<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
X Quarterly Report Pursuant to Section 13 or 15(d) of the
- ---
Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1997
___ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From ___________ To __________
Commission File Number 1-5502
ZURN INDUSTRIES, INC.
IRS Employer
State of Address and Identification
Incorporation Telephone Number Number
- --------------- ------------------ --------------
Pennsylvania 14801 Quorum Drive 25-1040754
Addison, Texas 75240-7584
972-560-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
February 11, 1998 -- Common Stock, $.50 Par Value -- 12,569,830
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<PAGE>
PART I - FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL POSITION
(Thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
-------- --------
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 10,895 $ 22,908
Marketable securities 5,895 8,489
Accounts receivable 109,272 110,194
Inventories
Finished products 72,917 80,473
Work in process 12,482 13,722
Raw materials and supplies 24,617 28,604
Contracts in process 10,758 11,467
-------- --------
120,774 134,266
Income taxes 62,471 59,551
Discontinued operations' net assets 13,529 4,313
Other current assets 8,276 8,323
-------- --------
Total current assets 331,112 348,044
Property, plant, and equipment 150,198 154,349
Less allowances for depreciation
and amortization 49,644 49,169
-------- --------
100,554 105,180
Goodwill 188,999 194,064
Investments 33,623 38,524
Other assets 48,816 40,545
-------- --------
$703,104 $726,357
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable $ 29,383 $ 49,243
Other current liabilities 202,838 190,581
-------- --------
Total current liabilities 232,221 239,824
Debt obligations 129,648 160,957
Retirement obligations 68,761 68,346
Other liabilities 16,614 26,512
Shareholders' equity
Common stock 6,368 6,285
Other shareholders' equity 249,492 224,433
-------- --------
255,860 230,718
-------- --------
$703,104 $726,357
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CONSOLIDATED OPERATIONS
(Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $152,529 $65,686 $475,126 $229,150
Cost of sales 105,014 45,891 332,590 164,378
Marketing and administration 27,769 13,523 88,164 41,873
Interest expense 4,512 441 13,886 1,092
Goodwill amortization 1,738 23 5,065 69
Interest income (570) (887) (2,030) (2,428)
Other expense (income) 973 (1,392) (504) (3,066)
-------- ------- -------- --------
Continuing operations income
before income taxes 13,093 8,087 37,955 27,232
Income taxes 5,650 3,210 16,340 10,300
-------- ------- -------- --------
Continuing operations income 7,443 4,877 21,615 16,932
Discontinued operations 2,164 (6,400)
-------- ------- -------- --------
Net income $ 7,443 $ 7,041 $ 21,615 $ 10,532
======== ======= ======== ========
Basic earnings per share
Continuing operations $ .60 $ .39 $ 1.74 $ 1.37
Net Income $ .60 $ .57 $ 1.74 $ .85
Diluted earnings per share
Continuing operations $ .59 $ .39 $ 1.72 $ 1.37
Net Income $ .59 $ .57 $ 1.72 $ .85
Average shares outstanding
Basic 12,496 12,346 12,413 12,343
Diluted 12,717 12,448 12,577 12,388
Cash dividends declared
per common share $ .10 $ .10 $ .30 $ .30
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
CONSOLIDATED CASH FLOWS
(Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
December 31
-------------------
1997 1996
-------- --------
<S> <C> <C>
Operations
Net income $ 21,615 $ 10,532
Depreciation and amortization 13,868 4,383
Operating assets and liabilities 6,684 12,818
Discontinued operations (10,770) (25,374)
Miscellaneous (18) (2,284)
-------- --------
31,379 75
Investing
Capital expenditures (12,799) (4,389)
Long-term investments (5,706) (705)
Purchase of business (2,984)
Property, plant, and equipment disposals 10,025 1,327
Sales of operations 3,065 2,706
Marketable securities 2,594 (25,925)
Discontinued operations 1,634 66,706
-------- --------
(4,171) 39,720
Financing
Borrowings 30,000
Debt payments (58,471) (626)
Dividends paid (3,704) (3,703)
Stock options exercised 3,132 160
Discontinued operations (80) (2,185)
-------- --------
(29,123) (6,354)
Cash and equivalents
(Decrease) increase (1,915) 33,441
Foreign exchange rate effect 407
Beginning of year 12,403 16,195
-------- --------
End of period $ 10,895 $ 49,636
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the results for the interim periods
presented. The results of operations for the nine months ended December 31, 1997
are not necessarily indicative of the results to be expected for the full year.
During fiscal 1998's first quarter, the January 1997 credit agreement was
amended to increase the available line for revolving loans by $20 million. At
December 31, 1997, $11.7 million of letters of credit were outstanding.
