in which he most recently accrued 29 benefits and thereafter in such priority as shall be determined by the Committee and the administrators of such other Plans and, next, by reducing contributions or allocating excess forfeitures for Defined Contribution Plans in which the Participant participated, such reduction to be made first with respect to the Plan in which he most recently accrued benefits and thereafter in such priority as shall be established by the Committee and the administrators of such other Plans; provided, however, that, whenever it is in the best interest of a Participant, necessary reductions may be made in a different manner and priority pursuant to the agreement of the Committee and the administrators of all other plans covering such Participant. Notwithstanding the preceding paragraph, if the limitations of Code Section 415 are exceeded for any Plan Year as a result of the allocation of forfeitures, a reasonable error in estimating the Participant's Compensation, a reasonable error in determining the amount of contributions that may be allocated under such limitations, or other facts and circumstances which the Commissioner of Internal Revenue finds justify the application of this provision, Tax- Deferred Contributions allocated to the Participant's Account for such Year (together with any gains attributable thereto) shall be returned to him to the extent necessary to comply with such limitation. 5.6 Accounts in General. The Committee shall notify each Participant as to the status of his Account or Accounts at least once per year. such notification shall not vest in any Participant any right, title or interest in the fund. The Employer, the funding Agent and the Committee do not in any manner or to any extent whatever warrant, guarantee or represent that the value of any Participant's Accounts will at any time equal or exceed the amount previously allocated thereto and, except as provided in ERISA, shall not be liable or responsible for any inadequacy of the Fund to meet and discharge any or all payments and liabilities under the Plan. 30 ARTICLE VI Right to Benefits 6.1 Vesting of Tax-Deferred Contributions Account The interest of each Participant in his Tax-Deferred Contributions Account shall be, at all times, one hundred percent (100%) vested and nonforfeitable. (a) Vesting of Regular Account (i) Each Participant's Safe Harbor Nonelective Contribution SubAccount and Basic Contribution SubAccount shall be one hundred percent (100%) vested and nonforfeitable at all times. (ii) Each Participant's Profit Sharing Contribution SubAccount and Matching Contributions SubAccount pursuant to Section 4.1(a)(ii) and (iii) shall vest pursuant to the following schedule: Vested Period of Service percentage Less than 2 years 0% 2 years but less than 3 years 25 3 years but less than 4 years 50 4 years but less than 5 years 75 5 or more years 100 (b) One hundred percent (100%) on the Participant's attaining age sixty-five (65). (c) One hundred percent (100%) on the Participant's death, or upon a determination, in accordance with Section 3.4(b), that he is totally and permanently disabled. (d) For purpose of determining a Participant's vested percentage, a Period of Service of twelve (12) complete months, aggregated to the extent provided in Section 2.1, shall constitute a year. The vesting of a Participant's interest in whole, or in part, in his Regular Account shall not preclude the allocations and valuations required under the preceding Article. If the Plan should ever be amended to change the vesting schedule, or if the vesting schedule changes because the Plan becomes or ceases to become Top Heavy, then each Participant's vested percentage in his Regular Account shall not be less than his vested percentage computed under the Plan without regard to such amendment or such change. Furthermore, those Participants with a Period of Service of three (3) or more years shall have the right to continue vesting under the more favorable vesting schedule. 31 (e) The Profit Sharing and Matching Contributions of any Participant who was employed by Pyle Industries, Inc. ("Pyle") on October 13, 1996 and ceased as of the following day to be employed by Pyle or any other Affiliated Employer as a result of the sale of certain assets of Pyle to Pyle Manufacturing, L.L.C. shall be one hundred percent (100%) vested, without regard to such Participant's Period of Service. In addition, any such Participant will be entitled to the Matching Contributions that would otherwise have been credited with respect to Compensation paid to him in October. 6.2 Forfeitures. Any amount forfeited by a Participant shall be applied to reduce the Contributions of the Participating Employer who employed such Participant. If the Participant is reemployed prior to the date that he incurs a Period of Separation of sixty (60) consecutive months following a Break in Employment, the Participating Employer shall reinstate any amounts so forfeited to the Participant's Regular Account, provided that if the Participant received an actual distribution that resulted in the forfeiture, such Participant must repay the full amount of such distribution. Such repayment must be made before the earlier of the date which is five (5) years after the date on which the Participant is subsequently reemployed by the Employer or the date which is the close of a Period of Separation of sixty (60) consecutive months following a Break in Employment after the date of his reemployment. 6.3 Top Heavy Provisions. The following provisions shall apply for each Plan Year for which the Plan is Top Heavy: (a) If the Employer does not maintain a qualified defined benefit retirement plan, or does maintain such a plan but each Non-Key Employee does not accrue the minimum benefit thereunder required by Section 416 of the Code, the Employer contribution, if any, for any such Plan Year shall be allocated on the basis of each Participant's Compensation in such manner as may be prescribed by the Code or any pertinent regulations promulgated thereunder as will result in each Non-Key Employee receiving an allocation hereunder of the amount which, when added to the amount allocated to his Regular Account or any amount allocated pursuant to Section 401(k) under this or any other qualified defined contribution retirement plan maintained by the Employer for such Year, will at least equal the lesser of: (i) three percent (3%) of his Compensation, (ii) the highest percentage computed by dividing the amount of the Employer contributions so allocated to each Key Employee's Accounts by his Compensation, or (iii) the amount otherwise required after any credit against or reduction of the minimum amounts described in clauses (i) or (ii) allowable for benefits accrued under any such defined benefit plan. Non-Key Employees entitled to the minimum percentage contribution set forth in clause (i) or (ii) shall also include (iv) Participants who have not incurred a Break in Employment at the end of the Plan Year and (v) Eligible Employees who declined to make Tax-Deferred Contributions to the Plan but must be considered as Participants to satisfy the coverage requirements of Code Section 410(b) in accordance with Section 401(a)(5) of the Code even if such Participants or Eligible Employees have earned less than 1,000 hours of service and regardless of their level of compensation. However, if the Employer maintains any other qualified defined benefit retirement plan and this Plan is aggregated therewith for purposes of meeting the requirements of Section 401(a)(4) or 410 of the Code, the minimum amount described in clause (ii) of the preceding sentence shall not be applicable. Further, if the Employer maintains any other qualified defined benefit plan for purposes of providing the additional benefits permissible by 32 Section 415 of the Code, and each Non-Key Employee does not accrue the minimum benefit thereunder required by Section 416 of the Code, the percentage set forth in clause (i) herein above shall be deemed to be seven and one-half percent (7-1/2%). (b) A Participant's vested percentage in his Regular Account attributable to Employer contributions made for Years in which this Plan is Top Heavy shall be no less than the percentage determined in accordance with the schedule below if his participation hereunder terminates. Vested Period of Service Percentage Less than 2 years 0% 2 years but less than 3 years 20 3 years but less than 4 years 40 4 years but less than 5 years 60 5 years but less than 6 years 80 6 or more years 100 (c) Unless the Plan qualifies under an exception as described in Section 416(h)(2) of the Code, "1.0" shall be substituted for "1.25" in the definitions of Defined Benefit Plan fraction and Defined Contribution Plan fraction contained in this Plan. (d) Solely for the purpose of determining if the Plan, or any other plan included in a required aggregation group of which this Plan is a part, is Top Heavy (within the meaning of Section 416(g) of the Code) the accrued benefit of an Employee other than a Key Employee (within the meaning of Section 416(i)(1) of the Code) shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Affiliated Employers, or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rule of Section 411(b)(1)(C) of the Code. (e) Neither Elective Deferrals nor Matching Contributions shall be used to satisfy the minimum contribution or benefit accrual which must be made on behalf of Non-Key Employees pursuant to this Section. 6.4 Persons under Legal or Other Disability. In the event a Participant or his Beneficiary is judicially determined to be incompetent, and a conservator or other person legally charged with the care of his person or of his estate is appointed, any benefits to which such Participant or Beneficiary is entitled shall be paid to such conservator or other person legally charged with the care of his person or of his estate. Except as provided in this Section, when, in the opinion of the Committee, a Participant or his Beneficiary is in any way incapacitated so as to be unable to manage his financial affairs, the Committee may direct the Funding Agent to make payments or distributions to his legal representative or to a relative or friend of such person for 33 his benefit, or the Committee may direct the Funding Agent to make payments and distributions for the benefit of the Participant or his Beneficiary in any way the Committee determines. 6.5 Missing Participants or Beneficiaries. Each Participant and each Beneficiary shall file, or cause to be filed, with the Committee through the Employer from time to time in writing, his mailing address and each change of mailing address. Any communication, statement or notice addressed to a Participant or his Beneficiary at his last mailing address filed with the Committee, or if no address is filed with the Committee, then at his last mailing address as shown on the Employer's records, will be binding on the Participant and his Beneficiary for all purposes of the Plan. Neither the Committee nor the Funding Agent shall be required to search for or locate a Participant or his Beneficiary. However, the Committee will mail a notice to a Participant who is entitled to a benefit under the Plan at the time of the Participant's Normal Retirement Age. The notice will state that the Participant is entitled to a distribution under the Plan and that, if the Participant or his Beneficiary fails to claim his benefits under the Plan within three (3) calendar years, the benefits shall be forfeited, but that the amount of such benefits shall be reinstated if a valid claim is subsequently made by the Participant or his Beneficiary. The forfeiture shall be used to reduce Employer contributions in the year of forfeiture. 6.6 Withdrawals Prior to Termination of Employment. (a) Except as provided in this Section, no amounts may be withdrawn from a Participant's Regular Account while he remains in the employ of the Employer. Effective April 1, 1999, upon request to the Committee in accordance with such procedures as the Committee may establish, if a Participant who is an Employee has attained age seventy and one-half (70- 1/2), such Employee may withdraw all or a portion of his Account. If a Participant who is an Employee has attained age fifty-nine and one-half (59-1/2), such Employee may withdraw his Tax Deferred Contributions, and, effective June 25, 2000, earnings thereon, and amounts in such Employee's Rollover Account upon request to the Committee in accordance with such procedures as it may establish. Such withdrawals shall be allowed only under rules uniformly applicable to all Participants and shall require spousal consent if the Participant is married. Such spousal consent must acknowledge the effect of the withdrawal, be signed within the 90-day period preceding the date the withdrawal is to be made, and be witnessed by a Plan representative or notary public. Any amount attributable to an "annuity portion," must be withdrawn in the form of a "qualified joint and survivor annuity" unless the Participant obtains "spousal consent," as such terms are defined in Section 7.2(b). (b) In addition, a Participant may request a distribution of his Tax-Deferred Contributions and amounts in his Rollover Account on account of hardship, but only if the distribution is necessary to satisfy the hardship. Such distribution shall be made subject to spousal consent as described above. In no event shall such distribution include any of the investment gains earned after December 31, 1988 on such Tax-Deferred Contributions or be made in an amount less than $500.00. 