UNITED STATES 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 January 2, 1999 Commission File No. 1-8045
GenRad, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-1360950
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7 Technology Park Drive, Westford, Massachusetts 01886-0033
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 589-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of shares of Common Stock held by non-affiliates of
the registrant as of April 14, 1999 was $425,481,000, 29,334,651 shares of the
Common Stock of GenRad, Inc., $1.00 par value, were outstanding on April 14,
1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of GenRad, Inc. for the Annual Meeting
of Shareholders to be held on May 13, 1999 (the "1999 Proxy Statement"),
which will be filed with the Securities and Exchange Commission within 120
days after the close of the Company's fiscal year ended January 2, 1999,
are incorporated by reference into Part III.
<PAGE>
PART I
Item 1. Business
GenRad, Inc. ("GenRad" or "the Company"), which commenced operations in 1915, is
a leading global manufacturing solutions company. GenRad designs, manufactures
and markets integrated hardware and software solutions that enable the
successful manufacture, test and service for microprocessors and other
electronic devices and components. The Company operates primarily in the United
States, Western Europe and Southeast Asia through its three business segments,
Electronic Manufacturing Solutions ("EMS"), Advanced Diagnostic Solutions
("ADS") and GR Software ("GRS") (each of which is further described below). The
Company's three business segments each aggregate similar classes of products.
The Company's EMS business segment includes primarily products used in the
manufacture, test and inspection of printed circuit boards while the Company's
ADS business segment includes diagnostic systems used primarily by the
transportation industry. GR Software includes the Company's software product
line, which is comprised of the TRACS(R), CimBridge(TM) and SFDM(TM) products,
all of which are utilized by GenRad customers to improve their manufacturing
processes. Summarized financial information with respect to each of the
Company's business segments is included in Note 13 to the Company's consolidated
financial statements included in Item 8 of this Annual Report on Form 10-K.
Electronic Manufacturing Solutions
GenRad's EMS business segment focuses on the integration of hardware and
software for process control in the manufacture of printed circuit boards,
emphasizing inspection technologies. EMS provides its customers with
leading-edge, cost effective solutions used to collect data about their
manufacturing process and provide reliable, timely and useful information which
can be used to optimize manufacturing processes.
GenRad's EMS business is headquartered in Westford, MA and consists of the
following product offerings, which collectively make up the EMS product class.
Board Test
- ----------
The GR228X i Series family of production test solutions are optimized to test,
inspect and report defects that can occur in the manufacturing of printed
circuit boards (PCB's). These advanced board test solutions provide precise
fault diagnosis, utilizing test and inspection technologies, on the most
demanding of PCB's. The GR228X i Series is recognized for delivering the highest
fault coverage and highest throughput in a production test environment. These
systems sell for prices ranging from $50,000 to over $1,000,000.
Geneva(R) Test and Measurement Solutions
- ----------------------------------------
Geneva(R) is a combined hardware and software functional test and measurement
system that uses the industry standard VXIbus for instrument control. GenRad's
extensions add a scanner bus above the instruments to solve the signal
interconnect problems not addressed by VXI. The company has a patent for this
VXIScan(R) architectural extension. The Geneva(R) architecture is capable of
addressing the needs of a wide range of functional test and measurement solution
applications, including solutions used in the telecom, datacom and medical
market segments. These systems sell for prices ranging from $100,000 to
$500,000.
Viper(R) Process Inspection Solutions
- -------------------------------------
Viper(R) Process Inspection Solutions are low-cost test and inspection solutions
designed to provide real-time, closed-loop feedback regarding process variations
and faults on a printed circuit board manufacturing line. This solution is
ideally suited for companies that manufacture price sensitive products (i.e.
consumer). To accommodate the local markets we serve throughout the world, this
system is offered with standard vacuum fixture compatibility, a Press Down Unit
and an in-line configuration at prices ranging from $25,000 to $125,000.
Pilot(TM)
- ---------
GenRad's Pilot solution is a 'fixtureless' test solution designed to test and
inspect populated printed circuit boards by utilizing both 'flying' and fixed
probes to gain access to the components under test. This test technology is
ideal for verifying prototypes and initial production runs, which are typically
small in quantity and utilize boards with limited test point access, and for use
as a diagnostic tool to augment the functional testing of printed circuit board
assemblies. This system is ideally suited for companies striving to reduce their
new products' time-to-production schedule as well as eliminating the fixture
costs and development times that are associated with traditional board test
products. This system sells for prices ranging from $200,000 to $300,000.
Integrated Customer Services ("ICS")
- ------------------------------------
ICS provides programming services, fixture development and on-site training and
support to owners of in-circuit and functional testers throughout the United
States and Europe. Fixtures, which match the test device with the device under
test, are generally custom designed (both hardware and software) and range in
price from $7,500 to $90,000.
<PAGE>
Advanced Diagnostic Solutions
GenRad's ADS business segment is a global leader in developing and marketing
diagnostic information solutions comprised of hardware, software and services
which optimize the manufacturing and service capabilities of leading
transportation and equipment companies. ADS's solutions, which generally include
complex electronic solutions, are used by its customers to
maximize manufacturing efficiencies at time of product build as well as to
maintain efficient and effective service operations throughout the product's
life. Because of the complexity of ADS' products, ADS is able to develop
long-term partnering relationships with its customers thereby allowing a range
of implementation approaches resulting in customer driven solutions which may
include hardware, software and consultative support. ADS is headquartered in
Manchester, England with development and service centers in Detroit, MI and
Ismaning, Germany as well as a worldwide product support network.
GRSoftware
GenRad's GRS business segment was expanded during 1998 with the Company's
acquisition of Industrial Computer Corporation ("ICC"), a privately held
manufacturing execution systems company with operations in Atlanta. Upon
acquisition, the Company combined the operations of ICC with its existing
manufacturing software development, sales and support groups, which included the
TRACS(R) and CimBridge(TM) products, to form GRS. GRS develops and markets
product solution and services to companies wishing to achieve and maintain
control over manufacturing processes. GRS's flagship product, Shop Floor Data
Manager(TM) ("SFDM"), manages a business's process information necessary to
manufacture products according to plan. SFDM, along with TRACS and CimBridge,
enable the shop floor to communicate, at varying levels, with a Company's ERP
systems to have a real time direct impact on a business's manufacturing
operations. GRS is headquartered in Atlanta, GA with technology development and
support centers in Portland, OR, Aberdeen, Scotland and Zurich, Switzerland.
Principal Markets and Customers
The principal markets for GenRad's product and service offerings include, but
are not limited to, original equipment manufacturers of electronics and
electronic components and peripherals, contract electronics manufacturers and
transportation and telecommunications companies. Management believes that these
industries will continue to be a significant revenue source for the Company.
These markets are characterized by rapid technological change, an increased
demand for specific feature requests by customers, evolving industry standards,
and frequent new product introductions. The introduction of products embodying
new technology or the emergence of new industry standards or practices could
render the Company's existing products obsolete or otherwise unmarketable.
Future operating results are dependent upon the Company's ability to develop,
design, manufacture and market technologically innovative products that meet
customer needs. During 1998, one customer, Ford Motor Company ("Ford") accounted
for 10.6% of consolidated revenues.
During 1998, the Company began substantial work on a multi-year hardware,
software and services contract with Ford. Pursuant to the agreement, the Company
has undertaken to provide customers of Ford with diagnostic tools designed to
enable Ford's dealers to test, and diagnose problems with, electrical systems
in Ford vehicles. The Company expects to derive significant revenue from this
contract during 1999 and 2000. The loss of this contract or any deterioration in
the Company's relationship with Ford could have a material adverse effect on the
Company's results of operations, financial position and cash flow.
Sales, Support and Distribution
GenRad sells and supports its products primarily through its own sales and
support organizations. The Company maintains sales offices and support centers
in the United States, Mexico, the United Kingdom, Germany, France, Switzerland,
Italy, Singapore and Malaysia. GenRad also contracts with independent
representatives throughout the world to provide sales and support services,
primarily in areas not covered directly by a GenRad sales and support center.
Suppliers
GenRad purchases certain materials and components used in the manufacture of
product from various single sources, primarily United States companies. GenRad's
purchasing strategy is to develop supportive supplier partnerships to leverage
core competencies by driving material through a preferred supplier base
committed to excellence through continuous improvement. The Company has
developed alternative sources of supply for most materials and components;
however, certain microcomputers, microprocessors, general-purpose digital
computers and custom semiconductor devices are available only from a limited
number of suppliers worldwide. Management does not believe that the loss of any
one of its primary materials or components suppliers would have a material
adverse effect on its results of operations, financial position or cash flow.
Foreign Operations
GenRad's operations abroad consist of selling, marketing, distributing and
servicing products and providing other types of customer support services such
as software development and manufacturing of diagnostic systems. GenRad is
subject to the usual risks of international trade, including unfavorable
economic conditions, political instability, restrictive trade policies, controls
on funds transfers and foreign currency fluctuations. Financial information
concerning GenRad's foreign operations is included in Note 13 to the Company's
consolidated financial statements included in Item 8 of this Annual Report on
Form 10-K.
<PAGE>
Backlog
Backlog, represented by those orders received which are backed by a purchase
order, at the end of fiscal 1998 was approximately $21.6 million as compared to
approximately $24.9 million at the end of fiscal 1997. In the opinion of
management, most orders are filled within three months of receipt. The Company
believes that a substantial portion of the fiscal 1998 backlog will be
recognized as revenue during the first quarter of its 1999 fiscal year. Although
orders are subject to cancellation by purchasers, GenRad's experience has been
that losses resulting from cancellations are not material.
Competitive Conditions
Management believes that competition, from both domestic and foreign
competitors, remains intense across all business segments. Certain of the
Company's competitors are substantially larger companies with greater resources.
For example, the Company competes with Hewlett-Packard, Inc. and Teradyne
Corporation in its EMS business and with Hewlett-Packard and Siemens A.G. in its
ADS business. Typically, GenRad meets competition by carefully selecting its
markets and by developing its products to meet the needs of each group of
customers. Primary competitive factors are product performance, customer
specific applications engineering, customer support services and pricing. The
EMS market is subject to rapid change, and success is dependent on the
development of new technologies and products. A key competitive advantage for
GenRad is the Company's broad and integrated product family and its extensive
hardware and software capabilities.
Research and Development
GenRad's expenditures for the development of new products and services, and the
improvement of existing products and services, were approximately $19.0 million
in fiscal 1998, approximately $19.9 million in fiscal 1997 and approximately
$16.5 million in fiscal 1996. The expenditures were primarily for staffing and
related expenses for the development and redesign of electronic manufacturing
systems and advanced diagnostic solutions and software products.
Patents and Trademarks
GenRad seeks patents in the United States and appropriate foreign countries for
significant technological inventions. GenRad also owns patents, copyrights,
trademarks and proprietary information, some of which are considered to be
valuable assets. In the opinion of management, no individual patent, copyright,
trademark or proprietary information is material to the business as a whole.