On January 29, 1998, the United States Bankruptcy Court for the Eastern District
of Texas confirmed the Chapter 11 bankruptcy Plan of Reorganization filed by
United States Brass Corporation, an indirect wholly-owned subsidiary of the
Company. The Plan is expected to become effective prior to March 31, 1998 and
establishes the Brass Trust to pay claims resulting from US Brass polybutylene
plumbing systems and provides for the payment of all other unsecured claims.
The Trust will be funded by an amount equal to any amounts US Brass and its
affiliates eventually recover from their insurance carriers, $53.4 million in
cash, and a $20 million noninterest bearing note payable over ten years.
Consequently, US Brass will continue to be a subsidiary and future US Brass
polybutylene plumbing systems claims will be enjoined and channeled to the
Trust.
The Company operates plants that generate hazardous and nonhazardous wastes
which are subject to federal and state disposal laws and believes it is in
material compliance with such laws and related regulations. Several of the
Eljer Industries, Inc. facilities acquired in January 1997 have implemented
required remediation programs to remedy the effects of past waste disposal and
others have not undergone comprehensive environmental studies. Included in the
statement of financial position is a $7.7 million reserve for environmental,
health, and safety matters which management believes is adequate and expects
payments of substantial portions to be made over the next three years.
In the normal course of business, financial and performance guarantees are made
in connection with major engineering and construction contracts and a liability
is recognized when a probable loss occurs. Also, there are various other
claims, legal, and environmental proceedings which management believes will have
no material effect on the Company's financial position or results of operations
when they are resolved.
Earnings per share are based on income and the average shares of common stock
and dilutive securities outstanding during the period. Excluded out-of-the-
money stock options were: 1997 - 242,000 at $37.00 to $45.375; 1996 - 651,000 at
$28.75 to $45.375. Basic and diluted earnings (loss) per share from
discontinued operations in 1996 were: three months - $.18; nine months - $(.52).
The adoption in the current quarter of Statement of Financial Accounting
Standards No. 128, "Earnings per Share," increased the 1997 quarter and nine
months diluted amounts $.01 per share and did not affect previously reported net
income earnings per share for the prior year.
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended December 31
----------------------------------
1997 1996
---------------- ----------------
Income Shares Income Shares
-------- ------ -------- ------
(Thousands)
<S> <C> <C> <C> <C>
Basic earnings per share
Average common shares outstanding 12,496 12,346
Continuing operations income $ 7,443 $ 4,877
Dilutive securities' effect
Convertible preferred stock 4 4
Restricted common stock 6 4
Stock options 211 94
------- ------ ------- ------
Diluted earnings per share $ 7,443 12,717 $ 4,877 12,448
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended December 31
----------------------------------
1997 1996
---------------- ----------------
Income Shares Income Shares
------- ------ ------- ------
(Thousands)
<S> <C> <C> <C> <C>
Basic earnings per share
Average common shares outstanding 12,413 12,343
Continuing operations income $21,615 $16,932
Preferred stock dividends (2) (2)
------- -------
21,613 16,930
Dilutive securities' effect
Convertible preferred stock 2 4 2 4
Restricted common stock 5 2
Stock options 155 39
------- ------ ------- ------
Diluted earnings per share $21,615 12,577 $16,930 12,388
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
- -------------------
Liquid assets amounted to $16.8 million and $20.9 million at December 31 and
March 31, 1997, respectively. The $10.5 million of restricted cash at March 31,
1997 (classified with cash and equivalents in the accompanying statement of
consolidated financial position) was released during the first quarter on
payment of the debt obligations it secured. Inventories declined as a result of
greater net sales and actions taken to reduce inventory levels. Trade accounts
payable declined (primarily in the first quarter) in line with the more
efficient cash management practices instituted in fiscal 1996 and the payment of
costs accrued in connection with the acquisition of Eljer Industries, Inc. in
January 1997.
The increase in discontinued operations' net assets was primarily caused by
payment of the operations' liabilities. The remaining balance includes amounts
owed under construction contracts and asset sale agreements, as well as costs
related to two power plants that were under construction when the State of
Illinois Retail Rate Law of 1987 was repealed. If the repeal is not
-6-
<PAGE>
reversed and the projects' assets, including debt funding by the owner, are
insufficient, the Company could sustain up to a $14 million pretax loss for
which no provision has been made as management believes the Company's costs will
be recovered.
Sales of underutilized assets and the sale/leaseback of a manufacturing facility
reduced the carrying amount of property, plant, and equipment. The sale
proceeds were used to prepay long-term debt obligations which also were reduced
when a sales-type lease receivable was liquidated and the customer assumed the
related debt obligation. The decline in other long-term liabilities is
attributable to the transfer of Marysville, Ohio property to a party which has
assumed the Company's environmental remediation obligation.