34 (c) In order to receive a hardship distribution all of the following requirements must be satisfied: A. The distribution is not in excess of the amount needed to satisfy the hardship, B. The Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Employer, C. The Participant's Elective Contributions are suspended for at least twelve (12) months under the Plan, and any other plan maintained by the Employer, after receipt of the hardship distribution, and D. The Participant does not make Elective Contributions under the Plan, or any other plan maintained by the Employer, for the Employee's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Code Section 402(g) for such next taxable year less the amount of such Participant's Elective Contributions for the taxable year of the hardship distribution. (d) Unless otherwise allowed by the appropriate income tax regulations, the need to pay following expenses shall be the only needs which will be considered as a hardship for purposes of this Section: deductible medical expenses (within the meaning of Section 213(d) of the Code) of the Employee and the Employee's spouse or dependents (as defined in Code Section 152); the expense (excluding mortgage payments) of purchasing a principal residence of the Employee; tuition expenses (including room and board) for the next year of post-secondary education for the Employee or Employee's spouse or dependents (as defined in Code Section 152); expenses required to prevent the eviction of the Employee from, or a foreclosure on the mortgage of the Employee's principal residence; or expenses resulting from the occurrence of a natural disaster, as determined by the Committee. 6.7 Nature of Participants' Interest. The interest of a Participant in the Fund shall be limited to the right to receive, in cash or in kind, the nonforfeitable or vested interest in his Account, as determined by the Committee, at such time and subject to the provisions of Articles VII and VIII. 6.8 Suspension of Benefits. Notwithstanding any other provision of this Agreement, the payment of benefits hereunder to a former Participant who returns to the employ of the Employer after incurring a Break in Employment shall be suspended for the period of such reemployment. 6.9 Application for Benefits. (a) A Participant must complete and file an application for benefits under the Plan. Application for benefits shall include all pertinent information requested by the Committee, including reasonable proof thereof. Applications for benefits must be in writing on the forms 35 prescribed by the Committee and must be signed by the Participant and his spouse, if any, and submitted to the Committee. (b) Each application for benefits shall be acted upon and approved or disapproved within ninety (90) days following its receipt by the Committee. (c) The Employer shall appoint an individual or entity to make an initial determination with respect to a disputed claim for benefits (the "Claims Coordinator"). If any initial claim for benefits is wholly or partially denied, the Claims Coordinator shall notify the applicant in writing of such denial and of such Participant's right to a review by the Committee. The notice shall set forth specific reasons for such denial, specific references to pertinent Plan provisions on which the denial is based, a description of any additional material or information necessary for the applicant to perfect the application, an explanation of why such material or information is necessary, and an explanation of the Plan's review procedure. If the Participant has not received this notice within the ninety (90) day period specified above, the Participant may assume that his application for benefits has been denied either in whole or in part and may appeal the denial to the Committee, as provided in the following Section. 6.10 Appeals Procedure. (a) Any Participant, or such Participant's duly authorized representative, whose application for benefits is denied, in whole or in part, may appeal from such denial to the Committee for a review of the decision by submitting to the Committee within sixty (60) days after receiving written notice from the Committee of the denial of the claim a written statement: (i) Requesting a review of the application for benefits by the Committee; (ii) Setting forth all of the grounds upon which the request for review is based and any facts in support thereof; and (iii) Setting forth any issues or comments which the applicant deems relevant to the application. The Committee shall act upon each such application within sixty (60) days after either receipt of the applicant's request for review by the Committee or receipt of any additional materials reasonably requested by the Committee from such applicant, whichever occurs later. (b) The Committee shall make a full and fair review of each such application and any written materials submitted by the applicant or the Employer in connection therewith and may require the Employer or the Participant to submit within thirty (30) days after a written notice by the Committee therefor, such additional facts, documents or other evidence as is deemed necessary or advisable in the sole discretion of the Committee in making such a review. On the basis of the review, the Committee shall make an independent determination of the applicant's eligibility for benefits under the Plan. The decision of the Committee on any application for benefits shall be final and conclusive upon all persons if supported by substantial 36 evidence in the record. If the Committee denies an application in whole or in part, the Committee shall give written notice of the decision to the applicant setting forth the specific reasons for such denial and specific references to the pertinent Plan provisions on which the Committee's decision is based. Such written notice shall be given within one hundred-twenty (120) days of the date the appeal was filed. 37 ARTICLE VII Distribution of Benefits 7.1 Form of Distribution. Subject to Sections 7.2 and 7.4, the vested amount of a Participant's Account in the Plan shall be distributed to the Participant in a single sum in cash, or, at the Participant's election with respect to amounts invested in the common stock of the Company, in shares of Company common stock. 7.2 Protected Options Prior to June 27, 2002. (a) Prior to June 27, 2002, to the extent required under Code Section 411(d)(6), a Participant may elect to have the "transfer portion" of his Account, if any, distributed in a "protected option," as set forth in Appendix A. However, a transfer portion that is also an "annuity portion" shall be distributed in the form of a "qualified joint and survivor annuity" unless, during the 90-day period ending on the "annuity starting date," the Participant elects to have the annuity portion distributed in another available form. With respect to an annuity portion, the Committee shall provide Participant not more than 90 days nor less than 30 days before his annuity starting date, a written summary of the following information: (i) the terms and conditions of the qualified joint and survivor annuity; (ii) the rights to make, and the effect of, an election to waive the qualified joint and survivor annuity; (iii) the rights of a spouse to require distribution of the annuity portion in the form of a qualified joint and survivor annuity; and (iv) the right to make, and the effect of, a revocation of an election to waive the qualified joint and survivor annuity. If the Participant is married at the time, any such election shall require "spousal consent." The Committee may permit a Participant to waive any notice period specified in this Article, provided the waiver satisfies the requirements of applicable Treasury regulations. (b) For purposes of this Article and Appendix A, the following definitions apply. "Annuity starting date" means the first day of the first period for which an amount is payable as an annuity or, in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the Participant to such benefit. "Annuity portion" means that part of a transfer portion which is subject to the joint and survivor requirements of Code Section 401(a)(11). "Protected option" means any form of distribution available to a Participant under the plan from which the Participant's transfer portion was derived, as described in Appendix A. "Qualified joint and survivor annuity" means an annuity purchased from an insurance company with the proceeds of the Participant's transfer portion which is payable for the life of the Participant with a survivor annuity for the life of the spouse which is not less than 50% of (and not greater than 100% of) the amount of the annuity which is payable during the joint lives of the Participant and the spouse. The applicable percentage shall be "50%" unless the Participant elects otherwise. "Spousal consent" means written consent by a spouse to an election by the Participant of a form of distribution other than a qualified joint and survivor annuity, provided the election (1) designates a form of benefits and, if applicable, a Beneficiary which may not be changed without spousal consent (unless the consent of the spouse expressly permits such subsequent changes by the Participant without any requirement of further consent by the spouse), (2) acknowledges the effect of such election, and (3) is witnessed by a Notary Public or a Plan representative. Spousal consent is not required if the Participant demonstrates to the satisfaction of the Committee that there is no spouse, or the spouse cannot be located, or because 38 of such other circumstances as may be permitted by the Secretary of the Treasury under Regulations. Spousal consent (or the establishment that consent of a spouse may not be obtained) is effective only with respect to that spouse, but with respect to such spouse it is irrevocable. "Transfer portion" means assets in a Participant's Account that were transferred to the Plan from another plan, provided that, together with earnings (or losses) thereon, the value of those assets that have vested exceeds $5,000. 7.3 Time of Distributions. (a) All distributions from the Plan shall commence as soon as practicable after the Participant's Termination Date, and all unvested amounts shall be forfeited as of the earlier of (A) the date of such distribution, or (B) as soon as practicable following the Participant's Termination Date. (A Participant who has a zero vested interest in his Account shall be deemed to have had the zero amount distributed.) However, if the Participant's nonforfeitable interest in his Account exceeds $5,000, no distributions prior to Normal Retirement Age or, if earlier, the date of his death, shall be made from such Account without the consent of the Participant. Such consent must be given no more than 90 nor less than 30 days prior to the date the distribution is to begin. However, a distribution that does not include an annuity portion may commence less than 30 days after such consent is given, provided that (1) the Committee clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving notice of his rights to defer the distribution to consider whether or not to elect a distribution, and (2) the Participant, after receiving the notice, affirmatively elects a distribution. (b) Notwithstanding any other provision of the Plan, to the extent required under Section 401(a)(9) of the Code, all distributions from the Plan to a Participant who is a 5% owner (as defined in Section 416 of the Code) shall commence not later than April 1 of the calendar year following the calendar year in which he attains age 70. Notwithstanding any other provision in the Plan, all distributions under the Plan shall comply with Section 401(a)(9) of the Code and regulations promulgated thereunder. 7.4 Death Benefit. The vested portion of a Participant's Account shall be distributed to his Beneficiary in a single lump sum as soon as practicable after the Participant's death, provided, however, that the value of an Annuity Portion, if any, shall be paid to the spouse of a Participant who was married at the time of his death in the form of a life annuity for the remainder of such spouse's lifetime. Such surviving spouse may elect to receive the distribution in a single sum cash payment and to defer the date of distribution to what would have been the Participant's Normal Retirement Age. 7.5 Direct Rollovers. If a Participant (which for purposes of this Section shall include a spouse or former spouse who is an alternate payee under a qualified domestic relations order as defined in Code Section 414(p) or a Beneficiary who is the Participant's surviving spouse) is to receive an "eligible rollover distribution" (as defined below), he may elect to have all of the amounts, or any portion thereof that would otherwise be paid to the Participant or Beneficiary paid directly to an "eligible retirement plan" (as defined below) that will accept such a rollover. Such election shall not apply, however, to the extent a distribution or withdrawal is a minimum distribution required under Code Section 401(a)(9). 39 Upon the election of a Participant or Beneficiary under this Section, the amount of the distribution with respect to which the election was made shall be paid directly, by such means as the Committee shall determine, to the specified eligible retirement plan at the time it would otherwise have been paid to the Participant or Beneficiary. The portion, if any, of the distribution or withdrawal that may not be directly rolled over or which the Participant or Beneficiary has elected not to be rolled over shall be made to the Participant or Beneficiary as otherwise provided in the Plan. Not earlier than 90 days or later than 30 days before a distribution or withdrawal would otherwise be made, the Committee will deliver or cause to be delivered to the Participant or Beneficiary notice of his right to make an election under this Section. Any election must be made within such period and shall be subject to such terms and conditions as the Committee shall prescribe, including any such terms, conditions, or limitations required or permitted by government regulations, rulings and announcements. An election shall be accompanied by such documentation, information and verifications as the Committee shall require regarding the eligible retirement plan to which the direct rollover is to be made and to enable the Funding Agent to properly make the direct rollover. For purposes of this Section, "eligible retirement plan" shall mean: (1) an individual retirement account described in Code Section 408(a); (2) an individual retirement annuity described in code Section 408(b) (other than an endowment contract); (3) with respect to a Participant, a defined contribution plan qualified under Code Section 401(a); or (4) with respect to a Participant, an annuity plan described in Code Section 403(a). For purposes of this Section, the term "eligible rollover distribution" shall mean any distribution of all or any portion of the balance to the credit of the distributee from an employees' trust described in Code Section 401(a) which is exempt from tax under Code Section 501(a) except (i) any distribution that is one of a series of substantially equal periodic payments (paid not less frequently than annually) over the life (or life expectancy) of the distributee or the joint lives (or life expectancies) of the distributee and a designated beneficiary or for a specified period of ten years or more, (ii) any distribution to the extent required under Code Section 401(a)(9), (iii) the portion of any distribution that is not includible in gross income, (iv) effective for distributions after December 31, 1999, any "hardship" distribution (as defined in Code Section 401(k)) and (v) such other amounts specified in Treasury regulations and rulings, notices or announcements issued under Section 402(c) of the Code. 40 ARTICLE VIII The Committee 8.1 Committee. The Employer shall appoint a Committee of at least one (1) person. The members of the Committee shall serve at the pleasure of the Employer, and any member may resign by written instrument addressed to the Employer and may be removed by the Employer with or without cause. While a vacancy exists, the remaining member(s) of the Committee may perform any act which the Committee is authorized to perform. The decisions of the majority of the number of members of the Committee then in office shall constitute the final and binding act of the Committee. The Committee may act with or without a meeting being called or held and shall keep minutes of all meetings held and a record of all actions taken by written consent. Vacancies in the membership of the Committee shall be filled promptly by the Employer. 