Environment
GenRad's manufacturing facilities are subject to numerous laws and regulations
designed to protect the environment. GenRad does not anticipate that compliance
with such laws or regulations presently in effect will adversely affect its
capital expenditures, earnings or competitive position. GenRad does not expect
to make any material expenditures for environmental control facilities in the
current fiscal year.
Employees
GenRad had 1,270 employees, including contract employees, on January 2, 1999 and
1,388 employees on January 3, 1998. None of GenRad's employees are covered by
collective bargaining agreements, and GenRad believes relations with its
employees are good.
Executive Officers of GenRad
<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C> <C>
James F. Lyons 64 President and Chief Executive Officer and Director
Paul Geere 43 President, Advanced Diagnostic Solutions
Lori B. Hannay 41 Vice President, Worldwide Human Resources and Corporate
Operations
Michael W. Schraeder 41 President, Electronic Manufacturing Solutions
Walter A. Shephard 45 Vice President, Chief Financial Officer and Secretary
</TABLE>
All officers are elected by the Board of Directors (the "Directors"). Elected
officers hold office until the first meeting of the Directors following the
Annual Meeting of Shareholders (the "Annual Meeting") and thereafter until a
successor is chosen and qualified. There are no family relationships among the
officers and/or directors.
James F. Lyons joined the Company as President, Chief Executive Officer and a
Director in July 1993. From January 1992 until July 1993, Mr. Lyons served as
President and Chief Executive Officer of Harry Gray Associates, a global
investment and management consulting organization specializing in acquisitions
and leveraged buyouts.
Paul Geere was elected President, Advanced Diagnostic Solutions in May 1998.
From May 1996 to May 1998, Mr. Geere was Vice President, Managing Director,
Advanced Diagnostic Solutions. From September 1995 to May 1996, Mr. Geere was
Managing Director of GenRad's Advanced Diagnostic Solutions division in
Manchester, England. From January 1995 to September 1995, Mr. Geere held the
position of GenRad's Director of Consultative Selling. From November 1989 to
January 1995, Mr. Geere worked as a Management Consultant for Coopers & Lybrand
in its London office.
<PAGE>
Lori B. Hannay was elected Vice President, Information Services and Corporate
Operations in May 1998. From November 1996 to May 1998, Ms. Hannay was GenRad's
Vice President, Human Resources. From November 1994 to November 1996, Ms. Hannay
served as the Company's Director of Compensation and Benefits. From July 1990 to
November 1994, Ms. Hannay was Corporate Secretary and Vice President of Human
Resources for First Inter-Bancorp.
Michael W. Schraeder was elected President, Electronic Manufacturing Systems in
March 1998. From November 1996 to May 1998, Mr. Schraeder was Vice President,
Worldwide Sales and Service. From March 1995 to November 1996, Mr. Schraeder
served as Vice President, Sales and Service for the Americas region. From April
1992 to February 1995, Mr. Schraeder held the position of Eastern Regional Sales
Manager. Prior to April 1992, Mr. Schraeder had been employed in various sales
positions with the Company for more than 12 years.
Walter A. Shephard was elected Vice President, Chief Financial Officer and
Secretary in November 1998. From August 1997 to November 1998, Mr. Shephard was
Vice President Investor Relations and Treasurer. From February 1991 to August
1997, Mr. Shephard was Treasurer and Clerk. Prior to February 1991, Mr. Shephard
had been employed by the Company in various Finance positions for more than 7
years.
Item 2. Properties
In March 1999, the Company entered into a 7 year lease for research and
development and office space located in Atlanta, Georgia. The facility will
serve primarily as a development center and sales office, along with certain
administrative functions for GenRad's GRS business segment. The facility
includes 26,500 square feet of office space.
In July 1996, the Company entered into a 15 year lease for two adjoining
properties located in Westford, Massachusetts. These leased facilities include
130,000 square feet of prime office space used for the Company's corporate
headquarters, research and development and general business offices and 100,000
square feet used for manufacturing for the EMS business unit.
In October 1996, the Company's European subsidiary entered into a 15-year lease
commitment at the Orion Business Park located in Manchester, England. The
facility, encompassing 75,000 square feet, is used for administrative office
space as well as for manufacturing for the ADS business unit.
In addition, GenRad engages in research, design, manufacturing or marketing
operations in leased facilities in eight states in the United States and in
seven foreign countries. In the opinion of management, all of GenRad's
properties are well maintained and the current facilities are adequate for its
present needs.
Item 3. Legal Proceedings
On April 28, 1998, the Company and James F. Lyons, President and Chief Executive
Officer were served with a lawsuit purported to be a class action suit on behalf
of persons who purchased Company stock in the open market over a specified
period of time. The lawsuit, entitled Duck Enterprises, LPV v. GenRad and James
F. Lyons, CA No. 98-10706-PBS, was filed in the United States District Court for
the District of Massachusetts. The complaint specified unspecified damages, plus
costs and attorney's fees. On January 8, 1999, the suit was dismissed without
finding.
On May 27, 1998, William E. Gaines, William E. Masskaker, Frank B. Wingate and
Heritage Investment Limited Partnership ("the plaintiffs") filed a Demand for
Arbitration ("the Demand") with the American Arbitration Association in Boston
(No. 11 168 00247 98) against the Company, James F. Lyons and Paul Pronsky, Jr.
The claims arise out of the acquisition of Industrial Computer Corporation
("ICC") by GenRad. The plaintiffs sought damages totaling $13.6 million, plus
costs and attorneys' fees. On June 18, 1998, the Company filed a response to the
Demand and on August 21, 1998, the Company filed an amended response and
counterclaims which arose from the acquisition of ICC and sought unspecified
damages. On April 7, 1999, the parties agreed to settle all claims arising from
the acquisition of ICC. In connection with the settlement, the Company will pay
$7.0 million, net of insurance proceeds of $4.0 million to the plaintiffs.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for Registrants' Common Stock and Related Shareholder Matters
Stock Price Information
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol GEN. The following table shows the quarterly high and low closing price
for a share of the Company's Common Stock for the Company's 1998 and 1997 fiscal
years.
<TABLE>
<CAPTION>
1998 1997
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1ST QUARTER 32-5/8 24 23-3/4 11-7/8
2ND QUARTER 32-15/16 16-5/8 22-15/16 13-5/8
3RD QUARTER 19-3/4 10-3/8 30-1/8 20-1/16
4TH QUARTER 18-3/16 10-15/16 34 23-7/16
</TABLE>
Common Stock
As of March 25, 1999 there were 2,924 stockholders of record holding 29,306,183
shares of the Company's Common Stock.
Dividends
It is the policy of the Company to retain earnings to support the growth and
expansion of the Company's business. Although the Company has paid dividends in
the past, there are no plans to resume paying dividends in the foreseeable
future. Payment of dividends is restricted by financing agreements to which the
Company is a party.
Acquisitions
In April, 1998, the Company acquired by merger all of the outstanding shares of
Industrial Computer Corporation ("ICC") in exchange for 1,237,917 of its Common
Stock, which were issued to stockholders of ICC. The issuance of the Company's
Common Stock in this transaction was exempt from the registration requirements
of the Securities Act of 1933, as amended, pursuant to Regulation D thereunder.
The Company registered the shares on Form S-3, filed on June 19, 1998. The
issuance of the shares did not involve any underwriters.
During fiscal 1996, the Company completed the acquisition of two companies which
involved the issuance of shares of its Common Stock. On June 20, 1996 the
Company acquired by merger all of the outstanding shares of stock of Mitron
Corporation in exchange for 1,196,127 shares of the Company's Common Stock which
were issued to the stockholders of Mitron Corporation. On November 8, 1996 the
Company acquired by merger all of the outstanding shares of stock of Testware,
Inc. in exchange for 79,862 shares of the Company's Common Stock which were
issued to the stockholders of Testware, Inc. The issuance of the Company's
Common Stock in both transactions was exempt from the registration requirements
of the Securities Act of 1933, as amended, pursuant to Regulation D thereunder.
The Company relied in part on representations of the stockholders of the
acquired companies in determining that such exemptions were available. Neither
transaction involved any underwriters.
Item 6. Selected Financial Data
The selected financial data set forth below are derived from the consolidated
financial statements, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The consolidated balance sheet for the Company's 1998
and 1997 fiscal years and the related consolidated statements of operations and
cash flows for the three years ended January 2, 1999 and notes thereto appear
elsewhere in this Form 10-K. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and related notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
(Dollar and share amounts in thousands):
- ----------------------------------------
1998(a) 1997 1996 1995(b) 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operations:
Net product and service sales $224,789 $236,761 $183,545 $158,753 $147,903
Gross margin 105,912 126,764 96,408 76,822 69,407
Operating income (loss) (14,294) 38,486 25,856 16,369 8,657
Net income (loss) $ (9,068) $41,295 $27,335 $12,271 $4,512
Net income (loss) per common
and common equivalent share:
Basic $(0.32) $1.54 $1.22 $0.59 $0.23
Diluted $(0.32) $1.43 $1.11 $0.56 $0.22
</TABLE>
(a) Operating income (loss) includes the effect of charges related to acquired
in-process research and development totaling approximately $10.1 million,
impairment losses totaling approximately $4.9 million and restructuring and
other charges totaling approximately $13.6 million. Gross margin includes
the effect of one-time charges related to restructuring and other
non-recurring charges totaling approximately $4.9 million.
(b) Operating income (loss) includes the effect of a restructuring credit
totaling approximately $1.0 million.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Balance sheet:
Current ratio 2.5 3.6 2.7 1.7 1.3
Total assets $208,225 $178,957 $115,765 $87,406 $81,816
Long-term debt, including current portion 8,487 10,953 146 49,073 48,955
Stockholders' equity (deficit) $134,031 $115,013 $63,680 $(23,238) $(37,788)
Other data:
Number of employees 1,270 1,388 1,239 1,138 1,137
Weighted average common and
common equivalent shares used in
computing per share amounts
Basic 28,003 26,814 22,488 20,869 19,775
Diluted 28,003 28,788 27,484 21,866 20,493
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The matters discussed herein contain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in Item 1
"Business" of this report as well as those discussed in this section and
elsewhere in this Report.
Overview
GenRad, Inc. ("Genrad" or "the Company"), which commenced operations in 1915, is
a leading global manufacturing solutions company. Genrad designs, manufactures
and markets integrated hardware and software solutions that enable the
successful manufacture, test and service for microprocessors and other
electronic devices and components. The Company operates primarily in the United
States, western Europe and Southeast Asia through its three business segments,
Electronic Manufacturing Solutions ("EMS"), Advanced Diagnostic Solutions
("ADS") and GR Software ("GRS").
EMS focuses on the integration of hardware and software for process control in
the manufacture of printed circuit boards, emphasizing inspection technologies.