Results of Operations
- ---------------------
The Company's sales were derived from:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Thousands)
<S> <C> <C> <C> <C>
Building Products
Plumbing Products $ 90,797 $38,645 $292,444 $125,666
Heating, Ventilating,
and Air Conditioning 39,139 113,369
Fire Protection Systems 10,471 12,009 33,625 32,636
-------- ------- -------- --------
140,407 50,654 439,438 158,302
Water Resource Construction 12,122 15,032 35,688 70,848
-------- ------- -------- --------
$152,529 $65,686 $475,126 $229,150
======== ======= ======== ========
</TABLE>
The Plumbing Products and HVAC sales increase and the increases in costs and
expenses primarily resulted from the acquisition of Eljer. In thousands of
dollars, the contribution of Eljer for the three- and nine-month periods of
1997, respectively, to sales, operating income, and earnings (net of acquisition
financing effects) was: sales - $87,352 and $269,818; operating income - $9,219
and $24,961; pretax income - $2,619 and $5,632; net income -$1,231 and $2,249,
or $.10 and $.18 per diluted share. Eljer's revenues were lower than last year
largely due to HVAC revenues suffering from unseasonably warm weather in the
North American market and, in Europe, from a soft German market and adverse
currency exchange rates. The lower Water Resource Construction revenues reflect
the timing of Advanco Constructors' project starts and the sale last year of
Gary Concrete which contributed $2.0 and $12.7 million to sales for the three-
and nine-month periods ended December 31, 1996.
The greater gross profit margin percentage in 1997 was attributable to Advanco
Constructors' larger profit on lower revenues which offset lower Fire Protection
Systems margins and those obtained by Eljer Plumbingware and Selkirk HVAC in the
remodeling, repair, and do-it-yourself markets. Included in other expense for
the current quarter is $1.4 million for the relocation of the Company's
headquarters to a leased facility in Dallas, Texas. Last year other income
included the gain from the sale of Gary Concrete and a full
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<PAGE>
quarter's income from the sales-type lease which was liquidated in the current
quarter. Goodwill amortization, which is not deductible, increased the 1997
effective tax rate compared to the prior year.
The Company's backlog of unfilled orders was as follows:
<TABLE>
<CAPTION>
December September December
1997 1997 1996
----- ----- -----
(Millions)
<S> <C> <C> <C>
Building Products $ 53 $ 57 $ 32
Water Resource Construction 89 87 73
----- ----- -----
$ 142 $ 144 $ 105
===== ===== =====
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not required to present the disclosures before its fiscal year
ending March 31, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
United States Brass Corporation Bankruptcy
- ------------------------------------------
The second paragraph of "Notes To Consolidated Financial Statements" on page 5
is incorporated herein by reference.
Environmental Matters
- ---------------------
On September 30, 1997, US Brass received notice from the United States
Environmental Protection Agency of the approval of a Record of Decision calling
for implementation of the final gas migration and landfill cover at the
Operating Industries, Inc. Superfund site in Monterey Park, California which was
operated as a landfill from 1948 through 1984. The notice seeks a $684,712
payment from US Brass as its allocated share of the estimated $215 million of
costs to be incurred under the Seventh Partial Consent Decree entered by the
United States District Court for the Central District of California in the
action entitled U.S., et al vs Chevron Chemical Co., et al.
See Form 10-Q, Part II, Item 1 for the quarterly period ended September 30,
1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
The exhibits listed in the Exhibit Index to this report on Form 10-Q are
incorporated herein by reference. Management contracts and compensatory plan
arrangements are preceded by an asterisk (*) in the Exhibit Index.
Reports on Form 8-K
- -------------------
No reports were filed during the quarter for which this report is filed.
-8-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ZURN INDUSTRIES, INC.