8.2 Committee Action. The Committee shall choose a secretary (the "Secretary") who may, but need not, be one of the members of the Committee. The Secretary shall keep minutes of the Committee's proceedings and all records and documents pertaining to the Committee's administration of the Plan. Any action of the Committee shall be taken pursuant to a majority vote or the written consent of a majority of its members, and such action shall constitute the action of the Committee and be binding the same as if all members had joined therein. A quorum of the Committee shall consist of a majority of its members. The Secretary may execute any certificate or other written direction on behalf of the Committee. A member of the Committee shall not vote or act upon any matter which relates solely to himself as a Participant. If a matter arises affecting one of the members of the Committee as a Participant and the other members of the Committee are unable to agree as to the disposition of such matter, the Employer may appoint a substitute member of the Committee in the place of the affected member, for the sole and only purpose of passing upon and deciding the particular matter. 8.3 Rights and Duties. The Committee shall be the "administrator," as defined in Section 3(16)(A) of ERISA and shall have all powers and duties necessary to accomplish this duty, including, without limiting the generality of the foregoing, the following: (a) To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan; (b) To interpret the Plan and its provisions (including, without limitation, by supplying omissions from, correcting deficiencies in, or resolving inconsistencies or ambiguities in, the language of the Plan), its interpretation thereof in good faith to be final and conclusive on all Employees, former Employees, Participants, former Participants and Beneficiaries; (c) To make factual findings with respect to any issue arising under the Plan, determine all questions concerning the Plan and the eligibility of any person to participate in the Plan, and to decide disputes arising under the Plan; 41 (d) To determine, compute and certify to the Funding Agent the amount and form of benefits which will be payable to any Participant, former Participant, or Beneficiary in accordance with the provisions of the Plan, and to determine the person or persons to whom such benefits will be paid; (e) To authorize the payment of benefits and all other disbursements by the Funding Agent from the Fund; (f) To maintain all the necessary records for the administration of the Plan other than those maintained by the Funding Agent; (g) To provide for disclosure of all information and filing or provision of all reports and statements to Participants, Beneficiaries or governmental bodies as shall be required by ERISA or the Code, and to submit to the Employer, at least annually, such information as is necessary to fully inform the Employer of the discharge by the Committee or its delegates of responsibilities under the Plan; (h) To enter into a written agreement or agreements with one or more Investment Managers (as defined by Department of Labor Regulations) to advise the Committee or the Funding Agent with respect to investment of the Fund, or to manage (including the power to acquire or dispose of) any assets of the Plan; (i) To establish a procedure for the Plan to deal with qualified domestic relations orders. 8.4 Funding Policy and Method. The Committee shall establish and carry out a funding policy and method for the Plan, consistent with the objectives of the Plan and the requirements of Title I of ERISA, which shall be communicated to the Funding Agent. 8.5 Transmittal of Information. The Employer shall supply full and timely information to the Committee on all matters it needs to perform its functions under the Plan. 8.6 Compensation. The members of the Committee shall serve without compensation for their services hereunder. Members of the Committee and its appointed delegates shall be bonded to the extent required by ERISA and the regulations issued by the Secretary of Labor. The expense of such bond and all expenses of the Committee or such delegate shall be paid by the Employer, and the Employer shall furnish the Committee with such clerical and other assistance as is necessary in the performance of its duties. Effective July 1, 1990, all necessary and appropriate costs, charges and expenses of administering the Plan shall be paid from the assets of the Plan unless the Employer in its discretion determines to pay them. 8.7 Retention of Advisors. The Committee may employ such persons or organizations to render advice or perform services with respect to the responsibilities of the Committee under the Plan as the Committee, in its sole discretion, determines to be necessary and appropriate. 42 8.8 Allocation and Delegation of Fiduciary Responsibilities. (a) The Employer shall appoint the Committee and the Funding Agent, but shall not otherwise be responsible in any way for the operation and administration of the Plan. (b) The Committee, from time to time, may allocate to one (1) or more of its members and delegate to others any of its rights, powers, responsibilities and duties (hereinafter collectively referred to as "Duties") with respect to the operation and administration of the Plan. Each such allocation and/or delegation shall be in writing; shall specify the Duties so allocated or delegated; and shall be subject to termination by the Committee upon notice to the person or persons to whom such Duties have been allocated and/or delegated. Each person to whom Duties have been allocated and/or delegated shall, by a written acknowledgment, accept such allocation or delegation and acknowledge that he is a fiduciary with respect to the Plan. (c) The Committee shall periodically review the performance of any of its members or others to whom Duties have been allocated or delegated under the provisions of this Section. 8.9 Indemnification. To the fullest extent permitted by the laws of the State of Delaware and ERISA, the Employer shall indemnify and hold harmless the Board of Directors, the Committee, and each member thereof, and any other Employee to whom any fiduciary responsibility with respect to the Plan is allocated or delegated. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Employer or provided by the Employer under any agreement, operating policies or otherwise, as such indemnities are permitted under the laws of the State of Delaware. Payments with respect to any indemnity and payment of insurance premiums, expenses or fees under this Section shall be made only from the Employer's assets and shall not be made directly or indirectly from the Fund assets. 8.10 Determinations and Corrections. The Committee shall have the power to make such corrections and equitable adjustments, arising from mathematical, accounting or factual errors made in good faith, as the Committee shall in its discretion deem appropriate, which adjustments shall be final and binding on all Employees, former Employees, Participants, former Participants and Beneficiaries. 43 ARTICLE IX Amendment and Termination 9.1 Amendment by Employer. The Employer shall have the right to amend this Plan from time to time, provided, however, that no such amendment shall cause any reduction in retirement benefits or optional form of benefits in violation of Code Section 411(d)(6). Amendments shall be stated in a written instrument executed by the Employer, and all Employees, former Employees, Participants, former Participants, Beneficiaries, and the Employer shall be bound thereby. 9.2 Retroactive Amendments. Any amendment may be made effective retroactively as of such date as the Employer considers necessary or appropriate to enable the Plan to meet any applicable requirement. 9.3 Discontinuance or Termination of Plan. It is the Employer's expectation that the Plan will be continued indefinitely, but continuance of the Plan is not assumed as a contractual obligation. The Employer may at any time reduce or temporarily suspend contributions hereunder and may terminate the Plan at any time. In the event of a complete discontinuance of contributions by the Employer, or upon termination or partial termination of the Plan, the entire interest of each affected Participant shall be fully vested. 9.4 Failure to Contribute. The failure of the Employer to contribute to the Fund for any Plan Year when no contribution is required shall not of itself be a discontinuance of contributions to the Fund by the Employer. 9.5 Merger and Consolidation of Plan. In the case of any merger or consolidation with, or transfer of assets and liabilities to, any other plan, provisions shall be made so that each Participant in the Plan on the date thereof (if the Plan then terminated) would receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately prior to the merger, consolidation or transfer (if the Plan then terminated). 9.6 Substitution of Successor Employer. In the event of the dissolution, merger, consolidation or reorganization of the Employer, provision may be made by which the Plan will be continued by any successor and, in that event, such successor shall be substituted for the Employer under the Plan. 44 ARTICLE X Miscellaneous 10.1 Contributions Not Recoverable. Except as permitted by the provisions of the Plan or required by ERISA or the Code, it shall be impossible for any part of the principal or income of the Fund to be used for, or diverted to, purposes other than the exclusive benefit of such Participants or their Beneficiaries. Notwithstanding any provision of this Plan, the Employer shall recover (a) any contributions made to the Fund as a result of a mistake in fact; or (b) any contribution that was not allowed as a deduction for Federal Income Tax purposes; and (c) amounts remaining after termination of the Plan which cannot be allocated to Participants because of the limits of Code Section 415. The permissible recovery under (a) must be made within one (1) year from the date the contribution was made to the Plan and under (b) must be made within one (1) year from the date of disallowance of the tax deduction. The permissible recovery under (c) shall only be made after a determination by the Internal Revenue Service that such recovery will not jeopardize the prior qualified status of the Plan and Fund. 10.2 Employment Rights. Participation in the Plan shall not give any Employee or any other person (a) the right to be retained in the employ of the Employer; (b) any right or claim to any interest in the Plan, unless the right or claim has specifically accrued under the Plan; or (c) any legal or equitable right against the Employer, the Committee or the Funding Agent, except as provided herein. It is a condition of the Plan, and each Participant expressly agrees by his participation herein, that each Participant shall look solely to the assets held in the Fund for the payment of any benefit to which he is entitled under the Plan. 10.3 Receipt or Release. Any payment to a Participant, former Participant, or his Beneficiary in accordance with the provisions of this Plan shall, to the extent thereof, be in full satisfaction of all claims against the Funding Agent, the Committee and the Employer, and the Committee or Funding Agent may require such Participant, former Participant, or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. 10.4 Alienation. None of the benefits, payments, proceeds or claims of any Participant, former Participant, or Beneficiary shall be subject to any claim of any creditor or subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind, either voluntary or involuntary. Any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, garnish, levy or otherwise dispose of or execute upon any right or benefit payable hereunder shall be void. The Fund shall not in any manner be liable or subject to the debts, contracts, liabilities, engagements or costs of any Participant entitled to benefits hereunder, and such benefits shall not be considered an asset of the Participant in the event of his insolvency or bankruptcy. This provision shall not prevent the Plan from complying with the terms of a "qualified domestic relations order" as defined in Code Sections 401(a)(13) and 414(p) so long as such compliance will not adversely affect the qualified status of the Plan. If a qualified domestic relations order so provides, the portion of a Participant's Account payable to an alternate payee may be distributed to the alternate payee at 45 the time specified in such order, regardless of whether the Participant is entitled to a distribution from the Plan at such time. Notwithstanding any provision of the Plan to the contrary, effective August 5, 1997, the Plan shall honor a judgment, order, decree or settlement providing for the offset of all or a part of a Participant's benefit under the Plan, to the extent permitted under Code Section 401(a)(13)(C); provided that the requirements of Code Section 401(a)(13)(C)(iii) relating to the protection of the Participant's spouse (if any) are satisfied. 