EMS provides its customers with leading-edge, cost effective solutions used to
collect data about their manufacturing process and provide reliable, timely and
useful information which can be used to optimize manufacturing processes.
ADS is a global leader in developing and marketing diagnostic solutions
comprised of hardware, software and services which optimize the manufacturing
and service capabilities of leading transportation and equipment companies.
ADS's solutions are used by its customers to maximize manufacturing efficiencies
at time of product build as well as to maintain efficient and effective service
operations throughout the product's life.
GRS was expanded during 1998 with the Company's acquisition of Industrial
Computer Corporation ("ICC"), a privately held manufacturing execution systems
company with operations in Atlanta. Upon acquisition, the Company combined the
operations of ICC with its existing manufacturing software development, sales
and support groups to form GRS. GRS develops and markets product solution and
services to companies wishing to achieve and maintain control over manufacturing
processes. GRS's flagship product, Shop Floor Data Manager(TM) ("SFDM"), manages
a business's process information necessary to manufacture products according to
plan. SFDM also enables the shop floor to communicate with a Company's ERP
systems to have a real time direct impact on a business's manufacturing
operations.
The fiscal year ended January 2, 1999 includes 52 weeks. The fiscal year ended
January 3, 1998 included 53 weeks, while the fiscal year ended on December 28,
1996 included 52 weeks.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain items in the Company's Consolidated Statement of
Operations.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET PRODUCT AND SERVICE SALES 100.0% 100.0% 100.0%
COST OF PRODUCTS AND SERVICES SOLD 52.9 46.5 47.5
---- ---- ----
GROSS MARGIN 47.1 53.5 52.5
SELLING, GENERAL AND ADMINISTRATIVE 31.1 28.9 29.4
RESEARCH AND DEVELOPMENT 8.4 8.4 9.0
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT 4.5 -- --
RESTRUCTURING CHARGES 3.9 -- --
LOSS FROM IMPAIRMENT OF INTANGIBLE ASSETS 2.2 -- --
ARBITRATION SETTLEMENT 3.4 -- --
---- ---- ----
TOTAL OPERATING EXPENSES 53.5 37.3 38.4
<PAGE>
<S> <C> <S> <C>
OPERATING INCOME (LOSS) (6.3) 16.2 14.1
OTHER EXPENSE (0.6) (0.3) (0.1)
INCOME TAX BENEFIT 2.9 1.5 0.9
--- --- ---
NET INCOME (LOSS) (4.0)% 17.4% 14.9%
====== ===== =====
</TABLE>
1998 vs. 1997
Orders for the Company's products and services decreased to $221.5 million for
the twelve months ended January 2, 1999 from $237.0 million for the prior fiscal
year. The decrease in orders was across all product lines due to decreased
customer demand. Orders in fiscal 1998 for EMS and ADS decreased to $172.2
million and $32.3 million, respectively, as compared to $180.6 million and $48.3
million in fiscal 1997. Orders in fiscal 1998 for GRS increased to $17.0 million
as compared to $8.1 million in fiscal 1997. Orders increased to $128.6 million
in North America in fiscal 1998 as compared to $126.0 million in fiscal 1997.
Orders decreased in Europe and Asia to $74.9 million and $18.0 million,
respectively, in fiscal 1998 as compared to $89.4 million and $21.6 million,
respectively, for fiscal 1997. Backlog at the end of 1998 was $21.6 million
compared to $24.9 million at the end of 1997. The Company believes that a
substantial portion of the 1998 backlog will be recognized as revenue during the
first quarter of 1999.
Net product and service sales decreased to $224.8 million for the twelve months
ended January 2, 1999 as compared to $236.8 million for the prior fiscal year.
Sales in fiscal 1998 for EMS, ADS and GRS were $175.9 million, $32.3 million and
$16.6 million, respectively, as compared to $181.7 million, $48.5 million and
$6.6 million in fiscal 1997. In 1998, EMS sales decreased primarily due to
softening demand for the Company's products, particularly in Europe due to
economic conditions in the region throughout 1998. ADS sales decreased due to
continued increased competition for the segment's products and softening demand
overall in the market place during 1998. Offsetting these declines was an
increase in GRS sales due to the acquisition of ICC in the second quarter of
1998. Sales were $129.7 million in North America, $75.8 million in Europe and
$19.3 million in Asia for the fiscal year ended January 2,1999. Sales for the
fiscal year ended January 3, 1998 were $122.8 million in North America, $93.7
million in Europe and $20.3 million in Asia. Product and service sales from
international markets are subject to the risks of currency fluctuations and
other customary risks associated with international markets.
Product margins, including 1998 unusual product costs of $4.9 million related to
the discontinuance of certain ADS product offerings ($3.5 million) and the exit
from the hardware portion of the Company's Vision product line ($1.4 million),
were 49.7% and 56.3% for the twelve months ended January 2, 1999 and January 3,
1998, respectively. Product margins in 1998 excluding these charges were 52.8%.
Excluding unusual charges, the decline in margins was driven primarily by lower
than anticipated manufacturing levels, resulting in increased per unit costs and
by lower ADS sales affected by softening demand for the Company's hardware
products during 1998. Management has taken steps to eliminate the excess
capacity in manufacturing by downsizing the headcount to improve product
margins.
Inventory turnover for 1998 decreased to 2.5 times per year as compared to 3.1
times per year in 1997. The decrease in inventory turnover in 1998 as compared
to 1997 is primarily related to a specific build-up of work in process inventory
related to the Company's contract with the Ford Motor Company. Excluding this
inventory, inventory turnover for the fiscal year ended January 2, 1999 was 3.0
turns, which is consistent with the 1997 turnover ratio.
Service margins decreased to 40.8% for the twelve months ended January 2, 1999
from 44.9% from the prior year. The decrease in margins in 1998 as compared to
1997 is primarily due to a service margin decline in ADS as a result of lower
margin contracts. This was partially offset by increased utilization in the EMS
service organization and the favorable inclusion of ICC margins (GRS) commencing
in the second quarter of 1998.
Selling, general and administrative expenses increased for the twelve months
ended January 2, 1999, to $69.8 million from $68.4 million in the prior fiscal
year. Expenses increased in 1998 as compared to 1997 due primarily to the
inclusion of ICC, which was acquired in the second quarter of 1998 and accounted
for $3.2 million of incremental expenses. Marketing costs decreased 9.0% in 1998
as compared to 1997 due to the restructuring measures taken by the Company in
the second and third quarters of 1998. Management believes that the full impact
of these changes will be realized commencing in fiscal 1999. As a percent of
sales, selling, general and administrative expenses were 31.1% in fiscal 1998 as
compared to 28.9% in fiscal 1997, which is relatively consistent with the
overall decrease in sales.
Research and development expenses decreased for the twelve months ended January
2, 1999 to $19.0 million from $19.9 million in the prior fiscal year. As a
percentage of sales, research and development expenses remained constant at 8.4%
in fiscal 1998 and 1997. In 1998, the primary research and development projects
were for in-circuit and functional test equipment software systems, design of a
next generation in-circuit hardware platform, system enhancements to support
automation capabilities and enhancements to the GRS
<PAGE>
suite of products. The Company capitalized $4.9 million and $0.2 million of
software development costs for the fiscal years ended January 2, 1999 and
January 3, 1998, respectively. The majority of costs capitalized in fiscal 1998
related to new EMS and GRS product developments.
The operating loss was $14.3 million for the twelve months ended January 2,
1999, a decrease from $38.5 million of operating income in the prior fiscal
year. Excluding unusual inventory provisions ($4.9 million), acquired in-process
research and development charges ($10.1 million), restructuring charges ($8.7
million), losses from impairment of intangible assets ($4.9 million) and the
arbitration settlement ($7.7 million), operating income was $22.0 million in
fiscal 1998.
Interest expense was $1.2 million for the fiscal year ended January 2, 1999, as
compared to $0.8 million for the prior fiscal year. Interest expense for both
years related to a $12 million term loan entered into on June 26, 1997 for the
purchase of furniture and fixtures for the Company's new corporate headquarters
and manufacturing facilities in Westford, Massachusetts. A full year of interest
expense was incurred in 1998 compared to approximately one half year of interest
expense in 1997.
Other net expenses remained constant at $0.5 million for the fiscal years ended
January 2, 1999 and January 3, 1998. These relate primarily to the net effect of
gains and losses on foreign currency transactions. Interest income decreased
slightly to $0.4 million for the fiscal year ended January 2, 1998, as compared
to $0.5 million for the prior fiscal year due to lower average cash balances
during fiscal 1998.
A net income tax benefit of $7.5 million was recorded in the first quarter of
1998 as compared to $5.4 million in the comparable 1997 period. The tax benefit
represents a reduction in the Company's valuation allowance for deferred taxes
and was recorded due to management's expectations of future income and expected
utilization of the Company's domestic net operating loss carryforwards.
Excluding the income tax benefits previously noted, the income tax provision of
$1.0 million for the twelve months ended January 2, 1999 decreased by $0.9
million from the comparable period in 1997. The income tax provision decreased
due to reduced worldwide taxable income. At January 2, 1999, the Company had a
net deferred tax asset of $60.2 million with a valuation allowance of $44.8
million. Management will continue to assess the realizability of the deferred
tax assets based on actual and forecasted results.
As a result of the above, the Company reported a net loss of $9.1 million for
the twelve months ended January 2, 1999 as compared to net income of $41.3
million for the comparable period in 1997.
Impairment loss
In fiscal 1996, the Company purchased TTA and Testware. These components provide
custom test programming, text fixture integration and other value-added services
to manufacturers and users of electronic products. Additionally, GenRad acquired
certain assets of Field Oriented Engineering, AG in fiscal 1996, consisting
primarily of the software program known as TRACS(R) III, which is sold to
electronic manufacturing systems customers. The excess purchase price over the
net assets acquired for these acquisitions was recorded as long-term
intangibles, primarily goodwill.
The historical financial performance of these entities has continued to be less
than anticipated and the businesses have been negatively impacted by the recent
decline in the in-circuit test market. Due to these factors as well as certain
management changes during the second quarter of 1998, the Company prepared
revised projections of future net cash flows relating to these businesses, which
indicated that the businesses would not generate sufficient net cash flows to
realize the carrying value of the intangible assets. This analysis was performed
in accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Assets to
be Disposed Of." As a result, a $4.9 million impairment loss, representing the
net book value of goodwill, was recorded during the second quarter of 1998 and
is included in the accompanying statement of operations.
Acquired in-process diagnostic software
On July 2, 1998, the Company acquired the rights to certain diagnostic software
for which technological feasibility had not been established. The Company plans
to use the acquired technology in the development and diagnosis of increasingly
complex mechatronic systems, particularly in vehicle systems. At the time of the
acquisition, the acquired technology had not yet reached technological
feasability and had no alternative future uses and, accordingly, the entire
purchase price was expensed. The total of $1.7 million is included in acquired
in-process research and development in the accompanying consolidated financial
statements.