(Registrant)
February 13, 1998 /s/ George W. Hanthorn
-----------------------------
George W. Hanthorn
Vice President-General Counsel
and Secretary
February 13, 1998 /s/ John E. Rutzler III
-----------------------------
John E. Rutzler III
Vice President-Controller
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<PAGE>
EXHIBIT INDEX
3 Articles Of Incorporation And By-laws
-------------------------------------
Restated Articles of Incorporation with Amendments through Incorporated
April 22, 1996 filed as Exhibit 3.1 to Form 10-K for the by reference
year ended March 31, 1996
By-laws as of August 1995 filed as Exhibit 3.1 to Form Incorporated
10-Q for the quarter ended September 30, 1995 by reference
4 Instruments Defining The Rights Of Security Holders,
----------------------------------------------------
Including Indentures
--------------------
Description of Common Stock contained in the prospectus Incorporated
dated July 26, 1972 beginning on page 18 ("Description of by reference
Capital Stock") forming a part of Amendment No. 3 to the
Form S-1 Registration Statement No. 2-44631
Description of Common Stock as set forth in the Restated Included in
Articles of Incorporation with Amendments through Exhibit 3.1
April 22, 1996 filed as Exhibit 3.1 to Form 10-K for the
year ended March 31, 1996
Description of Preferred Share Purchase Rights contained Incorporated
in the Form 8-A Registration Statement dated May 17, 1996 by reference
10 Material Contracts
------------------
* 1986 Stock Option Plan filed as Exhibit 28A to Form S-8 Incorporated
Post-Effective Amendment No. 1 Registration Statement No. by reference
33-19103
* 1989 Directors Stock Option Plan filed as Exhibit 28 to Incorporated
Form S-8 Registration Statement No. 33-30383 by reference
* 1991 Stock Option Plan filed as Exhibit 28 to Form S-8 Incorporated
Registration Statement No. 33-49224 by reference
* 1995 Directors Stock Option Plan filed as Exhibit 99 to Incorporated
Form S-8 Registration Statement No. 33-65219 by reference
* 1996 Employee Stock Plan filed as Exhibit 10.17 to Form Incorporated
10-K for the year ended March 31, 1997 by reference
* Supplemental Executive Retirement Plan of Zurn Incorporated
Industries, Inc. filed as Exhibit 10.1 to Form 10-Q for by reference
the quarter ended December 31, 1994
* 1986 Retirement Plan for Outside Directors of Zurn Incorporated
Industries, Inc. filed as Exhibit 10.16 to Form 10-Q for by reference
the quarter ended December 31, 1996
* Zurn Long-Term Incentive Plan filed as Exhibit 10.22 to Incorporated
Form 10-Q for the quarter ended September 30, 1997 by reference
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<PAGE>
* Agreements Relating to Employment dated June 5, 1989 Incorporated
with J.A. Zurn filed as Exhibit 10H to Form 10-Q for the by reference
the quarter ended June 30, 1989; dated October 17, 1994
with R.R. Womack filed as Exhibit 10.2 to Form 10-Q for
the quarter ended December 31, 1994; dated July 1, 1995
with J.R. Mellett filed as Exhibit 10.8 to Form 10-Q for
the quarter ended June 30, 1995; dated August 14, 1995
with F.E. Sheeder filed as Exhibit 10.11 to Form 10-Q for
the quarter ended September 30, 1995; dated April 21, 1997
with W.J. Durbin, D. Haines, J.A. Harris, and B.F. Sherman
filed as Exhibit 10.18 to Form 10-K for the year ended
March 31, 1997; dated July 9, 1997 with G.W. Hanthorn
filed as Exhibit 10.23 to Form 10-Q for the quarter ended
September 30, 1997
10.25* Agreement Relating to Employment dated January 19, 1998
with J.E. Rutzler III
* Employment Agreement dated January 22, 1996 with R.R. Incorporated
Womack filed as Exhibit 10.13 to Form 10-Q for the by reference
quarter ended December 31, 1995
* Zurn Industries, Inc. Deferred Compensation Plan for Non- Incorporated
Employee Directors filed as Exhibit 19E to Form 10-Q for by reference
the quarter ended June 30, 1989
* Zurn Industries, Inc. Deferred Compensation Plan for Incorporated
Salaried Employees filed as Exhibit 10.3 to Form 10-Q for by reference
the quarter ended December 31, 1994
* Zurn Industries, Inc. Optional Deferment Plan for Incorporated
Incentive Compensation Plan Participants filed as Exhibit by reference
10.4 to Form 10-Q for the quarter ended December 31, 1994
* Zurn Supplemental Pension Plan filed as Exhibit 10.5 to Incorporated
Form 10-Q for the quarter ended December 31, 1994 by reference
* Indemnity Agreements dated August 14, 1986 with E.J. Incorporated
Campbell, and J.A. Zurn filed as Exhibit 19J to Form 10-Q by reference
for the quarter ended September 30, 1986; dated October
20, 1986 with J.E. Rutzler III filed as Exhibit 10B to
Form 10-Q for the quarter ended December 31, 1988; dated
January 25, 1993 with W.E. Butler, April 1, 1993 with
D. Haines, and August 6, 1993 with Z. Baird filed as
Exhibit 10A to Form 10-Q for the quarter ended June 30,
1993; dated October 17, 1994 with R.R. Womack filed as
Exhibit 10.6 to Form 10-Q for the quarter ended December
31, 1994; dated June 8, 1995 with R.D. Neary, and July 1,
1995 with J.R. Mellett filed as Exhibit 10.9 to Form 10-Q
for the quarter ended June 30, 1995; dated August 14, 1995
with F.E. Sheeder filed as Exhibit 10.12 to Form 10-Q for
the quarter ended September 30, 1995; dated October 30,
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<PAGE>
1995 with M.K. Brown filed as Exhibit 10.14 to Form 10-Q
for the quarter ended December 31, 1995; dated October 28,
1996 with W.J. Durbin, January 28, 1997 with S.G. Arbuckle,
and June 4, 1997 with J.M. Sergey filed as Exhibit 10.19 to
Form 10-K for the year ended March 31, 1997; dated July 8,
1997 with G.W. Hanthorn
* Irrevocable Trust Agreements for the Grantor's: 1986 Incorporated
Retirement Plan for Outside Directors of Zurn Industries, by reference
Inc.; Deferred Compensation Plan for Non-Employee
Directors; Supplemental Executive Retirement Plan for