10.5 Controlling Law. This Plan shall be construed, administered, and governed in all respects under applicable Federal law, and to the extent that Federal law is inapplicable, under the laws of the State of California; provided, however, that such interpretation shall be given thereto as is consistent with the Plan being a qualified plan within the meaning of Section 401 of the Code. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 10.6 Text Prevails over Captions. The headings and subheadings of the Articles and Sections of this Plan are included herein solely for convenience or reference, and if there be any conflict between such headings and subdivisions and the text of this Plan, the text shall control. 10.7 Counterparts. This Plan may be executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same instrument, which may be sufficiently evidenced by any one counterpart. 10.8 Successors and Assigns. This Plan shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns. 10.9 Military Service. Notwithstanding any provisions of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. "Qualified military service" means any service in the uniformed services (as defined in chapter 43 of title 38 of the United States Code) by any individual if such individual is entitled to reemployment rights under such chapter with respect to such service. 10.10 Electronic Media. Notwithstanding any provision of the Plan to the contrary, including any provision which requires the use of a written instrument, to the extent permitted by applicable law, the Committee may establish procedures for the use of electronic media in communications and transactions between the Plan or the Committee and Participants and Beneficiaries. Electronic media may include, but are not limited to, e-mail, the Internet, intranet systems and automated telephonic response systems. 10.11 Suspension During Conversion. Notwithstanding any provision of the Plan to the contrary, during any conversion period, in accordance with procedures established by the Administrator, the Administrator may temporarily suspend, in whole or in part, certain provisions of the Plan, which may include, but are not limited to, a Participant's right to change his contribution election, a Participant's right to change his 46 investment election and a Participant's right to borrow or withdraw from his Account or obtain a distribution for his Account. 47 ARTICLE XI Participating Employers 11.1 Adoption by Affiliated Employers. With the consent of the Employer, any Affiliated Employer may adopt this Plan and all of the provisions hereof, and become a Participating Employer, by properly executing a document evidencing said intent. 11.2 Requirements of Participating Employers. (a) Each Participating Employer shall be required to use the Funding Agent selected by the Employer. (b) The Funding Agent shall commingle, hold and invest as one, all contributions received under the Plan. (c) The transfer of any Participant from or to an Employer participating in this Plan, whether he or she be an Employee of the Employer or an Affiliated Employer, shall not affect such Participant's rights under the Plan, and all amounts credited to such Participant's Accounts as well as his accumulated Period of Service with the transferor or predecessor, and his length of participation in the Plan, shall continue to his credit. (d) Any expenses of the Plan which are to be paid by the Employer shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total standing to the credit of all Participants. 11.3 Designation of the Employer as Agent. With respect to all of its relations with the Funding Agent and the Committee for the purpose of this Plan, each Participating Employer shall be deemed to have designated irrevocably the Employer as its agent. 11.4 Employee Transfers. In the event an Employee transfers between Participating Employers, the Employee shall carry with him his accumulated Service and eligibility. No such transfer shall effect a termination of employment hereunder, and the Participating Employer to which the Employee is transferred shall thereupon become obligated hereunder with respect to such Employee in the same manner as was the Participating Employer from whom the Employee was transferred. 11.5 Participating Employer Contributions. All contributions made by a Participating Employer, as provided for in this Plan, shall be determined separately by each Participating Employer, and shall be paid to and held by the Funding Agent for the exclusive benefit of the Employees of such Participating Employer and the Beneficiaries of such Employees, subject to all the terms and conditions of this Plan. On the basis of the information furnished by the Employer, the Committee shall keep separate books and records concerning the affairs of each Participating Employer hereunder and as to the Accounts and credits of the Employees of each Participating Employer. 48 11.6 Amendment. Amendment of this Plan by the Employer shall be deemed to be an amendment by each Participating Employer. 11.7 Participating Employer Discontinuance. Any Participating Employer may discontinue or revoke its participation in the Plan. At the time of any such discontinuance or revocation, satisfactory evidence thereof and of any applicable conditions imposed shall be delivered to the Committee. The Committee shall thereafter cause to be transferred, delivered and assigned Plan assets allocable to the Participants of such Participating Employer to such new Funding Agent as shall have been designated by such Participating Employer. If no successor is designated, the Committee shall retain such assets for the Employees of said Participating Employer pursuant to the provisions of the Funding Instrument. 11.8 Committee Authority. The Committee shall have authority to make any and all necessary rules or regulations binding upon all Participating Employers and all Participants to effect the purposes of this Article XI. IN WITNESS WHEREOF, the Employer, on behalf of each Participating Employer, has caused this Plan to be executed by its duly authorized officers this _______ day of _____________________, 2000. HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED By: /s/ Frank Meredith Frank Meredith Executive Vice President, Chief Financial Officer and Secretary 49 APPENDIX A PROTECTED OPTIONS PRIOR TO JUNE 27, 2002 Notwithstanding any other provision of the Plan, effective with respect to any Employee whose Termination Date occurs on or after June 27, 2002, the provisions of this Appendix A shall not apply and shall be without effect. Prior to June 27, 2002, a Participant who satisfies the requirements set forth in this Appendix A shall be entitled to elect a protected option, as set forth below. A. A Participant whose transfer portion is attributable to participation in the Pyle Industries, Inc. Profit Sharing Trust is entitled to the following protected options: 1. Life annuity guaranteed for ten years certain; or 2. Qualified joint and survivor annuity. Note that if a Participant who is married attempts to elect a life annuity, his benefit will be distributed in the form of a qualified joint and survivor annuity, unless he obtains spousal consent to the life annuity. B. A Participant whose transfer portion is attributable to Harman-Motive, Incorporated Retirement, Savings and Profit Sharing Plan is entitled to the following protected options: 1. Qualified joint and survivor annuity; 2. Substantially equal monthly, quarterly or annual installments; or 3. Any combination of the foregoing options, including a lump sum. C. A Participant whose transfer portion is attributable to participation in the United Recording Corporation Retirement, Savings and Profit Sharing Plan is entitled to the following protected options: 1. Substantially equal monthly, quarterly or annual installments; or 2. Combination of any of the foregoing installment options with a lump sum. D. A Participant whose transfer portion is attributable to participation in the JBL, Incorporated, Retirement and Savings Profit Sharing Plan is entitled to the following protected options: 1. Distribution in substantially equal monthly, quarterly or annual installments; or 50 2. Any combination of the foregoing installment options with a lump sum. E. A Participant whose transfer portion is attributable to participation in Studer Revox America, Inc. Employee Savings and Profit Sharing Plan Trust is entitled to the following protected options: 1. Installments. F. A Participant whose transfer portion is attributable to participation in the Lexicon Retirement Savings Plan is entitled to the following protected options: 1. Straight life annuity; 2. Qualified joint and survivor annuity; or 3. Equal monthly, quarterly or semi-annual installments. G. A Participant whose transfer portion is attributable to participation in the Madrigal Audio Laboratories, Inc. 401(k) Plan is entitled to the following protected options: 1. Installments; 2. Straight life annuity; 3. Life annuity with a term certain guarantee; 4. Qualified joint & 100% survivor annuity; or 5. Qualified joint & 50% survivor annuity. 51 EX-13 5 a10kmda01.txt EXHIBIT 13.1 HII ANNUAL REPORT MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations. Net sales for fiscal 2001 increased 2 percent to $1.717 billion, compared to $1.678 billion in fiscal 2000 and $1.500 billion in fiscal 1999. Fiscal 2001 sales increased due to higher audio system sales to automakers and strong demand for aftermarket car radio and navigation units. Sales of home speakers and electronics were down. Professional audio sales approximated last year's levels. In fiscal 2000, sales growth was driven by higher audio system shipments to the automakers as well as strong sales to personal computer manufacturers. Continued weakness in European currencies reduced our reported sales as compared to prior year in both fiscal 2001 and fiscal 2000. Excluding currency effects, fiscal 2001 sales increased 8 percent over the prior year, and fiscal 2000 sales increased 17 percent over the prior year. The Company experiences seasonal fluctuations in sales and earnings. The first fiscal quarter is the weakest due to automotive model changeovers and the July and August holidays in Europe. Variations in seasonal demands among end-user markets may also cause operating results to vary from quarter to quarter. The Company's businesses are organized by the end-user markets they serve. The Consumer Systems Group manufactures loudspeakers and electronics for high fidelity audio reproduction in the home, in vehicles and with computers. The Professional Group manufactures loudspeakers and electronics used by audio professionals in concert hall, recording, broadcast and cinema applications. Consumer Systems Group sales increased 3 percent to $1.267 billion in fiscal 2001, compared to $1.228 billion in fiscal 2000 and $1.091 billion in fiscal 1999. Exclusive of currency effects, the Group's fiscal 2001 sales increased 9 percent over fiscal 2000. Sales to automobile manufacturers were higher by $64.9 million in fiscal 2001 due to increased audio system shipments to Toyota and higher shipments of radio and navigation units to Mercedes-Benz and the European aftermarket. Sales of home speakers and electronics were lower by $15.2 million due to economic conditions compared to fiscal 2000. Sales to personal computer manufacturers were lower by $10.4 million as the industry experienced substantial sales declines over the past year. Fiscal 2000 sales were higher than the previous year as a result of strong audio system sales to the automakers and growth in radio and navigation system shipments. In addition, sales to the personal computer manufacturers, principally Dell, Apple and Compaq, were strong. Professional Group sales of $449.2 million in fiscal 2001 approximated fiscal 2000 sales of $449.7 million. Fiscal 1999 sales were $408.8 million. Excluding currency effects, sales were 4 percent higher in fiscal 2001 than in the previous year. Sales increased due to the acquisition of Crown and higher AKG microphone shipments to General Motors' OnStar program. These increases were offset by lower sales to mobile phone manufacturers and the disposition of Orban in May 2000. Fiscal 2000 sales were higher versus the prior year as JBL Pro, Crown, Harman Music Group and AKG all performed well. The Company reported a $36.3 million pretax charge for restructuring and other items in the third quarter 17 ended March 31, 2001. This included non-cash charges of $18.5 million and cash charges of $17.8 million. The significant items included in the charge were provisions to terminate distributors in the U.K. and Germany, severance costs, write-off of impaired assets, factory closures in the U.K. and Argentina, and inventory write-downs at Studer and Consumer International. The consolidated gross profit percentage was 26.1 percent in fiscal 2001, compared to 28.0 percent in fiscal 2000 and 26.5 percent in fiscal 1999. Fiscal 2001 gross profit was reduced by inventory write-downs totaling $8.6 million and other unusual charges of $5.3 million as discussed above. Excluding those charges, the fiscal 2001 gross profit percentage was 26.9 percent. Lower margins were realized for consumer audio products as the Company sought to decrease inventory levels while implementing a direct to retailer distribution system in Europe. The Professional Group experienced lower margins as well due to softness in the cinema business and inventory reduction initiatives at Studer. In fiscal 2000, the majority of the Consumer Systems Group and Professional Group companies reported a higher gross margin percentage than the prior year, but this was offset by lower margins on sales to international consumer audio dealers and distributors due to lower factory overhead absorption and other effects of the dealer destocking program. Fiscal 1999 gross profit included charges totaling $24.3 million to reduce the carrying value of inventories of discontinued product lines. Selling, general and administrative expenses as a percentage of sales were 22.0 percent in fiscal 2001, compared to 20.7 percent in fiscal 2000 and 21.5 percent in fiscal 1999. In fiscal 2001, selling, general and administrative expenses included $22.4 million in unusual charges to terminate distributors