Restructuring and other charges
During the second and third quarters of 1998, the Company restructured its
operations, which resulted in a workforce reduction of approximately 230
manufacturing and general and administrative employees or 15% of the Company's
workforce. In accordance with EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits, and Other Costs to Exit an Activity," the Company
recorded a charge for restructuring totaling approximately $6.8 million for
severance costs and post-employment benefits ($5.2 million), write-offs of
certain fixed assets which will no longer be utilized ($1.0 million) and for the
termination fees of certain equipment and real estate leases ($0.6 million).
During the third quarter of 1998, the Company ceased its manufacturing
operations at its Manchester, UK facility. Inventory related to the manufacture
of certain ADS products and the cessation of ADS' contract manufacturing
business totaling $3.5 million was charged to cost of products sold. In
addition, restructuring charges totaling approximately $0.5 million were
recorded related to a workforce reduction of approximately 20 manufacturing
people and certain fixed assets which will no longer be utilized and will be
disposed of in 1999.
During the third quarter, the Company completed an in depth analysis of the
hardware portion of the Vision product line resulting in a decision to exit
this business. This decision was based upon the following: (i) the market for
Vision equipment in PCB manufacturing was not as large as had been previously
estimated, and (ii) the continued research and development investment required
for the existing Vision product was not warranted given the resizing of the
Vision market. Exiting the Vision hardware product line resulted in charges
totaling $2.8 million related to fixed assets which will no longer be utilized
and were disposed of in 1998 and certain excess inventory, inventory purchase
commitments and prepaid royalties. Of the total of $2.8 million, $1.4 million is
recorded in costs of products sold and $1.4 million is recorded as restructuring
charges in the accompanying consolidated financial statements.
As of January 2, 1999, the Company had made cash payments totaling approximately
$5.4 million related to restructuring charges recorded in 1998. The Company
expects to make cash payments on the approximate $3.5 million balance of
restructuring charges accrued during 1999 with approximately $1.6 million
anticipated in the first quarter of 1999, approximately $1.4 million in the
second quarter of 1999 and the balance of approximately $0.5 million over the
remainder of 1999.
Arbitration settlement
On May 27, 1998, William E. Gaines, William E. Masskaker, Frank B. Wingate and
Heritage Investment Limited Partnership ("the plaintiffs") filed a Demand for
Arbitration ("the Demand") with the American Arbitration Association in Boston
(No. 11 168 00247 98) against the Company, James F. Lyons and Paul Pronsky, Jr.
The claims arise out of the acquisition of Industrial Computer Corporation
("ICC") by GenRad. The plaintiffs sought damages totaling $13.6 million, plus
costs and attorneys' fees. On June 18, 1998, the Company filed a response to the
Demand and on August 21, 1998, the Company filed an amended response and
counterclaims, which arose from the acquisition of ICC and sought unspecified
damages.
On April 7, 1999, the parties agreed to settle all claims arising from the
acquisition of ICC. In connection with the settlement, the Company will pay $7.0
million, net of insurance proceeds of $4.0 million. The Company has recorded a
charge to operations totaling $7.7 million representing the cost of the
settlement plus costs and attorney fees.
<PAGE>
Acquisition of Industrial Computer Corporation
On April 7, 1998, GenRad acquired all of the then outstanding common shares of
Industrial Computer Corporation ("ICC"), a software company providing real-time
manufacturing execution systems to electronics manufacturers. ICC was
established in 1980 and is located in Atlanta, Georgia. The transaction was
accounted for as a purchase, and accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed based on their respective fair
values. In connection with the acquisition of ICC, 1,237,917 shares of GenRad's
common stock were issued for all of the then outstanding shares of ICC in a
tax-free reorganization. Consideration for the acquisition of ICC totaled
approximately $36.6 million. Direct costs of the acquisition totaled
approximately $1.6 million and consisted primarily of legal fees, accounting
fees and broker fees. Consideration was allocated to the tangible and intangible
assets of ICC as follows: acquired in-process research and development ($8.4
million), developed technology ($11.4 million), goodwill ($17.0 million), other
intangible assets ($1.7 million) and the net assets and liabilities of ICC (net
liability of $0.3 million). The results of ICC are included in the 1998
financial statements beginning from the date of purchase.
The Securities and Exchange Commission ("SEC") has recently issued guidance
related to the valuation of acquired in-process research and development as set
forth in its letter dated September 9, 1998 from the Chief Accountant of the SEC
to the American Institute of Certified Public Accountants. The Company has
corresponded with the staff of the SEC ("the Staff") concerning the application
of the methodology to the valuation of the incomplete technology and other
intangible assets and has implemented the methodology. As a result of the
application of the valuation methodology, the purchase price was allocated to
acquired in-process research and development, developed technology, assembled
workforce and tradename. The Company has restated its originally filed Forms
10-Q filings for its second and third quarters of fiscal 1998 to reflect this
methodology.
The valuation of acquired in-process research and development was based on
management's projections of the after tax net cash flows attributable to the
acquired in-process research and development. Specifically, the valuation
considers the following: (i) a fair market value premise; (ii) comprehensive due
diligence concerning all potential intangible assets including trademarks and
tradenames, patents, copyrights, non-compete agreements, assembled workforce and
customer relationships and sales channel relationships; (iii) the value
contribution of core technology to the acquired in-process technology, with a
view toward ensuring the relative allocations to core technology and acquired
in-process research and development were consistent with the relative
contributions of each to the final product; and (iv) the calculation used to
determine the value allocated to acquired in-process research and development
considered only the efforts completed as of the transaction date and only the
cash flow associated with the product development efforts in-process at the
acquisition date. The charge for acquired in-process research and development
relates to one development project in process at the date of the acquisition
that had not reached technological feasibility, had no alternative future use,
and for which ultimate successful development was uncertain. The conclusion that
the development efforts in-process, or any material sub-component, had no
alternative future use was reached in consultation with engineering personnel
from ICC as well as the Company's valuation advisors.
The in-process project consists of the development of ICC's existing UNIX based
product using an object oriented design and standard programming language which
will provide users of the product the ability to use ICC's Shop Floor Data
Manager (TM) ("SFDM") product on varied operating platforms. The primary project
tasks open at the time of acquisition included completion of the design of
certain modules, or objects, which will house the program code, completion of
program code written in the new language and preliminary quality assurance and
testing of the product. At the time of acquisition, additional development
remained on all tasks (management estimated that the project was approximately
69% complete) and costs to complete were estimated to total approximately
$928,000. At the time of the acquisition, management believed that the product
being developed would become available for sale late in fiscal 1999. GenRad will
begin to benefit from the acquired in-process research and development once
completed product is sold. Failure to reach successful completion of this
project may result in impairment of the associated capitalized intangible
assets, i.e. goodwill and developed technology, and/or may require the Company
to accelerate the time period over which the intangibles are being amortized,
which may have a material adverse effect on the Company's results of operations
and financial condition.
Significant assumptions used to determine the value of the acquired in-process
research and development included several factors. The first was a forecast of
net cash flows that were expected to result from the in-process development
effort using projections prepared by ICC management, portions of which (1998 and
1999) were provided to GenRad's Board of Directors. Net cash flow projections
included projected revenue growth and trends in profit margins and selling,
general and administrative expense that were consistent with recent historical
trends prior to the acquisition. Second, a percentage complete of 69% for the
project estimated by considering the costs invested to date relative to the
expected total cost of the development effort, supported by the amount of
technological progress completed as of the transaction date relative to the
overall technological achievements required to achieve the intended
functionality of the eventual product. The technological issues were addressed
primarily by engineering representatives from ICC along with the Company's
independent valuation advisors. Third, a 24% discount rate, which represents a
rate equivalent to that which would be employed in a fair value analysis, i.e.,
one that considers all cash flows associated with the project and resulting
product, and therefore represents a blended rate of all the risks associated
with the product. Lastly, a core technology charge reflected as one third of
after tax net income related to the in-process project was utilized. This rate
represents an amount that the Company would be required to pay in royalties
assuming it had licensed the products expected to be derived from the acquired
in-process development efforts.
As of January 2, 1999, the technological feasibility of the project had not yet
been reached and no significant departures from the assumptions included in the
valuation analysis have occurred.
Acquisition of Manufacturing Execution Systems Business
On April 9, 1998, GenRad acquired certain assets of the Manufacturing Execution
Systems ("MES") business of Valstar Systems Limited ("Valstar") located in
Aberdeen, Scotland. Valstar's MES component provides integration services and
support and distribution in Europe for ICC's Shop Floor Data Manager Software.
Consideration paid for Valstar's MES business totaled $3.2 million in cash,
including acquisition costs, funded through internally generated funds. As part
of the acquisition, the Company entered into a two-year consulting and services
agreement with Valstar that includes securing certain Valstar personnel and
other resources to transition the business to GenRad. Of the $3.0 million
purchase price, $2.0 million was paid on April 9, 1998 and $1.0 million was
released from escrow on October 7, 1998 as certain contingencies were achieved.
Direct costs of the acquisition totaled approximately $0.2 million and consisted
primarily of legal and accounting fees.
1997 vs. 1996
Orders for the Company's products and services increased to $237.0 million for
the twelve months ended January 3, 1998, from $181.0 million for the prior
fiscal year. Orders in fiscal 1997 for EMS, ADS and GRS increased to $180.6
million, $48.3 million and $8.1 million, as compared to $138.3 million, $37.6
million and $5.1 million in fiscal 1996. Orders increased across all geographies
to $126.0 million in North America, $89.4 million in Europe and $21.6 million in
Asia. Orders for the fiscal year ended December 28, 1996 were $85.7 million in
North America, $77.3 million in Europe and $18.0 million in Asia. The increase
in orders resulted from the strong demand in all aspects of the Company's
business, particularly from customers in the following industries: contract
manufacturing, computer manufacturing, telecommunications, data communications
and transportation. Backlog at the end of 1997 was $24.9 million compared to
$24.7 million at the end of 1996.
Net product and service sales were $236.8 million for the twelve months ended
January 3, 1998, as compared to $183.5 million for the prior fiscal year. Sales
in fiscal 1997 for EMS, ADS and GRS were $181.7 million, $48.5 million and $6.6
million, respectively, as compared to $137.7 million, $40.8 million and $5.0
million in fiscal 1996. The EMS increase was due primarily to an increase in
<PAGE>
product volume, the continuing shift towards the Company's higher priced, higher
pin count machines required by computer and contract manufacturing customers and
the strong demand for the Company's functional test equipment in the data
communication and telecommunication marketplaces. The ADS increase was due
primarily to hardware sales to new customers and the initial application
software revenue from the Company's contract with the Ford Motor Company, which
was entered into in 1997. Sales increased across all geographies for the fiscal
year ended January 3, 1998 to $122.8 million in North America, $93.7 million in
Europe and $20.3 million in Asia as compared to $86.6 million in North America,
$78.5 million in Europe and $18.4 million in Asia for comparable prior year.