Zurn Industries, Inc.; Zurn Industries, Inc. Supplemental
Pension Plan for Participants in the Deferred Compensation
Plan for Salaried Employees; Deferred Compensation Plan
for Salaried Employees; Optional Deferment Plan for
Incentive Compensation Plan Participants filed as Exhibit
19I to Form 10-Q for the quarter ended September 30, 1986
* Second Irrevocable Trust Agreement for the Grantor's Incorporated
Indemnity Agreements filed as Exhibit 10A to Form 10-Q by reference
for the quarter ended December 31, 1988
* Zurn Industries, Inc. Executive Incentive Plan filed as Incorporated
Exhibit 10.20 to Form 10-K for the year ended March 31, by reference
1997
Amended and Restated Credit Agreement dated June 6, 1997 Incorporated
among Zurn Industries, Inc., Eljer Manufacturing, Inc., by reference
Various Lending Institutions, NationsBank, N.A., as
Documentation Agent and Bankers Trust Company, as
Administrative Agent filed as Exhibit 10.21 to Form 10-Q
for the quarter ended June 30, 1997
27 Financial Data Schedule SEC Edgar
----------------------- Filing Only
* - Management contracts and compensatory plan arrangements.
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<PAGE>
EXHIBIT 10.25 - AGREEMENT RELATING TO EMPLOYMENT
Agreement Relating to Employment in the form of the attached entered into with
the following Employee as of January 19, 1998:
J.E. Rutzler III
<PAGE>
DATE
(Name)
14801 Quorum Dr.
Dallas, Texas 75240
RE: Agreement Relating To Employment
Dear Mr. :
ZURN INDUSTRIES, INC, (the "Company") considers it in the best interests of
its stockholders to foster the continuous employment of key management
personnel. In this connection, the Board of Directors of the Company (the
"Board") recognizes that, the possibility of a change in control may exist and
that such possibility, and the uncertainty and questions which it may arise
among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its stockholders.
Therefore, in order to induce you to remain in the employment of the
Company, the Company agrees that you shall receive the severance benefits set
forth in this letter agreement ("Agreement") in the event your employment with
the Company is terminated subsequent to a "change in control of the Company" (as
defined in Section 2 hereof) under the circumstances described below.
1. TERM OF AGREEMENT. This Agreement shall commence on the date hereof
-----------------
and shall continue in effect through December 31, 1998; and each January 1,
thereafter, the term of this Agreement shall automatically be extended for one
additional year, provided, if a change in control of the Company shall have
occurred during the original or extended term of this Agreement, this Agreement
shall continue in effect for a period of thirty-six (36) months beyond the month
in which such change in control occurred.
2. CHANGE IN CONTROL. No benefits shall be payable hereunder unless there
-----------------
shall have been a change in control of the Company, as set forth below. For
purposes of this Agreement, a "change in control of the Company" shall be deemed
to have occurred if:
(a) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended [the "Exchange Act"],
other than the Company, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any
Company owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of
stock of the Company) becomes the "beneficial owner" (as defined in
Rule 13d-3 promulgated under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of
the combined voting power of the Company's then outstanding
securities;
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<PAGE>
(b) during any period of two consecutive years (not including any period
prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in
clauses (a), (c) or (d) of this Section) whose election by the Board
or nomination for election by the Company's stockholders was approved
by a vote at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved cease
for any reason to constitute a majority thereof;
(c) the stockholders of the Company approve a merger or consolidation of
the Company with any other Company, other than (1) a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation or (2) a merger or consolidation effected to implement
a recapitalization of the Company (or similar transaction) in which
no "person" (as hereinabove defined) acquires more than 50% of the
combined voting power of the Company's then outstanding securities;
or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all of substantially all of the
Company's assets.
3. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events
---------------------------------------
described in Section 2 hereof constituting a change in control of the Company
shall have occurred, you shall be entitled to the benefits provided in
Subsection 4(iv) hereof upon the subsequent termination of your employment
during the term of this Agreement unless such termination is (a) because of your
death, Disability or Retirement, (b) by the Company for Cause, or (c) by you
other than for Good Reason.
(i) DISABILITY; RETIREMENT. If, as a result of your incapacity due to
-----------------------
physical or mental illness, you shall have been absent from the full-
time performance of your duties with the Company for six (6)
consecutive months, and within thirty (30) days after written notice
of termination is given you shall have not returned to the full-time
performance of your duties, your employment may be terminated for
"Disability". Termination by the Company or you of your employment
based on "Retirement" shall mean termination in accordance with the
Company's retirement policy at normal retirement age generally
applicable to its salaried employees or in accordance with any
retirement arrangement established with your consent with respect to
you.