in the U.K. and Germany, to cover severance costs for 250 employees, to write-off impaired assets, and to close factories in the U.K. and Argentina. Excluding these charges, selling, general and administrative expenses as a percentage of sales were 20.6 percent, approximately the same as last year. Higher selling costs and a $12.5 million increase in engineering and development expenses were partially offset by overhead cost reductions. Selling, general and administrative expenses as a percentage of sales decreased in fiscal 2000 compared to the prior year. The decrease was due to cost savings realized from the implementation of restructuring programs in fiscal 1999, partially offset by higher investments in business infrastructure but at a rate of increase lower than the sales growth rate. In fiscal 1999, Harman reported plant closing and severance costs of $17.0 million, equal to 1.1 percent of sales, and asset impairment costs of $20.0 million, equal to 1.3 percent of sales. The plant closing and severance costs resulted from the closure of the El Paso, Texas, electronics plant, the closure of other smaller facilities and elimination of full-time positions in certain other locations. The asset impairment charge resulted from the write-down of tooling, factory equipment and other assets associated with discontinued product lines and other write-downs of assets that no longer provided economic benefit to the Company. Fiscal 2001 operating income was 4.1 percent of sales, compared to 7.3 percent in fiscal 2000 and 2.6 percent 18 in fiscal 1999. Excluding the charges for restructuring and other items totaling $36.3 million, fiscal 2001 operating income was 6.3 percent of sales. Consumer Systems Group operating income decreased primarily due to higher costs to implement changes in consumer international distribution and lower operating margins on sales to Chrysler in North America, partially offset by higher operating margins from domestic home speaker and electronic sales. Consumer International's operating loss was $18.9 million before restructuring and other charges and $28.6 million after the charges. Professional Group operating income of $33.7 million, excluding unusual charges, approximated last year's level. Operating income in fiscal 2000 increased over fiscal 1999 due to sales growth, higher margins and overhead reductions as a result of the fiscal 1999 restructuring program, partially offset by $21 million of losses incurred in sales to international dealers due to a destocking program. Interest expense in fiscal 2001 was $25.0 million, compared to $18.5 million in fiscal 2000 and $23.6 million in fiscal 1999. Fiscal 2001 interest expense increased due to higher borrowings as a result of the Company's share repurchase program, higher working capital levels and increased interest rates. Capital expenditures of $88.1 million also contributed to the increase in borrowings in fiscal 2001. Fiscal 2000 interest expense was lower than the prior year due to strong operating cash flows used to reduce revolving credit facility borrowings. The weighted average interest rate in fiscal 2001 was 6.3 percent, compared to 5.7 percent in fiscal 2000 and 6.0 percent in fiscal 1999. The increase in average interest rates in fiscal 2001 was due to a higher percentage of U.S. dollar denominated borrowings versus Euro denominated borrowings due to the conversion of a Deutschmark term loan to U.S. dollars. In fiscal 2000, average interest rates decreased due to a lower percentage of U.S. dollar denominated debt. As a result, in fiscal 2001 the Company reported income before income taxes and minority interest of $45.1 million, or $81.4 million excluding restructuring and other charges, compared to $102.8 million in fiscal 2000, and $14.4 million in fiscal 1999, or $80.9 million before restructuring charges. In fiscal 2001, the Company reported income tax expense of $12.7 million, an effective tax rate of 28.2 percent. This compares with income tax expense of $29.9 million and an effective tax rate of 29.1 percent in fiscal 2000. Fiscal 1999 income tax expense was $2.7 million with an effective tax rate of 18.7 percent. The effective tax rates for fiscal years 2001, 2000 and 1999 were below the U.S. statutory rate due to utilization of tax credits, realization of tax benefits for United States exports and the utilization of tax loss carry- forwards at certain foreign subsidiaries. The effective tax rate for fiscal 1999 was significantly below the statutory rate because the above benefits offset a lower pretax income base. Net income for fiscal 2001 was $32.4 million. Excluding restructuring and other charges, net income was $58.2 million compared with $72.8 million in fiscal 2000 and $11.7 million in fiscal 1999. Fiscal 1999 net income was $57.6 million excluding restructuring charges. 19 Liquidity and Capital Resources. Harman International primarily finances its working capital requirements through cash generated by operations, borrowings under a revolving credit facility and normal trade credit. The Company and certain subsidiaries have a multi-currency revolving credit facility with a group of twelve banks committing $275 million to the Company for cash borrowings and letters of credit through September 30, 2002. The Company plans to refinance this agreement during the next fiscal year. At June 30, 2001, the Company had outstanding indebtedness under the revolving credit facility of $111.6 million, outstanding letters of credit of $7.3 million and unused credit thereunder of $156.1 million. The indebtedness at June 30, 2001, consists of committed rate loans, which bear interest at LIBOR plus 0.25 percent, and swing line borrowings, which bear interest at base rates. The Company and certain subsidiaries have a term loan with a group of banks led by Commerzbank committing $73.4 million to the Company for cash borrowings through August 30, 2002. The variable rate loan bears interest at LIBOR plus 0.60, equal to 4.7 percent at June 30, 2001. In addition, at June 30, 2001, the Company's international subsidiaries maintained unsecured short-term lines of credit of $23.2 million and had outstanding indebtedness thereunder of approximately $15.9 million. Capital expenditures, net of lease financing, were $88.1 million in fiscal 2001, compared with $80.4 million in fiscal 2000 and $67.8 million in fiscal 1999. Expenditures in fiscals 2001, 2000 and 1999 were for equipment and facilities required to increase capacity and efficiency, primarily in our business supplying the automotive industry, and new product tooling. The Company anticipates capital expenditures of approximately $120 to $130 million during the next fiscal year. Firm commitments for capital expenditures during fiscal 2002 of approximately $24.6 million existed as of June 30, 2001. The Company anticipates that a portion of these capital expenditures will be financed through operating lease arrangements. Net working capital at June 30, 2001, was $358.7 million, compared with $309.6 million at June 30, 2000. The increase primarily results from higher inventories, reflecting lower than anticipated sales, and lower accounts payable due to timing of purchases and vendor payments. Excess of cost over fair value of assets acquired was $145.3 million at June 30, 2001, compared with $166.6 million at June 30, 2000. The decrease was due to amortization and the effect of foreign currency translation. Shareholders' equity was $422.9 million at June 30, 2001, compared with $486.3 million at June 30, 2000, and $468.2 million at June 30, 1999. The decrease in fiscal 2001 resulted from net income offset by common stock repurchases totaling $67.0 million and negative foreign currency translation adjustments totaling $33.2 million due primarily to the weakening of the Euro against the U.S. dollar. Fiscal 2000 shareholders' equity increased due to net income offset by $36.0 million of common stock repurchases and negative foreign currency translation of $17.2 million. 20 Harman's Board of Directors has authorized the repurchase of 7.0 million shares. Through June 30, 2001, the Company has acquired and placed in treasury 5,689,300 shares of its common stock at a total cost of $137.0 million. Future repurchases are expected to be funded with operating cash flow. Cash generated by operations and the unused credit available under the revolving credit facility should provide sufficient funds to meet the Company's working capital, capital expenditure, dividend, debt service and share repurchase requirements in fiscal 2002. The Company is subject to various risks, including dependence on key customers, economic conditions affecting disposable consumer income and fluctuations in currency exchange rates. A disruption in the operations of one of our key customers, such as an automotive strike, could have a material adverse effect on the Company. Effects of Inflation and Currency Exchange Rates. The Company maintains significant operations in Germany, the United Kingdom, Denmark, France, Austria, Hungary, Switzerland, Mexico and Sweden. As a result, exposure to foreign currency gains and losses exists. A portion of foreign currency exposure is hedged by incurring liabilities, including bank debt, denominated in the local currency where subsidiaries are located. The Company's subsidiaries purchase products and parts in various currencies. As a result, the Company may be exposed to cost increases relative to local currencies in the markets to which it sells. To mitigate such adverse trends, the Company enters into foreign exchange contracts and other hedging activities. Also, foreign currency positions are partially offsetting and are netted against one another to reduce exposure. Some products made in the U.S. are sold abroad. Sales of such products are affected by the value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could depress these sales. Competitive conditions in the Company's markets may limit its ability to increase product pricing in the face of adverse currency movements. However, due to the multiple currencies involved in the Company's businesses and the netting effect of various simultaneous transactions, the Company's foreign currency positions are partially offsetting. Over the next several years Harman International expects significant revenue and earnings growth due to major new OEM automotive awards. The Company recently announced that it will supply all navigation systems for Mercedes-Benz vehicles beginning in fiscal 2003. The new awards are for integrated infotainment systems with display for E Class vehicles and for DVD navigation systems for S Class vehicles. Recent Accounting Pronouncements. Recent accounting pronouncements SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," are discussed in footnote 1 to the consolidated financial statements, Summary of Significant Accounting Policies. 21 Statement of Management Responsibility The consolidated financial statements and accompanying information were prepared by, and are the responsibility of, the management of Harman International Industries, Incorporated. The statements were prepared in conformity with generally accepted accounting principles and, as such, include amounts that are based on management's best estimates and judgements. The Company's internal control systems are designed to provide reliable financial information for the preparation of financial statements, to safeguard assets against loss or unauthorized use and to ensure that transactions are executed consistent with Company policies and procedures. Management believes that existing internal accounting control systems are achieving their objectives and that they provide reasonable assurance concerning the accuracy of financial statements. Oversight of management's financial reporting and internal accounting control responsibilities is exercised by the Board of Directors through the audit committee which consists solely of outside directors. The committee meets periodically with financial management and the independent auditors to ensure that each is meeting its responsibilities and to discuss matters concerning auditing, accounting control and financial reporting. The independent auditors have free access to meet with the audit committee without management's presence. /s/ Bernard A. Girod /s/ Frank Meredith Bernard A. Girod Frank Meredith Vice Chairman and Executive Vice President and Chief Executive Officer Chief Financial Officer 22 Independent Auditor's Report The Board of Directors and Shareholders of Harman International Industries,Incorporated: We have audited the accompanying consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries as of June 30, 2001 and 2000 and the related consolidated statements of operations, cash flows and shareholders' equity for each of the years in the three-year period ended June 30, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harman International Industries, Incorporated and subsidiaries as of June 30, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Los Angeles, California August 10, 2001 23 Consolidated Balance Sheets Harman International Industries, Incorporated and Subsidiaries
June 30, 2001 and 2000 ($000s omitted except per share amounts) Assets 2001 2000 - -------------------------------------------------------------------------- Current assets Cash and cash equivalents $ 2,748 4,365 Receivables (less allowance for doubtful accounts of $11,457 in 2001 and $11,760 in 2000) 315,817 306,596 Inventories (note 2) 317,500 298,273 Other current assets 72,806 61,792 ------------ ------------ Total current assets 708,871 671,026 Property, plant and equipment, net (notes 3, 5 and 6) 264,136 251,737 Excess of cost over fair value of assets acquired (less accumulated amortization of $40,645 in 2001 and $32,196 in 2000) 145,258 166,647 Other assets 44,120 48,095 ------------ ------------ Total assets $ 1,162,385 1,137,505 ------------ ------------ Liabilities and Shareholders' Equity - --------------------------------------------------------------------------- Current liabilities Short-term borrowings (notes 4 and 5) $ 19,394 14,969 Current portion of long-term debt (note 5) 5,544 7,537 Accounts payable 151,478 161,333 Accrued liabilities 173,739 177,542 ------------ ------------ Total current liabilities $ 350,155 361,381 Borrowings under revolving credit facility (note 5) 108,072 11,835 Senior long-term debt (note 5) 235,750 242,983 Other non-current liabilities 44,537 33,918 Minority interest 929 1,055 Shareholders' equity (notes 5 and 7) Preferred stock, $.01 par value. Authorized 5,000,000 shares; none issued and outstanding -- -- Common stock, $.01 par value. Authorized 100,000,000 shares; issued 37,749,931 shares in 2001 377 188 and 37,550,608 shares in 2000 Additional paid-in capital 297,515 292,897 Accumulated other comprehensive income: Unrealized gains on hedging derivatives 2,785 -- Equity adjustment from foreign currency translation (92,288) (59,131) Retained earnings 351,525 322,383 Less common stock held in treasury (5,689,300 shares in 2001 and 3,488,000 shares in 2000) (136,972) (70,004) ------------ ------------ Total shareholders' equity $ 422,942 $ 486,333 ------------ ------------ Commitments and contingencies (notes 6, 10 and 12) Total liabilities and shareholders' equity $ 1,162,385 1,137,505 ------------ ------------