Product gross margins as a percent of sales increased to 56.3% for the twelve
months ended January 3, 1998, as compared to 55.7% for the prior fiscal year.
Product margins improved due to the continued shift toward higher margin, higher
pin count machines, increased sales from the introduction of new product
offerings and on-going efforts to minimize product costs offset by decreasing
product margins in ADS and GRS due to competitive pricing pressures.
Inventory turnover for the fiscal year ended January 3, 1998 decreased to 3.1
turns as compared to 3.3 turns for the comparable prior period. Inventory
turnover decreased primarily as a result of carrying higher inventory levels in
1997 to reduce the time from shipment to delivery to customers.
Service gross margins as a percent of sales increased to 44.9% for the twelve
months ended January 3, 1998 as compared to 43.9% for the prior fiscal year.
Overall service margins improved due to a shift in the service mix towards more
value-added services such as training, software support and applications
programming primarily in the ADS segment.
Selling, general and administrative expenses increased for the twelve months
ended January 3, 1998, to $68.4 million from $54.1 million in the prior fiscal
year. As a percent of sales, selling, general and administrative expenses were
28.9% as compared to 29.4% for the comparable period in 1996. Selling expense
increased due to the expansion of the sales force in its existing and new
regions and incremental commission expense associated with the 31% increase in
orders in 1997, as compared to 1996. Facility expenses increased as a result of
the relocation of the corporate headquarters to Westford, Massachusetts in June
of 1997, as well as the relocation of the European headquarters in Manchester,
England in October of 1996. The increased costs were partially offset by a $0.9
million gain in the fourth quarter of 1997 for the settlement of a portion of
the Company's U.S. defined benefit pension plan through the purchase of
non-participating group annuity contracts for approximately one third of the
plan's participants.
Research and development expenses increased for the twelve months ended January
3, 1998, to $19.9 million from $16.5 million in the prior fiscal year. As a
percent of sales, research and development expenses were 8.4%, as compared to
9.0% for the prior fiscal year. In 1997, the three primary research and
development projects were for the design of a GR Vision product (subsequently
shut down in the third quarter of 1998), enhancements to the GRS suite of
products and a redesign of the in-circuit test equipment operating systems. The
Company capitalized $0.2 million and $1.2 million of software development costs
for the fiscal years ended January 3, 1998 and December 28, 1996, respectively.
Operating income increased to $38.5 million for the twelve months ended January
3, 1998, from $25.9 million in the prior fiscal year. For the fiscal year ended
January 3, 1998, operating profit was 21.6% in North America and 7.2% in Europe
as compared to 24.4% and 3.9%, respectively, in the prior fiscal year. Operating
margins are lower in the European sector as compared to North America primarily
due to the combination of heavy price competition, lower margin machines being
sold and additional European infrastructure costs required in order to support
multiple languages and sites. The Company continues to support the European
markets to maintain its status as a worldwide solution provider and is working
to minimize costs through engineered cost reductions.
Interest expense was $0.8 million for the fiscal year ended January 3, 1998, as
compared to $4.6 million for the prior fiscal year. Interest expense in 1997
related to a $12 million term loan entered into on June 26, 1997 for the
purchase of furniture and fixtures for the Company's new corporate headquarters
and manufacturing facilities in Westford, Massachusetts. During the prior fiscal
year, interest expense of $3.1 million related to the Company's 7 1/4%
convertible subordinated debentures and $0.5 million related to the credit
facility. Additionally, the Company recorded $1.0 million of interest expense in
the fourth quarter of 1996 to obtain a short-term financing facility, which was
not utilized, for the redemption of all of its 7 1/4% convertible subordinated
debentures and to replace its $15 million secured credit facilities with a $25
million unsecured credit facility.
Other net expense of $0.5 million for the fiscal year ended January 3, 1998 was
primarily from foreign currency exchange losses. Other net income of $4.3
million for the fiscal year ended December 28, 1996 was primarily the result of
a $4.0 million gain from the sale of property, plant and equipment, primarily
generated from the sale of the Company's corporate headquarters and
manufacturing facility in Concord, Massachusetts.
A net income tax benefit of $5.4 million was recorded in the first quarter of
fiscal 1997 as compared to $2.5 million for the comparable period in 1996. The
benefits represent reduction in the Company's valuation allowance for deferred
taxes, which were recorded due to
<PAGE>
management's improved expectation of future income and expected utilization of
the Company's domestic net operating loss carryforwards. Excluding the
previously noted deferred income tax benefits, the income tax provisions was
$1.9 million for the twelve months ended January 3, 1998, as a compared to $0.8
million for the prior fiscal year. At January 3, 1998, the Company had a net
deferred tax asset of $61.0 million with a valuation allowance of $53.2 million.
As a result of the above, the Company reported net income of $41.3 million for
the twelve months ended January 3, 1998, as compared to net income of $27.3
million for the comparable period in 1996.
Liquidity and Sources of Capital
Sources and uses of cash
Cash and cash equivalents at January 2, 1999 totaled approximately $13.0
million, compared to approximately $21.9 million at January 3, 1998. The
Company's current ratio at January 2, 1999 decreased to 2.5 from 3.6 at January
3, 1998. Net cash provided by operating activities was $26.5 million during
1998, compared to $12.2 million in 1997 and $4.8 million in 1996.
The increase in net cash provided by operating activities during 1998 is
primarily attributable to improved cash collections on accounts receivable,
improved inventory management and the extended time over which certain of the
Company's restructuring charges are to be paid (see Note 3 to the Company's
consolidated financial statements included in Item 8 of this Annual Report on
Form 10-K). Excluding accounts receivable acquired upon the acquisition of ICC,
accounts receivable decreased approximately $10.1 million during 1998 compared
to an approximate $24.9 million increase during 1997. This decrease is
attributable to slightly lower revenue during 1998 compared to 1997 but, more
specifically, improved cash collections on accounts receivable. Excluding the
effects of unusual inventory write downs, inventory increased approximately $7.8
million compared to an approximate $10.2 million increase during 1997. The
overall increase is attributable to continued maintenance of higher inventory
levels to meet increasing customer demands for shorter delivery periods and a
specific build up of inventory necessary to meet the demands of the Company's
contract with Ford. The lower inventory increase in 1998 as compared to 1997
reflects management's increased focus on managing inventory levels throughout
1998. Offsetting these favorable effects on cash provided by operations during
1998 was a decrease in accounts payable reflecting the general timing of vendor
and employee payments.
During the year ended January 2, 1999, the Company's accounts receivable
turnover was approximately 3.8 times per year compared to approximately 4.4
times per year for the year ended January 3, 1998. The deterioration in accounts
receivable turnover is attributable to customer demands for more favorable
payment terms during 1998.
During 1998, net cash used in investing activities was $24.3 million, compared
to $22.7 million in 1997 and $7.2 million in 1996. Capital expenditures totaled
$15.2 million in 1998, $24.9 million in 1997 and $8.9 million in 1996. Cash used
in the acquisition of subsidiaries totaled $4.2 million during 1998 compared to
$0 in 1997. Cash used in the acquisition of certain intangible assets totaled
$5.0 million during 1998 compared to $0 in 1997.
The decrease in capital expenditures during 1998 is due primarily to the
relocation of the Company's corporate headquarters and manufacturing facilities
to Westford, Massachusetts which was completed in 1997. During 1999, the Company
expects to spend approximately $15.4 million on capital expenditures. A
significant portion of this relates to the Company's new business system
implementation. In 1998, the Company began efforts to implement SAP R/3(TM)
("SAP"), an enterprise resource planning system. At the end of 1998, the Company
completed Phase I of this project with the successful implementation of certain
modules of the SAP ERP system. During 1998, total capital expenditures related
to the Company's SAP implementation totaled approximately $3.0 million. During
1999, the Company will embark on Phase II of this project, which will involve
the implementation of certain other modules of SAP, including sales,
manufacturing and distribution related modules. Total expenditures in 1999 are
expected to approximate $6.0 million to $7.0 million. Thereafter, the Company
expects to continue to incur certain capital expenditures related to the
implementation of SAP, however such expenditures are expected to be
significantly less than those made in 1998 and expected to be made in 1999.
Cash used in the acquisition of subsidiaries, net of cash acquired, of $4.2
million during 1998 represents approximately $3.0 million used in the
acquisition of Valstar's MES business and approximately $1.8 million of direct
acquisition costs related to both the acquisition of ICC and Valstar's MES
business. Cash used in the acquisition of certain intangible assets of $5.0
million represents the costs of software capitalized in accordance with
Statement of Financial Accounting Standards No. 86 as well as the direct
purchase of certain intangible assets from third parties.
Net cash used in financing activities was $10.0 million in 1998 compared to cash
provided by financing activities of $20.9 million in 1997 and $4.7 million in
1996. The change in cash provided by/used in financing activities during 1998 as
compared to previous years is primarily attributable to the Company's stock
repurchase plan as well as payments on long-term debt borrowings totaling $2.4
million in 1998 compared to $1.3 million in 1997 and the lack of borrowings on
long-term debt in 1998 which provided $12.0 million in 1997. In addition,
proceeds from issuance of common stock decreased to $7.3 million in 1998
compared to $9.4 million in 1997 and $6.1 million in 1996.
Stock repurchase program
During the second quarter of 1998, the Company commenced a stock repurchase
program whereby the Company will purchase, in the open market, shares of its
stock. The Company intends to buy back its stock at times when its market value
presents opportunities to
<PAGE>
do so. The Company's stock repurchase plan is intended as a means to partially
mitigate the dilutive impact of stock options and to provide an alternative
investment for the Company's excess cash. The Plan has been funded entirely
through operating cash flow, however, the Company may, if it considers it
prudent, utilize its available credit facilities in connection with its stock
repurchase program. Through January 2, 1999, the Company had utilized
approximately $15.0 million to repurchase 1,012,000 shares of its common stock.
Credit facility
During 1998, the Company renegotiated its existing $25.0 million credit
facility, increasing the amount of available credit to $50.0 million. The line,
which requires the Company to maintain certain financial and operating covenants
expires in July 2001. Borrowings on the line are payable on demand and bear
interest, which is payable quarterly in arrears, at the lesser of the Bank's
prime rate or LIBOR plus a range of from 0.75% to 1.50%, as determined from time
to time by the Bank. Under the terms of the credit facility, the Company is
required to pay a commitment fee on the unused portion of the line of from 0.25%
to 0.50% of the total unused portion of the line dependent on the Company's
operating performance. At January 2, 1999, no borrowings were outstanding under
the line.
Summary
The Company's primary source of liquidity is internally generated funds. In
1999, the Company anticipates it will fund its working capital and capital
expenditure requirements, make principal and interest payments on its borrowings
and meet its cash obligations from internally generated funds and from its
available credit facility. As the Company continues to invest in new product
developments and enhancements to existing products, it expects research and
development expenditures to continue at approximately the same percentage of
sales as prior fiscal years.