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<PAGE>
(ii) CAUSE. Termination by the Company of your employment for "Cause"
-----
shall mean termination upon (a) the willful and continued failure by
you to substantially perform your duties with the Company (other than
any such failure resulting from your incapacity due to physical or
mental illness or any such actual or anticipated failure after the
issuance of a Notice of Termination, as defined in Subsection 3(iv),
by you for Good Reason) after a written demand for substantial
performance is delivered to you by the Board, which demand
specifically identifies the manner in which the Board believes that
you have not substantially performed your duties, or (b) the willful
engaging by you in conduct which is demonstrably and materially
injurious to the Company, monetarily or otherwise. For purposes (of
this Subsection, no act, or failure to act, on your part shall be
deemed "willful" unless done, or omitted to be done, by you not in
good faith and without reasonable belief that your action or omission
was in the best interest of the Company. You may be terminated for
Cause only after there shall have been delivered to you a copy of a
resolution duly adopted by the affirmative vote of not less then two
thirds (2/3) of the entire membership of the Board at a meeting of
the Board called and held for such purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be
heard before the Board), finding that in the good faith opinion of
the Board you were guilty of conduct set forth above in clauses (a)
or (b) of the first sentence of this Subsection and specifying the
particulars thereof in detail.
(iii) GOOD REASON. You shall be entitled to terminate your employment for
-----------
Good Reason. For purposes of this Agreement, "Good Reason" shall
mean, without your express written consent, any of the following:
(a) a substantial adverse alteration in the nature or status of your
responsibilities from those in effect immediately prior to a change
in control of the Company other than any such alteration primarily
attributable to the fact that the Company may no longer be a public
company;
(b) a reduction by the Company in your annual base salary as in effect on
the date hereof or as the same may be increased from time to time;
(c) the failure of the Company, without your consent, to pay to you any
portion of your current compensation, or to pay to you any portion of
an installment of deferred compensation under any deferred
compensation program of the Company, within seven (7) days of the
date such compensation is due;
(d) the failure by the Company to continue in effect any compensation
plan in which you participate including but not limited to the
Company's Incentive Compensation Plan and the Company's Stock Option
Plan, or any substitute plans adopted prior to the change in control,
unless an equitable arrangement (embodied in an
-3-
<PAGE>
ongoing substitute or alternative plan) has been made with respect to
such plan in connection with the change in control of the Company, or
the failure by the Company to continue your participation therein on
a basis not materially less favorable, both in terms of the amount of
benefits provided and the level of your participation relative to
other participants, as existed at the time of the change in control;
(e) the failure by the Company to continue to provide you with benefits
substantially similar to those enjoyed by you under any of the
Company's pension, life insurance, medical, health and accident, or
disability plans in which you were participating at the time of a
change in control of the Company, the taking of any action by the
Company which would directly or indirectly materially reduce any of
such benefits or deprive you of any material fringe benefits enjoyed
by you at the time of the change in control of the Company, or the
failure by the Company to provide you with the number of paid
vacation days to which you are entitled on the basis of years of
service with the Company in accordance with the Company's normal
vacation policy in effect at the time of the change in control;
(f) the failure of the Company to obtain a satisfactory agreement from
any successor to assume and agree to perform this Agreement, as
contemplated in Section 5 hereof; or
(g) any purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of
Subsection (iv) below (and, if applicable, the requirements of
Subsection (ii) above); for purposes of this Agreement, no such
purported termination shall be effective.
(h) a determination by you in good faith that, following a change in
control, you are no longer able to perform your duties and
responsibilities with the Company.
Your right to terminate your employment pursuant to this Subsection shall be
affected by your incapacity due to physical or mental illness. Your continued
employment shall not constitute consent to, or a waiver of rights with respect
to, any circumstance constituting Good Reason hereunder.
(iv) NOTICE OF TERMINATION. Any purported termination of your employment by the
---------------------
Company or by you shall be communicated by written Notice of Termination to
the other party hereto in accordance with Section 6 hereof. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of your employment under the
provision so indicated.