See accompanying notes to consolidated financial statements 24 Consolidated Statements of Operations Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2001, 2000 and 1999 ($000s omitted except per share amounts 2001 2000 1999 - --------------------------------------------------------------------------------------- Net sales $ 1,716,547 1,677,939 1,500,135 Cost of sales 1,268,512 1,208,603 1,102,400 ------------ ------------ ------------ Gross profit 448,035 469,336 397,735 Selling, general and administrative expenses 376,807 347,614 322,008 Plant closures and severance -- -- 17,010 Asset impairment -- -- 20,054 ------------ ------------ ------------ Operating income 71,228 121,722 38,663 Other expenses Interest expense 24,950 18,507 23,641 Miscellaneous, net 1,179 386 575 ------------ ------------ ------------ Income before income taxes and minority interest 45,099 102,829 14,447 Income tax expense 12,703 29,923 2,706 Minority interest 32 68 18 ------------ ------------ ------------ Net income $ 32,364 72,838 11,723 ------------ ------------ ------------ Basic EPS $ 1.00 2.11 0.33 ------------ ------------ ------------ Diluted EPS $ 0.96 2.06 0.32 ------------ ------------ ------------ Weighted average shares outstanding - basic 32,296 34,452 35,794 Weighted average shares outstanding - diluted 33,737 35,300 36,122
See accompanying notes to consolidated financial statements. 25 Consolidated Statements of Cash Flows Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2001, 2000 and 1999 ($000s omitted) 2001 2000 1999 - ----------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 32,364 72,838 11,723 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 52,168 53,487 60,202 Amortization of intangible assets 15,033 11,131 6,578 Special charges, net of cash paid -- -- 54,751 Tax benefit attributable to stock options 1,008 137 59 Deferred income taxes 12,480 4,512 2,635 Loss on disposition of assets 2,226 3,117 942 Change in working capital, net of acquisition/disposition effects: Decrease (increase) in: Receivables (25,174) (4,945) (14,897) Inventories (37,342) (20,557) (6,985) Other current assets 3,161 (63) 10,303 Increase (decrease) in: Accounts payable (1,699) 40,283 10,847 Accrued liabilities and income taxes payable 695 31,278 (10,731) Other operating activities (977) 3,347 753 ------------ ------------ ------------ Net cash provided by operating activities $ 53,943 194,565 126,180 ------------ ------------ ------------ Cash flows from investing activities: Payment for purchase of companies, net of cash acquired $ -- (49,683) (568) Proceeds from asset dispositions 4,135 16,690 2,861 Capital expenditures (88,083) (80,355) (67,830) Purchased and capitalized software expenditure (17,681) (16,306) (2,962) Collection (issuance) of loans, net 12,259 (645) (11,600) Other items, net (1,074) 356 1,825 ------------ ------------ ------------ Net cash used in investing activities $ (90,444) (129,943) (78,274) ------------ ------------ ------------ Cash flows from financing activities: Net borrowings (repayments) under lines of credit $ 4,826 (3,240) 1,477 Proceeds from issuance of long-term debt 106,418 11,740 35,206 Repayments of long-term debt (9,426) (33,568) (63,002) Repurchase of common stock (66,968) (36,027) (33,977) Dividends paid to shareholders (3,222) (3,444) (3,589) Exercise of stock options 3,799 1,888 2,479 ------------ ------------ ------------ Net cash flow provided by (used in) financing activities $ 35,427 (62,651) (61,406) ------------ ------------ ------------ Effect of exchange rate changes on cash (543) (569) 259 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (1,617) 1,402 (13,241) Cash and cash equivalents at beginning of year 4,365 2,963 16,204 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 2,748 4,365 2,963 ------------ ------------ ------------ Supplemental schedule of non-cash investing activities: Fair value of assets acquired $ -- 78,084 1,672 Cash paid for the capital stock -- 49,683 568 ------------ ------------ ------------ Liabilities assumed $ -- 28,401 1,104 ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 26 Consolidated Statements of Shareholders' Equity Harman International Industries, Incorporated and Subsidiaries
Years Ended June 30, 2001, 2000 and 1999 ($000s omitted) Accumulated Common Additional other Total stock $.01 paid-in comprehensive Retained Treasury shareholders' par value capital income earnings stock equity - ------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1998 $ 186 288,336 (21,478) 244,855 -- 511,899 ---------- ---------- ------------- -------- --------- ------------- Exercise of stock options 1 2,478 -- -- -- 2,479 Tax benefit attributable to stock option plan -- 59 -- -- -- 59 Treasury shares purchased -- -- -- -- (33,977) (33,977) Dividends ($.10 per share) -- -- -- (3,589) -- (3,589) Comprehensive income: Net income -- -- -- 11,723 -- 11,723 Foreign currency translation adjustment -- -- (20,407) -- -- (20,407) ---------- ---------- ------------- -------- ---------- ------------- Balance, June 30, 1999 $ 187 290,873 (41,885) 252,989 (33,977) 468,187 ---------- ---------- ------------- -------- ---------- ------------- Exercise of stock options 1 1,887 -- -- -- 1,888 Tax benefit attributable to stock option plan -- 137 -- -- -- 137 Treasury shares purchased -- -- -- -- (36,027) (36,027) Dividends ($.10 per share) -- -- -- (3,444) -- (3,444) Comprehensive income: Net income -- -- -- 72,838 -- 72,838 Foreign currency translation adjustment -- -- (17,246) -- -- (17,246) ---------- ---------- -------------- -------- --------- ------------ Balance, June 30, 2000 $ 188 292,897 (59,131) 322,383 (70,004) 486,333 ---------- ---------- -------------- -------- --------- ------------ Stock split 188 (188) -- -- -- -- Exercise of stock options 1 3,798 -- -- -- 3,799 Tax benefit attributable to stock option plan -- 1,008 -- -- -- 1,008 Treasury shares purchased -- -- -- -- (66,968) (66,968) Dividends ($.10 per share) -- -- -- (3,222) -- (3,222) Comprehensive income: Net income -- -- -- 32,364 -- 32,364 Foreign currency translation adjustment -- -- (33,157) -- -- (33,157) Unrealized gains on hedging derivatives -- -- 2,785 -- -- 2,785 ---------- ---------- -------------- -------- --------- ------------ Balance, June 30, 2001 $ 377 297,515 (89,503) 351,525 (136,972) 422,942 ---------- ---------- -------------- -------- --------- ------------
See accompanying notes to consolidated financial statements. 27 Notes to Consolidated Financial Statements Harman International Industries, Incorporated and Subsidiaries 1. Summary of Significant Accounting Policies Consolidation and Revenue Recognition Principles. The consolidated financial statements include the accounts of the Company and subsidiaries after the elimination of significant intercompany transactions and accounts. Revenue is primarily recognized upon shipment of goods, when title to goods transfers. Where necessary, prior years' information has been reclassified to conform to the 2001 consolidated financial statement presentation. Cash Equivalents. Cash equivalents of $0.5 million and $0.2 million with maturities less than three months were included in cash and cash equivalents at June 30, 2001 and 2000, respectively. Inventories. Inventories are valued at the lower of cost or market. Cost is determined principally by the first-in, first-out method. Property, Plant and Equipment. Property, plant and equipment is recorded at cost or, in the case of capitalized leases, at the present value of the future minimum lease payments. Depreciation and amortization of property, plant and equipment is provided primarily using the straight-line method over useful lives estimated from 3 to 50 years. Buildings and improvements are depreciated over 3 to 30 years or the term of the lease, whichever is shorter. Machinery and equipment are depreciated over 5 to 10 years and furniture and fixtures are depreciated over 3 years. Income Taxes. The deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversal of the cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. The Company has not provided U.S. Federal or foreign withholding taxes on foreign subsidiary undistributed earnings as of June 30, 2001, because such earnings are intended to be permanently invested. It is not practicable to determine the U.S. Federal income tax liability, if any, that would be payable if such earnings were not reinvested indefinitely. Foreign Currency Translation. Assets and liabilities in foreign functional currencies are translated into U.S. dollars based upon the prevailing currency exchange rates in effect at the balance sheet date. Translation gains and losses are not included in the determination of net income but are accumulated in a separate component of shareholders' equity. These translation gains and losses are a component of comprehensive income. Excess of Cost over Fair Value of Assets Acquired. The net excess of cost over fair value of assets acquired is being amortized over periods from 3 to 40 years, using the straight-line method. The Company evaluates the recoverability of the intangible assets through comparisons of projected cash flows from the related assets. Purchased and Deferred Software Costs. Software costs that are related to conceptual formulation and incurred prior to the establishment of technological feasibility are expensed as incurred. Costs incurred to purchase software to be sold as an integral component of a product are deferred. Software costs incurred subsequent to establishment of technological feasibility and which are considered recoverable by management are deferred in compliance with SFAS 86 and amortized over the product's life, usually three years. At June 30, 2001, purchased software costs were $7.3 million and other deferred software costs totaled $20.9 million, net of accumulated amortization of $9.9 million. Purchased software costs at June 30, 2000, totaled $7.3 million and other deferred costs totaled $9.8 million, net of accumulated amortization of $5.7 million. Purchased and deferred software costs, net, are included in other assets on the balance sheet. Deferred costs are principally comprised of costs to acquire or develop automotive navigation, telecommunications and networking software. 28 Research and Development. Research and development costs are expensed as incurred. The Company's expenditures for research and development were $88.7 million, $76.2 million and $76.0 million for the fiscal years ending June 30, 2001, 2000 and 1999, respectively. Stock Option Plan. Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company elected to continue to apply the provisions of APB Opinion No. 25 for stock-based compensation accounting and reporting. The Company provides disclosure of pro forma net income and pro forma earnings per share for grants made in 1995 and future years as if the fair- value-based method defined in SFAS No. 123 had been applied. Use of Estimates. Estimates and assumptions have been made relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reporting of revenues and expenses during the reporting periods to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Recent Accounting Pronouncements. In July 2001, the FASB issued Statement No.141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company is required to adopt the provisions of Statement 141 immediately and anticipates adopting Statement 142 effective July 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of 29 adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit,s carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. The Company has elected not to early adopt the provisions of Statement 142. Because of the extensive effort needed to comply with adopting the Statement, it is not practicable to reasonably estimate the impact of adopting this Statement on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. Amortization expense related to goodwill was approximately $7.5 million for the fiscal year ended June 30, 2001. 2. Inventories Inventories consist of the following: June 30 ($000s omitted) 2001 2000 - ---------------------------------------------------------------------- Finished goods $ 145,349 134,038 Work in process 38,572 40,815 Raw materials 133,579 123,420 ----------- ---------- Total $ 317,500 298,273 ----------- ---------- 3. Property, Plant and Equipment Property, plant and equipment are composed of the following: June 30 ($000s omitted) 2001 2000 - ---------------------------------------------------------------------- Land $ 6,899 4,647 Buildings and improvements 117,801 116,376 Machinery and equipment 327,175 326,264 Furniture and fixtures 37,959 38,885 ----------- ----------- 489,834 486,172 Less accumulated depreciation and amortization (225,698) (234,435) ----------- ----------- Property, plant and equipment, net $ 264,136 251,737 ----------- ----------- 4. Short-Term Borrowings At June 30, 2001, the Company had unsecured short-term lines of credit for certain of its international subsidiaries aggregating $23.2 million with outstanding borrowings of $15.9 million. Interest rates based on various indices ranged from 4.9 percent to 8.8 percent. At June 30, 2000, the Company had outstanding borrowings of approximately $11.8 million and interest rates ranging from 4.9 percent to 7.5 percent. The Company utilizes the swing line feature of the revolving credit facility to meet its short-term borrowing requirements. At June 30, 2001, 30 the Company had $3.5 million drawn on its swing lines at base rates in the local countries where the funds were drawn, ranging from 5.75 percent in the United Kingdom to 7.5 percent in Germany. At June 30, 2000, the Company had $3.1 million drawn on its swing lines at base rates in the local countries where the funds were drawn, ranging from 3.0 percent in Switzerland to 7.0 percent in Germany. 