Effects of Inflation and Foreign Exchange
Although the Company cannot accurately determine the precise effect of inflation
on its operations, it does not believe inflation has had a material effect on
its revenues or its results of operations. The Company attempts to mitigate
inflationary cost increases by continuously improving manufacturing methods and
technologies. Management does not expect inflation to have a significant impact
on operations in the foreseeable future.
The Company maintains development, sales and support facilities in several
locations worldwide, including, England, France, Germany, Switzerland,
Singapore, and Mexico, among others. A significant amount of the Company's
business is conducted with companies located in these and other countries and
certain transactions may be denominated in currencies other than the US dollar.
As a result, the Company may experience transaction gains and losses as a result
of currency fluctuations. In order to minimize its exposure to loss from changes
in foreign currency exchange rates, the Company mitigates its risk using foreign
currency forward exchange contracts. The Company's currency risk mitigation
strategies are designed to reduce the Company's vulnerability to certain foreign
currency exchange exposures. In executing its strategies, the Company actively
monitors foreign currency exchange rates and executes foreign currency forward
exchange contracts, primarily with financial institutions. These contracts serve
to offset the impact of actual foreign currency changes, e.g. if currency rates
changed with respect to a certain transaction resulting in a loss to the
Company, the forward contract would be structured to result in a gain, thereby
minimizing the actual loss incurred, if any.
The Company may be subject to losses resulting from unanticipated changes in
foreign currency exchange rates. The market factors that expose the Company in
this regard include economic conditions in which the Company conducts business
as well as the Company's ability to effectively and efficiently engage in
foreign currency forward exchange contracts at competitive rates with financial
institutions or others. The Company expects to continue these or similar
practices in the future to the extent appropriate. Historically, actual results
of the Company's foreign currency risk management procedures have been in line
with management's expectations and have not resulted in significant gains or
losses, however, there can be no assurance that these results will continue in
the future.
Factors That May Affect Future Results
This Annual Report may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results of operations and future
financial conditions may differ materially from those expressed in any such
forward-looking statements as a result of many factors that may be beyond the
Company's control. Factors that might cause such differences include, but are
not limited to, those discussed below.
The Company has experienced and expects to continue to experience fluctuations
in its results of operations, particularly on a quarterly basis. The Company's
expense levels are based, in part, on expectations of future revenues. If
revenue levels in a particular period do not meet expectations, due to the
timing of the receipt of orders from customers, customer cancellations or delays
of shipments, then operating results could be adversely impacted.
The market for the Company's products is characterized by rapid technological
change, an increased demand for specific feature
<PAGE>
requests by customers, evolving industry standards, and frequent new product
introductions. The introduction of products embodying new technology or the
emergence of new industry standards or practices could render the Company's
existing products obsolete or otherwise unmarketable. Future operating results
are dependent upon the Company's ability to develop, design, manufacture and
market technologically innovative products that meet customer needs.
Competition in the markets where the Company operates is intense. The Company
continues to invest in manufacturing productivity to try to minimize the impact
of competitive pricing pressures, fluctuations within the Company's product mix,
potential inventory obsolescence exposure and start-up manufacturing costs for
new product introductions.
The Company is dependent upon a number of suppliers for several key components
of its products. The loss of certain of the Company's suppliers, supply
shortages or increases in the costs of key raw materials could have a material
adverse effect on the Company.
The Year 2000 Issue
Many computer systems and other equipment with embedded chips or processors use
only two digits to represent the year. Consequently, they may be unable to
process certain dates before, during and after the year 2000. As a result,
entities are at risk for possible miscalculations or system failures causing
disruptions in their operations. GenRad has and continues to evaluate its
operations to assess modifications needed for this issue. A full time project
manager position was established in 1998 to address the Year 2000 issue.
GenRad has a comprehensive worldwide program that is intended to identify and
correct potential material problems related to the Year 2000 in its products,
information systems, infrastructure and manufacturing facilities. The work plan
established involves the following phases:
<TABLE>
<CAPTION>
Anticipated
Phase Status Completion Date
- ---------------------------------- -------------------- ------------------
<S> <C> <C>
Inventory GenRad products, assets, First pass complete. Planned for summer
facilities and manufacturing and of 1999 as
business processes verification of
first pass. Final
review scheduled
for completion in
Fall 1999.
Assess the risk associated First pass complete. Planned for summer
with that inventory. of 1999 as
verification of
first pass. Final
review scheduled
for completion in
Fall 1999.
Correct business systems impacted On-going Fall 1999.
by Year 2000 issues.
Identify and communicate to On-going. Customers Fall 1999.
customers those products that are identified as
will be Year 2000 compliant and product assessments
that have no remediation path are completed.
and will not be Year 2000 compliant.
Test and document all of the On-going Fall 1999.
above that must be or are
represented to be compliant.
</TABLE>
A number of inventory reviews have been completed and will continue to be
updated in the future. Software and hardware, as well as tools to test, age and
evaluate data, have been acquired, are being installed and are being utilized
for the Year 2000 compliance work plan. Test plans for items identified as
critical are either being deployed or currently being developed.
Prior to addressing the Year 2000 issue, GenRad had decided to replace all of
its business system software. GenRad is replacing its worldwide business systems
with systems that use programs primarily from SAP America, Inc. ("SAP"). SAP has
advised GenRad that its programs are Year 2000 compliant. The financial system
replacement was completed in the first quarter of 1999. The manufacturing,
materials, order entry and service portions are scheduled for completion in the
fourth quarter of 1999. As a
<PAGE>
contingency, the existing business systems have been corrected, tested, and
determined to be Year 2000 compliant. Although the results have been tested,
there can be no assurances that such systems will function as tested, if
necessary, in the Year 2000.
With respect to GenRad products, the Company is in the process of designing and
executing scripted tests that will determine the impact of the Year 2000 on each
currently manufactured GenRad product. GenRad will treat any Year 2000 issue
discovered during this process, if any, as an important product maintenance
issue and will make reasonable efforts to provide available fixes to all
worldwide GenRad customers. The on-going status of GenRad's Year 2000 compliance
for each product it manufactures is posted on the Company's home page at the
following web address: http://www.genrad.com.
GenRad has initiated formal communications with all significant external
interfaces, including customers, banks and municipal agencies, and suppliers to
determine the extent to which GenRad is vulnerable to third party failures to
correct their own potential Year 2000 problems. GenRad's primary significant
external interfaces include its external banking service providers and municipal
agencies. The Company's banking service providers provide necessary service to
the Company in the area of cash management. Certain municipal agencies in the
municipalities in which GenRad operates provide necessary water and sewerage
services to the Company. GenRad's formal communications with suppliers and other
significant external interfaces have resulted in 57% of those contacted
responding. As of the date of this report, the Company has not identified any
suppliers or external interfaces which it believes critical to have a known Year
2000 compliance problem. GenRad's formal communications with customers have
resulted in a 13% response rate of those contacted responding. A failure of any
of these interfaces or suppliers to adequately address their Year 2000 issues
could adversely affect the Company's operations. This communication process is
on-going and is scheduled for completion by July of 1999.
Upon completion, the results in their entirety, will be evaluated in the context
of GenRad's contingency plans. To date, GenRad has not identified any specific
interfaces which it considers to place the Company at risk. However, no formal
discussions have yet to occur with the municipalities in which GenRad operates
as it pertains to local services such as water supply and sewerage services.
Costs incurred to date for the Year 2000 issue, primarily related to software
corrections, are approximately $427,000 with estimated future costs of $458,000.
The costs were and will continue to be funded through internally generated
resources, without cannibalizing the Company's Information Technology budget or
resources, and expensed as incurred in accordance with EITF 96-14, "Accounting
For the Costs Associated with Modifying Computer Software for the Year 2000."
Management believes that Year 2000 issues will be addressed in a manner that
will prevent such issues from having a material adverse effect on GenRad results
of operations, financial position or cash flows. However, there can be no
assurances that management will be successful in addressing all Year 2000
issues. If management is not, the Company's operating results and financial
position could be materially and adversely impacted. In the worst case, although
not anticipated or considered likely by GenRad management, the Company may not
be able to operate manufacturing facilities or other support functions which
would have a material adverse effect on the Company's financial position and
results of operations for periods subsequent to 1999. Management believes that
its contingency plans, which include the use of alternative manufacturing
facilities currently available to the Company and business systems, which the
Company currently utilizes, are adequate to mitigate the risk associated with
the Company's worst case scenario.
The Introduction of the Euro
The Company is aware of and has developed systems designed to handle the
introduction of the Euro as an effective currency in Europe. Although the
Company believes the systems that have been implemented are sufficient for the
Company to be able to process Euro denominated transactions, there can be no
assurances that such systems will actually function as designed. If they do not
so function, GenRad's financial results could be adversely affected. To date,
the Company has not encountered any significant processing issues related to the
introduction of the Euro. The introduction of the Euro has not materially
affected the manner in which the Company conducts its operations, nor has it
required the Company to alter any significant contracts with suppliers and/or
financial institutions.
Other factors
Other factors which could impact future results are past and future
acquisitions, strategic alliances, patent or product liability claims in excess
of available insurance coverage, changes in the Company's effective tax rates,
new regulatory requirements, political and economic changes, tariffs, trade
restrictions, transportation delays, foreign currency fluctuations and
inflation.
The Company disclaims any intent or obligation to update any forward-looking
statements that may be included in this report. Additionally, there can be no
assurance that other factors, not included above, could impact future results.
Impact of Recently Issued Accounting Pronouncements
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). This Statement requires disclosure of comprehensive income, as
defined, and its components in interim and annual financial statements.
Components of comprehensive income include any changes in equity during a period
that are not the result of transactions with owners, including cumulative
foreign currency translation adjustments and minimum pension liabilities, if
any. The Company adopted SFAS 130 during 1998. The adoption of SFAS 130 pertains
to disclosure only and, accordingly, had no impact on the Company's consolidated
financial position or results of operations.
<PAGE>
Segment Reporting
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 requires an enterprise to report financial and descriptive
information about its reportable operating segments. Operating segments are
components that are reviewed regularly by a chief operating decision maker, as
defined, in determining resource allocations and in assessing performance. SFAS
131 requires a business enterprise to report a measure of segment profit or
loss, certain specific revenue and expense items (including interest,
depreciation, and income taxes, if utilized by management), and segment assets
if utilized by management in a decision making capacity. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company adopted SFAS 131 in the fourth quarter of 1998,
as required. The adoption of SFAS 131 pertains to disclosure only and,
accordingly, had no impact on the Company's consolidated financial position or
results of operations.
Pension and Other Post-retirement Benefits
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"). SFAS 132 standardizes the disclosure requirements for
pensions and other post-retirement benefits where practicable. The Company
adopted SFAS 132 in the fourth quarter of 1998, as required. The adoption of
SFAS 132 pertains to disclosure only and, accordingly, had no impact on the
Company's consolidated financial position or results of operations.