(v) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (a) if
------------------------
your employment is terminated for Disability, thirty (30) days
-4-
<PAGE>
after Notice of Termination is given (provided that you shall not
have returned to the full-time performance of your duties during such
thirty (30) day period), and (b) if your employment is terminated
pursuant to Subsection (ii) and (iii) above or for any other reason
(other than Disability), the date specified in the Notice of
Termination which, in the case of a termination pursuant to
Subsection (ii) above shall not be less than thirty (30) days, and in
the case of a termination pursuant to Subsection (iii) above shall
not be less than thirty (30) nor more than sixty (60) days,
respectively, from the date such Notice of Termination is given);
provided that if within thirty (30) days after any Notice of
Termination is given the party receiving such Notice of Termination
notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the
dispute is finally determined, either by mutual written agreement of
the parties, by a binding arbitration award, or by a final judgment,
order or decree of a court of competent jurisdiction (which is not
appealable or the time for appeal therefrom having expired and no
appeal having been perfected); provided further that the Date of
Termination shall be extended by a notice of dispute only if such
notice is given in good faith and the party giving such notice
pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Company will
continue to pay you your full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to,
base salary) and continue you as a participant in all compensation,
benefit and insurance plans in which you were participating when the
notice giving rise to the dispute was given, until the dispute is
finally resolved in accordance with this Subsection. Amounts paid
under this Subsection are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any other
amounts due under this Agreement except to the extent otherwise
provided in paragraph (c) of Subsection 4(iv).
4. COMPENSATION UPON TERMINATION OR DURING DISABILITY. Following a
--------------------------------------------------
change in Control of the Company, as defined by Section 2, upon
termination of your employment or during a period of disability you
shall be entitled to the following benefits:
(i) During any period that you fail to perform your full-time duties with
the Company as a result of incapacity due to physical or mental
illness, you shall continue to receive your base salary at the rate
in effect at the commencement of any such period, together with all
compensation payable to you under the Company's long-term disability
insurance program or other [plan during such period, until this
Agreement is terminated pursuant to Section 3(i) hereof. Thereafter,
your benefits shall be determined in accordance with the Company's
insurance and retirement programs then in effect.
-5-
<PAGE>
(ii) If your employment shall be terminated by the Company for Cause or by
you other than for Good Reason, Disability, death or Retirement, the
Company shall pay you your full base salary through the Date of
Termination at the rate in effect at the time Notice of Termination
is given, plus all other amounts to which you are entitled under any
compensation plan of the Company at the time such payments are due,
and the Company shall have no further obligations to you under this
Agreement.
(iii) if your employment shall be terminated by you for Retirement, or by
reason of your death, your benefits shall be determined in accordance
with the Company's retirement and insurance programs then in effect.
(iv) If your employment by the Company shall be terminated (a) by the
Company other than for Cause or Disability or (b) by you for Good
Reason or Retirement, then you shall be entitled to the benefits
provided below:
(A) the Company shall pay you your full base salary through the Date
of Termination at the rate in effect at the time Notice of
Termination is given, plus other amounts to which you are entitled
under any compensation plan of the Company, at the time such payments
are due except as otherwise provided below;
(B) in lieu of any further salary payments to you for periods
subsequent to the Date of Termination, the Company shall pay as
severance pay to you a lump sum severance payment (together with
payments provided in paragraphs C, D, and E below, the "Severance
Payment") equal to 300% of the greater of (i,) your annual base
salary in effect on the Date of Termination or (ii) your annual base
salary in effect immediately prior to the change in control of the
Company and 300% of the average of the annual bonus paid to you for
the three full fiscal years preceding the termination.
(C) If any of the Severance Payments will be subject to the tax (the
"Excise Tax") imposed by section 4999 of the Internal Revenue Code,
(or any similar tax that may hereafter be imposed) the Company shall
pay to you at the time specified in Subsection (D), below, an
additional amount (the "Gross-Up Payment") such that the net amount
retained by you, after deduction of any Excise Tax on the Total
Payments (as hereinafter defined) and any federal, state and local
income tax and Excise Tax upon the payment provided for by this
subsection, shall be equal to the Total Severance Payments. For
purposes of determining whether any of the Severance Payments will be
subject to the Excise Tax and the amount of such Excise Tax, (a) any
other payments or benefits received or to be received by you in
connection with a change in control of the Company or your
termination of employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the
Company, any person whose actions result in a change in control of
the Company or any person
-6-
<PAGE>
affiliated with the Company or such person) (which together with the
Severance Payments, constitute the "Total Payments") shall be treated
as "parachute payments" within the meaning of section 28OG(b)(2) of
the Code, and all "excess parachute payments" within the meaning of
section 28OG(b)(1) shall be treated as subject to the Excise Tax,
unless in the opinion of tax counsel selected by the Company's
independent auditors and acceptable to you such other payments or
benefits (in whole or in part) do not constitute parachute payments,
or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered within the
meaning of section 28OG(b)(4) of the Code in excess of the base
amount within the meaning of section 28OG(b)(3) of the Code, or are
otherwise not subject to the Excise Tax, (b) the amount of the Total
Payments which shall be treated as subject to the Excise Tax shall be
equal to the lesser of (1) the total amount of the Total Payments of
(2) the amount of excess parachute payments within the meaning of
section 28OG(b)(1) (after applying clause (q) above, and (c) the
value of any non-cash benefits or any deferred payment or benefit
shall be determined by the Company's independent auditors in
accordance with the principles of section 28OG(d)(3) and (4) of the
Code. For purposes of determining the amount of the Gross-Up Payment,
you shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and local income
taxes at the highest marginal rate of taxation in the state and
locality of your residence on the Date of Termination, net of the
maximum reduction in federal income taxes which could be obtained
from deduction of such state and local taxes. In the event that the
Excise Tax is subsequently determined to be less than the amount
taken into account hereunder at the time of termination of your
employment, you shall repay to the Company at the time that the
amount of such reduction in Excise Tax is finally determined the
portion of the Gross-Up Payment attributable to such reduction (plus
the portion of the Gross-Up Payment attributable to the Excise Tax
and federal and state and local income tax imposed on the Gross-Up
Payment being repaid by you if such repayment results in a reduction
in Excise Tax and/or a federal and state and local income tax
deduction) plus interest on the amount of such repayment at the rate
provided in section 1274(b)(2)(B) of the Code. In the event that the
Excise Tax is determined to exceed the amount taken into account
hereunder at the time of the termination of your employment
(including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional gross-up payment in respect of such
excess (plus any interest payable with respect to such excess) at the
time that the amount of such excess is finally determined.