5. Long-Term Debt The Company and certain of its subsidiaries have a five-year multi-currency revolving credit facility with a group of twelve banks committing $275 million to the Company for cash borrowings and letters of credit through September 30, 2002. At June 30, 2001, the Company had borrowings of $111.6 million on the revolving credit facility (including swing line, competitive advance and revolving credit borrowings) and outstanding letters of credit of $7.3 million. The unused credit under the revolving credit facility at June 30, 2001, was $156.1 million. The interest rate on the June 30, 2001 competitive advance and revolving credit borrowings, at LIBOR plus 0.25 percent, ranged from 4.3 percent in the United States to 6.8 percent in Canada. The Company is required under the revolving credit agreement to maintain certain financial ratios and meet certain net worth and indebtedness tests. The Company was in compliance with such covenants at June 30, 2001 and 2000. The Company's other long-term debt agreements contain covenants that, among other things, limit the ability of the Company and its subsidiaries to incur additional indebtedness, create restrictions on subsidiary dividends and distributions, limit the Company's ability to encumber certain assets and restrict the Company's ability to issue capital stock of its subsidiaries. The Company was in compliance with the terms of its long-term debt agreements at June 30, 2001 and 2000. Under the most restrictive provisions, limited amounts of dividends may be paid as of June 30, 2001. Interest paid for both short- and long-term borrowings was $24,873,000, $20,472,000, and $25,288,000 during the fiscal years ended June 30, 2001, 2000 and 1999, respectively. Long-term debt is composed of the following: June 30 ($000s omitted) 2001 2000 - ------------------------------------------------------------------------------ Borrowings under revolving credit facility, due September 30, 2002, with variable rates ranging from 4.3% to 6.8% at June 30, 2001 $ 108,072 11,835 Senior notes, unsecured, due July 1, 2007, interest due semiannually at 7.3% 150,000 150,000 Borrowings under Commerzbank term facility, due August 30, 2002; variable rate was 4.7% at June 30, 2001 73,403 73,230 Obligations under capital leases (note 6) 4,561 12,710 Other unsubordinated loans due in installments through 2030, some of which vary with the prime rate, bearing interest at an average effective rate of 3.6% at June 30, 2001 13,330 14,580 ----------- ----------- Total 349,366 262,355 Less current installments (5,544) (7,537) ----------- ----------- Long-term debt $ 343,822 254,818 ----------- ----------- Long-term debt, including obligations under capital leases, maturing in each of the next five fiscal years (000s omitted) is as follows: - -------------------------- 2002 $ 5,544 2003 182,187 2004 726 2005 738 2006 382 Thereafter 159,789 - -------------------------- 31 6. Leases The following analysis represents property under capital leases: June 30 ($000s omitted) 2001 2000 - ---------------------------------------------------------------- Capital lease assets $ 10,254 34,361 Less accumulated amortization (2,392) (19,325) --------- -------- Net $ 7,862 15,036 --------- -------- Capital lease obligations of $7.4 million were incurred to fund equipment additions during the fiscal year ended June 30, 1999. No new capital lease obligations were incurred in fiscal years 2001 and 2000. At June 30, 2001, the Company is liable for the following minimum lease commitments under terms of noncancelable lease agreements: ($000s omitted) Capital Operating Leases Leases - ------------------------------------------------------ 2002 $ 799 62,172 2003 675 51,244 2004 719 43,531 2005 728 29,922 2006 305 23,411 Thereafter 1,857 56,940 --------- -------- Total minimum lease payments 5,083 267,220 less interest (522) -------- --------- Present value of minimum lease payments $ 4,561 --------- Operating lease expense net of subrental income under operating leases having noncancelable terms of greater than one year for the fiscal years ended June 30, 2001, 2000 and 1999 was $53,649,000, $43,731,000, and $35,072,000, respectively. 7. Stock Option Plan The 1992 Incentive Plan (the 1992 Plan) provides for the grant of stock options, stock appreciation rights in tandem with options, restricted stock and performance units to officers, key employees and consultants of the Company and its subsidiaries. In addition, the 1992 Plan provides for the automatic annual grant of options to the non-officer directors of the Company and for a further automatic grant to such non-officer directors each year in which the Company achieves a specified level of return on consolidated equity. The 1992 Plan replaced the Company's 1987 Plan and added an automatic grant feature for non-officer directors. The 1987 Plan has been terminated; however, options previously granted pursuant to this Plan remain outstanding and will be exercisable in accordance with the terms of the Plan. Stock appreciation rights allow the holders to receive a predetermined percentage of the spread between the option price and the current value of the shares. A grant of restricted stock involves the immediate transfer to a participant of ownership of a specified number of shares of Common Stock in consideration of the performance of services. The participant is entitled immediately to voting, dividend and other share ownership rights. A transfer of restricted stock may be made without consideration or in consideration of a payment by the participant that is less than current market value, as the Compensation and Option Committee may determine. A performance unit is the equivalent of $100 and is granted for the achievement of specified management objectives. 32 No stock appreciation right, performance unit or restricted stock grants have been made under the 1992 Plan through June 30, 2001. Options to purchase shares of Common Stock have been granted under both Plans. Options granted are at prices not less than market value on the date of grant and, under the terms of the 1992 Plan, may not be repriced. Options granted pursuant to the 1987 and 1992 Plans generally vest over five years and expire ten years from the date of grant. In August 1998, the Company granted 600,000 performance-based stock options to a group of employees that only vest as Harman's common stock price achieves specified target levels and the average closing stock price remains at or above those levels for at least 30 consecutive calendar days. These options were granted at a price of $19.88 per share, equal to the market price on the date of grant, and expire in August 2008. The Company measures the cost of these performance-based options as the difference between the exercise price and market price and recognizes this expense over the period to the estimated vesting dates and in full for options that have vested. The company recognized $8.6 million and $2.0 million in fiscal years 2001 and 2000, respectively, in compensation expense for the performance-based options. The Company has agreed to buy these options from the employees at fair market value. The fair value of each option granted has been estimated on the date of grant using the Black-Scholes option-pricing model, with the following assumptions for grants in fiscal 2001, fiscal 2000 and fiscal 1999: annual dividends consistent with the Company's current dividend policy, which resulted in payments of $0.10 per share in the last three years; expected volatility of 56 percent in fiscal 2001 and 33 percent in fiscal years 2000 and 1999; risk free interest rate of 3.9 percent in fiscal 2001, 6.4 percent in fiscal 2000 and 5.7 percent in fiscal 1999; and expected life of 2.3 years from the vesting date. The weighted average fair value of options granted was $14.81 in fiscal 2001, $19.11 in fiscal 2000 and $19.74 in fiscal 1999. Pro forma compensation cost for grants under the stock option program since July 1, 1995, recognized in accordance with SFAS No. 123, would reduce the Company's net income from $32.4 million (diluted EPS of $0.96) to $27.3 million (diluted EPS of $0.81) in fiscal 2001, from $72.8 million (diluted EPS of $2.06) to $68.6 million (diluted EPS of $1.94) in fiscal 2000, and from $11.7 million (diluted EPS of $0.32) to $9.5 million (diluted EPS of $0.26) in fiscal 1999. At June 30, 2001, a total of 6,266,637 shares of Common Stock were reserved for issuance under the 1992 Plan. Stock Option Activity Summary: Years ended June 30 Weighted Average Shares Exercise Price - --------------------------------------------------------------- Balance at June 30, 1998 2,948,666 $ 17.49 ---------- Granted 1,180,500 $ 20.73 Canceled (321,678) $ 20.24 Exercised (178,826) $ 13.87 ---------- Balance at June 30, 1999 3,628,662 $ 18.48 ---------- Granted 968,000 $ 22.86 Canceled (133,250) $ 17.96 Exercised (105,138) $ 21.06 ---------- Balance at June 30, 2000 4,358,274 $ 19.38 ---------- Granted 855,900 $ 28.49 Canceled (145,200) $ 20.71 Exercised (202,725) $ 19.28 ---------- Balance at June 30, 2001 4,866,249 $ 20.95 ---------- 33 Options Outstanding at June 30, 2001 Weighted average Weighted Range of Number of remaining average exercise prices options life in years exercise price - ------------------------------------------------------------------ $ 3.69-3.69 154,600 0.37 $ 3.69 $ 5.65-5.65 16,800 1.36 $ 5.65 $ 9.88-14.00 445,854 2.32 $ 12.50 $ 15.09-22.00 2,691,395 6.13 $ 20.22 $ 22.59-33.50 1,530,600 8.59 $ 26.23 $ 34.80-45.00 27,000 9.53 $ 42.01 --------------- ------------ $ 3.69-45.00 4,866,249 6.37 $ 20.95 --------------- ------------ Options Exercisable at June 30, 2001 Weighted Range of Number of average exercise prices options exercise price - -------------------------------------------------- $ 3.69-3.69 154,600 $ 3.69 $ 5.65-5.65 16,800 $ 5.65 $ 9.88-14.00 445,854 $ 12.50 $ 15.09-22.00 1,895,755 $ 19.61 $ 22.59-33.50 251,660 $ 25.00 $ 34.80-45.00 0 - --------------- ----------- $ 3.69-45.00 2,764,669 $ 17.98 --------------- ----------- At June 30, 2000, options with an average exercise price of $16.88 were exercisable on 2,163,304 shares. At June 30, 1999, options with an average exercise price of $15.87 were exercisable on 1,743,528 shares. Share data have been adjusted for the two-for-one stock split in August 2000. 8. Income Taxes The tax provisions and analysis of effective income tax rates are comprised of the following items: Years Ended June 30 ($000s omitted) 2001 2000 1999 - --------------------------------------------------------------------------- Provision for Federal income taxes before credits at statutory rate $ 15,785 35,990 5,056 State income taxes 314 276 (182) Difference between Federal statutory rate and foreign effective rate 1,086 (384) (3,863) Permanent differences between financial and tax accounting income 683 624 654 Tax exempt foreign sales corporation earnings (1,336) (1,139) (1,483) Change in valuation allowance (2,927) (2,422) - Change in other tax liabilities (1,325) (1,257) 966 Losses without income tax benefit 2,419 673 3,158 Federal income tax credits (2,000) (1,875) (1,500) Other 4 (563) (100) --------- -------- -------- Total $ 12,703 29,923 2,706 --------- -------- -------- 34 Income tax expense (benefit) consists of the following: Years Ended June 30 ($000s omitted) 2001 2000 1999 - ---------------------------------------------------------------------------- Current: Federal $ (1,247) 10,158 (2,847) State 209 368 305 Foreign 1,261 21,528 14,638 --------- -------- -------- 223 32,054 12,096 --------- -------- -------- Deferred: Federal (216) (2,039) (8,903) State 146 (92) (487) Foreign 12,550 -- -- --------- -------- -------- 12,480 (2,131) (9,390) --------- -------- -------- Total $ 12,703 29,923 2,706 --------- -------- -------- Deferred taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities and available tax loss carry-forwards. The following deferred taxes are recorded: Assets/(liabilities) June 30 ($000s omitted) 2001 2000 - ------------------------------------------------------------------ Federal tax credits $ 5,228 -- Inventory costing differences 7,485 6,387 Foreign net operating loss 7,343 7,862 Valuations and other allowances 9,381 9,863 --------- -------- Total gross deferred tax asset $ 29,437 24,112 Less valuation allowance (3,640) (5,440) --------- -------- Deferred tax asset $ 25,797 18,672 Total gross deferred tax liability from fixed asset depreciation $(12,906) (9,554) Foreign statutory accounting (16,253) - --------- -------- Total gross deferred tax liability $(29,159) (9,554) --------- -------- Net deferred tax asset (liability) $ (3,362) 9,118 --------- -------- Management believes the results of future operations will generate sufficient taxable income to realize the net deferred tax asset. The Company acquired tax loss carryforwards from certain foreign subsidiaries. A portion of the Company's loss carryforward has been recorded as an asset. Goodwill reduction resulting from tax loss carryforward utilization at Becker, in German marks, was 12.4 million in fiscal 2000 and 22.9 million in fiscal 1999. Cash paid (refunded) for Federal, state and foreign income taxes was $13,181,000, $2,306,000, and ($1,985,000), during fiscal years ended June 30, 2001, 2000 and 1999, respectively. Accrued income taxes were $11.3 million and $26.2 million as of June 30, 2001 and 2000, respectively. These balances are included in accrued liabilities. 9. Business Segment Data The Company manufactures high fidelity audio and video products. Our businesses are organized based on the end-user markets served - - consumer and professional. The Consumer Systems Group manufactures loudspeakers and electronics for high fidelity audio reproduction in the home, in vehicles, and with computers. Home applications include two-channel audio, multi-channel audio/video and personal computer audio. Consumer products are marketed worldwide under brand names including JBL, Harman Kardon, Infinity, Revel, Lexicon, Mark Levinson and Proceed. In the consumer segment, car audio sales to DaimlerChrysler accounted for approximately 20.5%, 22.3% and 23.4% of consolidated net sales for the years ended June 30, 2001, 2000 and 1999. 35 The Professional Group manufactures loudspeakers and electronics used by audio professionals in concert halls, cinemas, recordingstudios, broadcasting operations and live music events. Professional products are marketed worldwide under brand names including JBL, AKG, Crown, Studer, Soundcraft, DOD, Digitech and dbx. The following table reports net sales, operating income, assets, capital expenditures and depreciation and amortization by segment. Segmentation