Financial Instruments
On June 15, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This Statement is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Company) and requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company is currently determining the impact of the
adoption of SFAS 133 to its operating results or financial position.
Item 8. Financial Statements and Supplementary Data
Management Report
Management is responsible for the preparation and integrity of the consolidated
financial statements appearing in this Annual Report. The financial statements
were prepared in conformity with generally accepted accounting principles.
Management has included in the Company's financial statements, amounts that are
based on estimates and judgement, which they believe are reasonable under the
existing circumstances.
Management believes that its established accounting procedures and related
systems of internal control provide reasonable assurance, at an appropriate
cost/benefit relationship, that assets are safeguarded, that the books and
records properly reflect all transactions, and the policies and procedures are
implemented by qualified personnel.
Our independent accountants, PricewaterhouseCoopers LLP, have audited the
consolidated financial statements. Their audit was conducted in accordance with
generally accepted auditing standards and provides an independent opinion about
the fair presentation of the consolidated financial statements. When performing
their audit, PricewaterhouseCoopers LLP considers the Company's internal control
structure to the extent they deem necessary to issue their opinion on the
financial statements. The Board of Directors appoints the independent
accountants; ratification of the appointment is solicited annually from the
stockholders.
The Board of Directors, through its Audit Committee, consisting solely of
independent directors of the Company, is responsible for reviewing and
monitoring the Company's financial reporting and accounting practices.
PricewaterhouseCoopers LLP has full and free access to the Audit Committee, and
meets with the Committee, with and without the presence of management.
/s/Walter A. Shephard
- ---------------------
Walter A. Shephard
Vice President,
Chief Financial Officer and Secretary
January 24, 1999
Report of Independent Accountants
To the Board of Directors and Stockholders of GenRad, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders'
<PAGE>
equity (deficit) and of cash flows present fairly, in all material respects, the
financial position of GenRad, Inc. and its subsidiaries at January 2, 1999 and
January 3, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended January 2, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 24, 1999, except for Notes 2
and 12 which are as of April 7, 1999.
<PAGE>
GenRad, Inc. and Subsidiaries
Consolidated Statement of Operations
YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998, AND DECEMBER 28, 1996 (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
SALES:
SALES OF PRODUCTS $159,290 $179,672 $133,228
SALES OF SERVICES 65,499 57,089 50,317
------ ------ ------
TOTAL SALES 224,789 236,761 183,545
COST OF SALES:
COST OF PRODUCTS 80,102 78,515 58,900
COST OF SERVICES 38,775 31,482 28,237
------ ------ ------
TOTAL COST OF SALES 118,877 109,997 87,137
------- ------- ------
GROSS MARGIN 105,912 126,764 96,408
SELLING, GENERAL AND ADMINISTRATIVE 69,838 68,376 54,061
RESEARCH AND DEVELOPMENT 18,962 19,902 16,491
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT 10,097 -- --
RESTRUCTURING CHARGES 8,753 -- --
LOSS FROM IMPAIRMENT OF INTANGIBLE ASSETS 4,906 -- --
ARBITRATION SETTLEMENT 7,650 -- --
----- ------ ------
TOTAL OPERATING EXPENSES 120,206 88,278 70,552
------- ------ ------
OPERATING INCOME (LOSS) (14,294) 38,486 25,856
OTHER INCOME (EXPENSE):
INTEREST INCOME 399 530 106
INTEREST EXPENSE (1,163) (793) (4,575)
OTHER, NET (541) (477) 4,292
----- --- -----
TOTAL OTHER EXPENSES (1,305) (740) (177)
----- --- ---
INCOME (LOSS) BEFORE INCOME TAXES (15,599) 37,746 25,679
INCOME TAX BENEFIT 6,531 3,549 1,656
----- ----- -----
NET INCOME (LOSS) $(9,068) $41,295 $27,335
======= ======= =======
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
BASIC $(0.32) $1.54 $1.22
====== ===== =====
DILUTED $(0.32) $1.43 $1.11
====== ===== =====
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
USED IN COMPUTING PER SHARE AMOUNTS:
BASIC 28,003 26,814 22,488
====== ====== ======
DILUTED 28,003 28,788 27,484
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
GenRad, Inc. and Subsidiaries
Consolidated Balance Sheet
JANUARY 2, 1999 AND JANUARY 3, 1998 (IN THOUSANDS)
- --------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $12,998 $21,883
ACCOUNTS RECEIVABLE, LESS ALLOWANCES OF $1,538
AND $1,127 65,490 73,006
INVENTORIES 32,989 29,896
OTHER CURRENT ASSETS 7,119 4,194
----- -----
TOTAL CURRENT ASSETS 118,596 128,979
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 37,269 33,479
DEFERRED TAX ASSET 15,368 7,868
INTANGIBLE ASSETS 35,744 7,107
OTHER ASSETS 1,248 1,524
----- -----
$208,225 $178,957
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
TRADE ACCOUNTS PAYABLE $10,299 $12,730
ACCRUED LIABILITIES 19,786 6,386
DEFERRED REVENUE 6,789 6,059
ACCRUED COMPENSATION AND EMPLOYEE BENEFITS 6,844 6,884
ACCRUED INCOME TAXES 620 1,029
CURRENT PORTION OF LONG-TERM DEBT 2,425 2,434
----- -----
TOTAL CURRENT LIABILITIES 46,763 35,522
------ ------
LONG-TERM LIABILITIES:
LONG-TERM DEBT 6,062 8,519
ACCRUED PENSIONS AND BENEFITS 11,488 11,239
FUTURE LEASE COSTS OF UNUSED FACILITIES 3,854 4,106
DEFERRED REVENUE 962 374
OTHER LONG-TERM LIABILITIES 5,065 4,184
----- -----
TOTAL LONG-TERM LIABILITIES 27,431 28,422
------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
COMMON STOCK, $1 PAR VALUE, 60,000,000 SHARES AUTHORIZED;
29,176,000 AND 27,349,000 ISSUED AND OUTSTANDING
AT JANUARY 2, 1999 AND JANUARY 3, 1998, RESPECTIVELY 29,176 27,349
ADDITIONAL PAID-IN CAPITAL 214,227 172,026
TREASURY STOCK, 1,012,000 SHARES AT JANUARY 2, 1999 (14,958) --
ACCUMULATED DEFICIT (91,560) (82,492)
ACCUMULATED OTHER COMPREHENSIVE INCOME (2,854) (1,870)
------ ------
TOTAL STOCKHOLDERS' EQUITY 134,031 115,013
------- -------
$208,225 $178,957
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
GenRad, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998, AND DECEMBER 28, 1996
(IN THOUSANDS)
- --------------
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED STOCK-
ADDITIONAL OTHER HOLDERS'
COMMON PAID-IN TREASURY ACCUMULATED COMPREHENSIVE EQUITY
STOCK CAPITAL STOCK DEFICIT INCOME (LOSS) (DEFICIT)
------ ---------- -------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 30, 1995 $21,232 $109,436 $ -- $(151,122) $(2,784) $(23,238)
NET INCOME -- -- -- 27,335 -- 27,335
CURRENCY TRANSLATION ADJUSTMENT -- -- -- -- 1,104 1,104
------
COMPREHENSIVE INCOME 28,439
STOCK ISSUED UNDER EMPLOYEE STOCK PLANS 1,256 4,835 -- -- -- 6,091
STOCK ISSUED IN CONNECTION WITH
COMPANY ACQUISITIONS 108 1,972 -- -- -- 2,080
CONVERSION OF 7-1/4% CONVERTIBLE DEBENTURES 3,452 46,856 -- -- -- 50,308
----- ------ ---- ---- ---- ------
BALANCE AT DECEMBER 28, 1996 $26,048 $163,099 $ -- $(123,787) $(1,680) $ 63,680
NET INCOME -- -- -- 41,295 -- 41,295
CURRENCY TRANSLATION ADJUSTMENT -- -- -- -- (190) (190)
------
COMPREHENSIVE INCOME 41,105
STOCK ISSUED UNDER EMPLOYEE STOCK PLANS 1,301 8,121 -- -- -- 9,422
TAX BENEFIT OF STOCK OPTIONS -- 806 -- -- -- 806
----- --- ---- ---- ---- ---
BALANCE AT JANUARY 3, 1998 $27,349 $172,026 $ -- $ (82,492) $(1,870) $115,013
NET LOSS -- -- -- (9,068) -- (9,068)
CURRENCY TRANSLATION ADJUSTMENT -- -- -- -- (984) (984)
--------
COMPREHENSIVE LOSS (10,052)
STOCK ISSUED UNDER EMPLOYEE STOCK PLANS 589 6,683 -- -- -- 7,272
TREASURY STOCK PURCHASES -- (14,958) -- -- (14,958)
SHARES ISSUED UPON ACQUISITION OF ICC 1,238 35,358 -- -- -- 36,596
TAX BENEFIT OF STOCK OPTIONS -- 160 -- -- -- 160
------- -------- -------- --------- ------- --------
BALANCE AT JANUARY 2, 1999 $29,176 $214,227 $(14,958) $ (91,560) $(2,854) $134,031
======= ======== ======== ========= ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
GenRad, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
YEARS ENDED JANUARY 2, 1999, JANUARY 3, 1998, AND DECEMBER 28, 1996
(IN THOUSANDS)
- --------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (9,068) $41,295 $27,335
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 15,312 9,250 6,825
LOSS (GAIN) ON DISPOSITION OF
PROPERTY, PLANT AND EQUIPMENT 517 265 (4,034)
DEFERRED TAX BENEFIT (7,500) (5,388) (2,480)
PAYMENT FOR LEASE COSTS OF EXCESS FACILITIES, NET (985) (843) (1,671)
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT 8,420 -- --
LOSS FROM IMPAIRMENT OF INTANGIBLE ASSETS 4,906 -- --
RESTRUCTURING AND NON-RECURRING CHARGES 6,385 -- --
(DECREASE) INCREASE RESULTING FROM
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE 10,056 (24,941) (3,845)
INVENTORIES (7,787) (10,185) (4,211)
OTHER CURRENT ASSETS (2,853) 173 (1,373)
TRADE ACCOUNTS PAYABLE (2,951) 5,689 (1,375)
ACCRUED LIABILITIES 13,547 (2,305) (7,692)
ACCRUED COMPENSATION AND EMPLOYEE BENEFITS (68) (600) (2,930)
ACCRUED INCOME TAXES (623) (474) 775
OTHER, NET (853) 221 (485)
----- --- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,455 12,157 4,839
INVESTING ACTIVITIES:
PURCHASES OF PROPERTY, PLANT AND EQUIPMENT (15,157) (24,879) (8,947)
PURCHASE OF SUBSIDIARIES (4,178) -- (4,989)
PURCHASE OF INTANGIBLES (4,968) -- --
PROCEEDS FROM SALE OF PROPERTY, PLANT AND EQUIPMENT -- 2,175 6,769
------ ----- -----
NET CASH USED IN INVESTING ACTIVITIES (24,303) (22,704) (7,167)
FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF DEBT -- 12,009 --
REPAYMENT OF DEBT (2,433) (1,337) (642)
NET CHANGE IN REVOLVING LINE OF CREDIT -- -- (729)
PROCEEDS FROM EMPLOYEE STOCK PLANS 7,272 9,423 6,091
PURCHASE OF TREASURY STOCK (14,958)
TAX BENEFIT FROM EXERCISE OF STOCK OPTIONS 160 806 --
--- ----- -----
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (9,959) 20,901 4,720
------ ------ -----
EFFECTS OF EXCHANGE RATES ON CASH (1,078) 972 (899)
------ --- ----
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (8,885) 11,326 1,493
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 21,883 10,557 9,064
------ ------ -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $12,998 $21,883 $10,557
======= ======= =======
</TABLE>
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Stock issued in association with the Company's acquisition of Industrial
Computer Corporation in 1998 totaled approximately $36.6 million.