(D) The payment provided for in paragraph (B), above, shall be made
not later than the fifth day following the Date of Termination,
provided, however, that if the amounts of such
-7-
<PAGE>
payments, and the limitation on such payments set forth in paragraph
(C), above, cannot be finally determined on or before such day, the
Company shall pay to you on such day an estimate, as determined in
good faith by the Company, of the minimum amount of such payments and
shall pay the remainder of such payments (together with interest at
the rate provided in Section 1274(b)(2)(B) of the Code) as soon as
the amount thereof can be determined but in no event later than the
thirtieth day after the Date of Termination. In the event that the
amount of the estimated payments exceeds the amount subsequently
determined to have been due, such excess shall constitute a loan by
the Company to you, payable on the fifth day after demand by the
Company (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code).
(E) The Company shall also pay to you all legal fees and expenses
incurred by you as a result of such termination (including all such
fees and expenses, if any, incurred in contesting or disputing any
such termination or in seeking to obtain or enforce early right or
benefit provided by this Agreement).
(v) If your employment shall be terminated (a) by the Company other than
for Cause, Retirement or Disability or (b) by you for Good Reason,
then for a twenty-four (24) month period after such termination, the
Company shall arrange to provide you with life, disability, accident
and health insurance benefits substantially similar to those which
you are receiving immediately prior to the Notice of Termination.
(vi) You shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided
for in this Section 4 be reduced by any compensation earned by you as
the result of employment by another employer, by retirement benefits,
by offset against any amount claimed to be owing by you to the
Company, or otherwise.
(vii) In addition to all other amounts payable to you under this Section
4, you shall be entitled to receive all benefits payable to you under
the Company's retirement programs.
5. SUCCESSORS; BINDING AGREEMENT
-----------------------------
(i) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. Failure of the
Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this
Agreement and shall entitle you to compensation
-8-
<PAGE>
from the Company in the same amount and on the same terms as you
would be entitled hereunder if you terminate your employment for Good
Reason following a change in control of the Company, except for
purposes of implementing the foregoing, the date on which any
succession becomes effective shall be deemed the Date of Termination.
As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets
as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
(ii) This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If you should
die while any amount would still be payable to you hereunder if you
had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement
to your devisee, legatee or other designee or, if there is no such
designee, to your estate.
6. PRIOR AGREEMENT. This Agreement is in full and complete
---------------
substitution for any prior employment agreement including, if applicable, the
certain Employment Agreement dated December 1, 1981 and the certain agreement
dated October 20, 1988.
7. NOTICE. For the purpose of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notice to the Company shall be directed to the attention of the Board
with a copy to the Secretary of the Company, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
8. MISCELLANEOUS. No provision of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by you and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the Commonwealth of Pennsylvania. All reference to sections of
the Exchange Act or the Code shall be deemed also to refer to any successor
provisions to such sections. Any payments provided for hereunder shall be paid
net of any applicable withholding required under federal, state or local law.
The obligations of the Company under Section 4 shall survive the expiration of
the term of this Agreement.
-9-
<PAGE>
9. VALIDITY. The invalidity or unenforceability of any provision of
--------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
10. COUNTERPARTS. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
11. ARBITRATION. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
Erie, Pennsylvania in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction; provided, however, that you shall be entitled to
seek specific performance of your right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
Upon your acceptance of the terms set forth in this letter by signing and
returning a copy to the Secretary of the Company, this letter will then
constitute an agreement of the Company.
Very truly yours,
Chairman, Management Development and
Compensation Committee of the Board of Directors
AGREED TO this __________ day
of ________________ 1998.
- ---------------------------
SIGNATURE
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION AND CONSOLIDATED OPERATIONS
INCLUDED IN PART I OF THIS REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PP&E> 150,198
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0
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<SALES> 475,126
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