Years ended June 30 ($000s omitted) 2001 2000 1999 - ----------------------------------------------------------------- Net sales: Consumer $ 1,267,358 1,228,259 1,091,300 Professional 449,189 449,680 408,802 Other - - 33 ----------- --------- --------- Total $ 1,716,547 1,677,939 1,500,135 ----------- --------- --------- Operating income: Consumer $ 80,126 99,632 30,724 Professional 18,739 34,083 18,846 Other (27,637) (11,993) (10,907) ----------- --------- --------- Total $ 71,228 121,722 38,663 ----------- --------- --------- Assets: Consumer $ 828,861 777,900 770,963 Professional 292,839 320,277 256,403 Other 40,685 39,328 38,389 ----------- --------- --------- Total $ 1,162,385 1,137,505 1,065,755 ----------- --------- --------- Capital expenditures: Consumer $ 74,649 71,098 53,057 Professional 12,406 8,840 14,010 Other 1,028 417 763 ----------- --------- --------- Total $ 88,083 80,355 67,830 ----------- --------- --------- Depreciation and amortization: Consumer $ 49,074 48,943 48,345 Professional 13,934 14,124 15,574 Other 4,193 1,551 2,861 ----------- --------- --------- Total $ 67,201 64,618 66,780 ----------- --------- ---------
Net sales and long-lived assets by geographic area for the years ended June 30, 2001, 2000 and 1999 were as follows. Years Ended June 30 ($000s omitted) 2001 2000 1999 - ----------------------------------------------------------------- Net sales: U.S. $ 715,449 786,296 593,004 Europe 665,421 652,295 652,446 Other 335,677 239,348 254,685 ----------- --------- --------- Total $ 1,716,547 1,677,939 1,500,135 ----------- --------- --------- Long-lived assets: U.S. $ 170,139 211,212 161,476 Europe 232,897 223,811 233,947 Other 44,337 8,072 4,326 ----------- --------- --------- Total $ 447,373 443,095 399,749 ----------- --------- --------- 10. Commitments and Contingencies The Company is a defendant in a lawsuit entitled Bose Corporation v. JBL, Inc., and Infinity Systems, Inc., United States District Court, District of Massachusetts. In this case, Bose sued JBL and Infinity for infringement of a U.S. patent owned by Bose relating to the use of elliptical ports in loudspeaker cabinets. On September 1, 2000, the trial court issued a judgment in favor of Bose in the amount of $5.7 million. In addition, the court initially issued a permanent injunction prohibiting JBL and Infinity from the manufacture and sale of loudspeakers in the United States utilizing elliptical ports. The judgment was increased to $7.2 million, plus interest, to account for sales for the five months preceding the trial court's judgment and for sales made from JBL and Infinity inventory between September 27, 2000 and November 26, 2000 as permitted by the trial court's September 27, 2000 modification of its permanent injunction. Management believes the trial court erred in its ruling and is appealing the decision, and that the Company should be successful in its appeal. However, if the Company is unsuccessful in 36 its appeal and must pay $7.2 million plus interest in accordance with the trial court's judgment, this will have a material adverse effect on the results of operations. The Company and its subsidiaries are also involved in several other legal actions. The outcome cannot be predicted with certainty; however, management, based upon advice from legal counsel, believes such actions are either without merit or will not have a material adverse effect on the Company's financial position or results of operations. Harman's Board of Directors has authorized the repurchase of 7.0 million shares. Through June 30, 2001, the Company has acquired and placed in treasury 5,689,300 shares of its common stock at a total cost of $137.0 million. Future repurchases are expected to be funded with operating cash flow. 11. Employee Benefit Plans Under the Retirement Savings Plan, domestic employees may contribute up to 15.0% of their pretax compensation. With the approval of the Board of Directors, each division may make a safe harbor contribution equal to 3.0% of a participant's eligible compensation; a matching contribution of up to 3.0% (50.0% on the first 6.0% of an employee's tax-deferred contribution); and a profit sharing contribution. Profit sharing and matching contributions vest at a rate of 25.0% for each year of service with the employer, beginning with the second year of service. Expenses related to the Retirement Savings Plan for the years ended June 30, 2001, 2000 and 1999 totaled $6,740,129, $5,818,409 and $5,654,000, respectively. The Company also has a Supplemental Executive Retirement Plan (SERP) that provides normal retirement, preretirement and termination benefits, as defined, to certain key executives designated by the Board of Directors. Expenses related to the SERP for the years ended June 30, 2001, 2000 and 1999 were $2,067,300, $1,887,306 and $737,400, respectively.Additionally, certain non-domestic subsidiaries maintain defined benefit pension plans. These plans are not material to the accompanying consolidated financial statements. 12. Fair Value of Financial Instruments The estimated fair value of the Company's financial instruments was determined using market information and valuation methodologies. In the measurement of the fair value of certain financial instruments, quoted market prices were unavailable and other valuation techniques were utilized. These derived fair value estimates are significantly affected by the assumptions used. The fair values of cash and cash equivalents, receivables, accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these instruments. Long-Term Debt. Fair values of long-term debt are based on market prices where available. When quoted market prices are not available, fair values are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. At June 30, 2001, the carrying value and fair value of long-term debt, excluding obligations under capital leases and unsubordinated loans, was $331.5 million and $330.0 million, respectively. 37 13. Derivatives The Company uses foreign currency forward contracts to hedge a portion of its forecasted transactions. These forward contracts are designated as foreign currency cash flow hedges and recorded at fair value in the statement of financial position. The recorded fair value is balanced by an entry to other comprehensive income (loss) in the statement of financial position until the underlying forecasted foreign currency transaction occurs. When the transaction occurs, the gain or loss from the derivative designated as a hedge of the transaction is reclassified from accumulated other comprehensive income (loss) to the same income statement line item in which the foreign currency gain or loss on the underlying hedged transaction is recorded. If the underlying forecasted transaction does not occur, the amount recorded in accumulated other comprehensive income (loss) is reclassified to the miscellaneous, net line of the income statement in the then-current period. Because the amounts and the maturities of the derivatives approximate those of the forecasted exposures, changes in the fair value of the derivatives are highly effective in offsetting changes in the cash flows of the hedged items. Any ineffective portion of the derivatives is recognized in current earnings. The ineffective portion of the derivatives, which was immaterial for all periods presented, primarily results from discounts or premiums on forward contracts. As of June 30, 2001, the Company had contracts maturing through June 2002 to purchase and sell the equivalent of approximately $20.7 million of various currencies to hedge future foreign currency purchases and sales. The Company recorded approximately $1.6 million in net losses from cash flow hedges of forecasted foreign currency transactions in the year-ended June 30, 2001. These losses were offset by equivalent gains on the underlying hedged items. The amount as of June 30, 2001, that will be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months that is associated with these hedges is a loss of $0.8 million. The Company has also purchased forward contracts to hedge future cash flows due from foreign consolidated subsidiaries under operating lease agreements. As of June 30, 2001, the Company had such contracts in place to purchase and sell the equivalent of approximately $47.3 million of various currencies to hedge quarterly lease commitments through March 2006. The Company recorded $0.6 million in net gains from cash flow hedges related to the purchase of these forward contracts in the twelve months ended June 30, 2001. The amount as of June 30, 2001 that will be reclassified from accumulated other comprehensive income (loss) to earnings within the next twelve months that is associated with these hedges is a gain of $0.9 million. 14. Acquisitions In March 2000, the Company acquired professional amplifier manufacturer Crown International (Crown), located in Elkhart, Indiana. In December 1999, the Company acquired Innovative Systems GmbH (IS), a leading developer of route guidance, positioning and navigation software, located in Hamburg, Germany. The acquisitions of Crown and IS were not material to the consolidated financial statements. 38 15. Earnings Per Share Information
Years Ended June 30 ($000s omitted except per share amounts) 2001 2000 1999 - ----------------------------------------------------------------------------------------------- Basic Diluted Basic Diluted Basic Diluted ------- ------- ------- ------- ------- ------- Net income $32,364 32,364 72,838 72,838 11,723 11,723 ------- ------- ------- ------- ------- ------- Shares of Harman common stock outstanding 32,296 32,296 34,452 34,452 35,794 35,794 Employee stock options -- 1,441 -- 848 -- 328 ------- ------- ------- ------- ------- ------- Total average equivalent shares 32,296 33,737 34,452 35,300 35,794 36,122 ------- ------- ------- ------- ------- ------- Earnings per share $ 1.00 0.96 2.11 2.06 0.33 0.32 ------- ------- ------- ------- ------- -------
16. Quarterly Summary of Operations (unaudited) The following is a summary of operations by quarter for fiscal 2001 and 2000: Three months ended: ($000s omitted except per share amounts)
Fiscal 2001 Sept 30 Dec 31 Mar 31 Jun 30 - ----------------------------------------------------------------- Net sales $ 394,976 438,176 435,658 447,737 Gross profit $ 109,710 121,593 96,342 120,390 Net income $ 7,245 24,154 (18,392) 19,357 EPS-basic* $ 0.22 0.75 (0.57) 0.60 EPS-diluted* $ 0.21 0.72 (0.57) 0.58 Note: Quarter ended March 31, 2001, included restructuring and other charges totaling $36.3 million, equal to $0.76 per diluted share. Fiscal 2000 Net sales $ 356,773 450,826 423,931 446,409 Gross profit $ 96,243 126,491 124,179 122,423 Net income $ 4,894 22,307 22,317 23,320 EPS-basic* $ 0.14 0.65 0.65 0.68 EPS-diluted* $ 0.14 0.64 0.63 0.66
* Quarters do not add to full year due to changes in shares outstanding. 39 Shareholder Information Harman International Industries, Incorporated and Subsidiaries
Market Price Fiscal 2001 Fiscal 2000 Fiscal 1999 - ------------------------------------------------------------------------------------------------ High Low High Low High Low First quarter ended September 30 $ 41.375 30.250 23.594 20.469 21.063 16.250 Second quarter ended December 31 48.000 32.300 28.063 18.375 22.250 15.750 Third quarter ended March 31 37.050 24.900 31.875 27.500 21.344 17.907 Fourth quarter ended June 30 39.730 24.800 34.250 28.000 23.750 17.125
Share prices have been adjusted for the two-for-one stock split effective August 2000. The Common Stock of the Company is listed on the New York Stock Exchange and is reported on the New York Stock Exchange Composite Tape under the symbol HAR. As of June 30, 2001, the Company's Common Stock was held by approximately 189 record holders. The table above sets forth the reported high and low sales prices of the Company's Common Stock, as reported on the New York Stock Exchange, for each quarterly period for fiscal years ended June 30, 2001, 2000, and 1999. The Company paid dividends during fiscal years 2001, 2000 and 1999 of $.10 per share, with a dividend of $.025 paid in each of the four quarters. 40 Corporate Officers Sidney Harman Executive Chairman Bernard A. Girod Vice Chairman and Chief Executive Officer Gregory Stapleton President and Chief Operating Officer Frank Meredith Executive Vice President and Chief Financial Officer Erich Geiger Chief Technical Officer William S. Palin Vice President - Controller Sandra B. Robinson Vice President - Financial Operations Edwin Summers Vice President and General Counsel Floyd E. Toole Vice President - Acoustics Securities Traded New York Stock Exchange Symbol: HAR Corporate Headquarters 1101 Pennsylvania Avenue, NW Suite 1010 Washington, D.C. 20004 202-393-1101 www.harman.com Directors Bernard A. Girod Sidney Harman Shirley Mount Hufstedler Ann McLaughlin Korologos Edward H. Meyer Gregory Stapleton Stanley A. Weiss Annual Meeting The annual meeting of shareholders will be held on November 5, 2001, at Tavern on the Green, Central Park at West 67th Street, New York, NY 10023 at 11:00 a.m. EST. A proxy statement was sent to shareholders on or about September 14, 2001, at which time proxies for the meeting were requested. Registrar and Transfer Agent Mellon Investor Services 400 South Hope Street, 4th Floor Los Angeles, CA 90071 213-553-9720 Independent Auditor KPMG LLP 355 South Grand Avenue Los Angeles, CA 90071 213-972-4000 Except for the historical information contained in this Annual Report, the matters discussed herein contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements, including without limitation, the effect of economic conditions, product demand, currency exchange rates, labor disputes, competitive products and other risks detailed herein and in the Company's other filings with the Securities and Exchange Commission. 41 -----END PRIVACY-ENHANCED MESSAGE-----