Assets acquired and liabilities assumed upon acquisition of Industrial Computer
Corporation:
<TABLE>
<S> <C>
Accounts receivable $ 2,893
Other current assets 71
Property and equipment 341
Other assets, net 83
Accounts payable 498
Accrued liabilities 1,272
Accrued compensation and benefits 59
Accrued income taxes 139
Other long-term liabilities 2,370
</TABLE>
In conjunction with the purchase of TTA in 1996, the Company recorded a minimum
future obligation of $2.0 million which was classified as accrued liabilities
and other long-term liabilities.
Stock issued in association with the Company's acquisitions in 1996 increased
total stockholders' equity by $2.1 million.
The net carrying amount of convertible debt, including unamortized debt issue
costs and accrued interest, which converted to equity in 1996, was $50.3
million.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 2, 1999,
January 3, 1998, and December 28, 1996
Note 1: Description of the Business and Summary of Significant of Significant
Accounting Policies
Description of the Business
GenRad, Inc. ("GenRad" or "the Company"), which commenced operations in 1915, is
a leading global manufacturing solutions company. GenRad designs, manufactures
and markets integrated hardware and software solutions that enable the
successful manufacture, test and service for microprocessors and other
electronic devices and components. The Company operates primarily in the United
States, western Europe and Southeast Asia through its three business segments,
Electronic Manufacturing Solutions ("EMS"), Advanced Diagnostic Solutions
("ADS") and GR Software ("GRS").
Principles of Consolidation and Fiscal Year
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. The Company's fiscal year ends on the Saturday
nearest December 31. Fiscal year 1998 ("1998"), which ended on January 2, 1999,
includes 52 weeks, whereas fiscal year 1997 ("1997"), which ended on January 3,
1998, included 53 weeks and fiscal year 1996 ("1996"), which ended on December
28, 1996, included 52 weeks.
Accounting Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses at and during the reporting periods covered
by these consolidated financial statements. Actual results could differ from
those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original or
remaining maturities of three months or less to be cash equivalents.
Inventory Valuation
Inventories include material, labor and overhead and are stated at the lower of
cost (first-in, first-out method) or market.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets, generally 3 to 15 years for buildings and improvements, 3 to 8 years
for machinery and equipment and purchased and internal-use software, and 5 to 7
years for service parts.
Intangible Assets
Goodwill, representing the excess of the purchase price over the fair value of
the net assets of acquired entities, is amortized on a straight-line basis over
the period of expected benefit, generally ten years. Accumulated amortization on
goodwill totaled approximately $1.4 million at January 2, 1999 and approximately
$1.2 million at January 3, 1998.
The Company capitalizes certain computer software development costs once
technological feasibility is established in accordance with Statement of
Financial Accounting Standards No. 86, "Costs of Computer Software to be Sold,
Leased or Otherwise Marketed." Capitalized computer software costs are amortized
over the economic lives of the related products, generally three years,
beginning when the product is available for general release to customers.
Computer software costs capitalized totaled approximately $4.9 million during
1998, $0.2 million during 1997 and $1.2 million during 1996. Accumulated
amortization totaled approximately $1.9 million at January 2, 1999 and $0.7
million at January 3, 1998. Amortization expense totaled approximately $1.2
million in 1998, $0.7 million in 1997 and $0.0 in 1996.
Intangible assets also includes the cost of patents and trademarks acquired,
which are amortized on a straight-line basis over their estimated useful lives,
generally three to five years.
The Company records impairment losses on long-lived assets to be held and used
or to be disposed of when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the asset's carrying amount.
Deferred Revenue
Deferred revenue consists of pre-payments on service contracts to be earned in
the future on noncancelable agreements existing at the balance sheet date.
<PAGE>
Treasury Stock
Treasury stock is accounted for utilizing the cost method.
Revenue Recognition
Revenue from product sales is generally recognized upon delivery, provided there
are no remaining obligations to the Company and collectibility of the related
receivable is probable. Revenue from service contracts is recognized over the
contractual period either as services are performed for time and materials
priced service contracts or using a percentage-of-completion methodology for
fixed price service contracts.
Income Taxes
The Company records income taxes using the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and the tax
effect of net operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Concentrations of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on accounts receivable. The
Company maintains allowances for credit losses and such losses have been within
management's expectations.
Financial Instruments
The recorded amounts of financial instruments, including cash equivalents,
receivables, inventories, accounts payable, accrued liabilities and deferred
revenues, approximate their fair market values as of January 2, 1999. The
carrying value of long-term debt generally approximates its fair value as such
debt carries a variable rate which is tied to market rates of interest.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123") requires that
companies either recognize compensation expense for grants of stock, stock
options, and other equity instruments based on fair value, or provide pro forma
disclosure of net income (loss) and earnings (loss) per share in the notes to
the financial statements. The Company applies APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized under SFAS 123 for the Company's stock option plans, and
footnote disclosure is provided in Note 8.
Net Income Per Common and Common Equivalent Share
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (SFAS No. 128), was issued which supercedes the old methodology for
calculation of EPS, as promulgated under APB Opinion No. 15. The new Standard
simplifies the existing computational guidelines, revises the disclosure
requirements and increases the comparability of EPS data on an international
basis. SFAS No. 128 requires presentation of "basic" earnings per share (which
excludes dilution as a result of unexercised stock options and convertible
subordinated debentures) and "diluted" earnings per share. The Statement was
adopted in fiscal 1997 and all prior periods were retroactively restated.
Earnings per share was calculated in accordance with SFAS No. 128 for the 1998,
1997 and 1996 as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- --------------------------- ---------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC:
INCOME AVAILABLE TO
COMMON STOCKHOLDERS $ (9,068) 28,003 $(0.32) $41,295 26,814 $1.54 $27,335 22,488 $1.22
EFFECT OF DILUTIVE SECURITIES:
ASSUMED CONVERSION OF 7-1/4%
CONVERTIBLE SUBORDINATED
DEBENTURES -- -- -- 3,131 2,981
ASSUMED EXERCISE OF STOCK OPTIONS -- -- -- 1,974 2,015 --
---- ---- ----- ----- ----- ------
DILUTED:
INCOME AVAILABLE TO COMMON
STOCKHOLDERS AND ASSUMED
CONVERSIONS $ (9,068) 28,003 $(0.32) $41,295 28,788 $1.43 $30,466 27,484 $1.11
======== ====== ====== ======= ====== ===== ======= ====== =====
</TABLE>
<PAGE>
Foreign Currency
The local currency is the functional currency (primary currency in which
business is conducted) for the Company's subsidiaries with the exception of the
Company's Mexican subsidiary whose functional currency is the U.S. dollar. All
balance sheet accounts of foreign subsidiaries are translated at the current
exchange rates and statement of operations items are translated at the average
exchange rates during the year. Resulting translation adjustments are made
directly to a separate component of stockholders' equity (deficit), accumulated
other comprehensive income (loss). The effect of foreign currency transaction
gains and losses, included in the determination of 1998, 1997 and 1996 results
of operations, was not significant.
Reclassifications
Certain prior year balances have been reclassified to conform to the current
year presentation.
Comprehensive Income
Comprehensive income includes the effect of changes in equity not resulting from
transactions with owners, including foreign currency translation adjustments,
which have no income tax impact to the Company.
Note 2: Acquisitions
Industrial Computer Corporation
On April 7, 1998, GenRad acquired all of the then outstanding common shares of
Industrial Computer Corporation ("ICC"), a software company providing real-time
manufacturing execution systems to electronics manufacturers. ICC was
established in 1980 and is located in Atlanta, Georgia. The transaction was
accounted for as a purchase, and accordingly, the purchase price was allocated
to the assets acquired and liabilities assumed based on their respective fair
values. In connection with the acquisition of ICC, 1,237,917 shares of GenRad's
common stock were issued for all of the then outstanding shares of ICC in a
tax-free reorganization. The total consideration for the acquisition of ICC
totaled approximately $36.6 million. Direct costs of the acquisition totaled
approximately $1.6 million and consisted primarily of legal fees, accounting
fees and broker fees. The results of ICC are included in the 1998 financial
statements beginning from the date of purchase.
The purchase price was allocated to the tangible and intangible assets of ICC as
follows:
<TABLE>
<S> <C>
Acquired in-process research and development $ 8,420
Goodwill 16,982
Developed technology 11,370
Assembled workforce 1,280
Tradename 408
Assets, primarily accounts receivable and property and equipment 3,954
Liabilities assumed (4,215)
--------
$ 38,199
========
</TABLE>
The Securities and Exchange Commission ("SEC") has recently issued guidance
related to the valuation of acquired in-process research and development as set
forth in its letter dated September 9, 1998 from the Chief Accountant of the SEC
to the American Institute of Certified Public Accountants. The Company has
corresponded with the staff of the SEC ("the Staff") concerning the application
of the methodology to the valuation of the incomplete technology and other
intangible assets and has implemented the methodology. As a result of the
application of the valuation methodology the purchase price was allocated to
acquired in-process research and development, developed technology, assembled
workforce and tradename. The Company has restated its originally filed Form 10-Q
filings for its second and third quarters of fiscal 1998 to using this
methodology.
The valuation of acquired in-process research and development was based on
management's projections of the after tax net cash flows attributable to the
acquired in-process research and development. Specifically, the valuation
considers the following: (i) a fair market value premise; (ii) comprehensive due
diligence concerning all potential intangible assets including trademarks and
tradenames, patents, copyrights, non-compete agreements, assembled workforce and
customer relationships and sales channel relationships; (iii) the value
contribution of core technology to the acquired in-process technology, with a
view toward ensuring the relative allocations to core technology and acquired
in-process research and development were consistent with the relative
contributions of each to the final product; and (iv) the calculation used to
determine the value allocated to acquired in-process research and development
considered only the efforts completed as of the transaction date and only the
cash flow associated with said completed efforts for one generation of the
product development efforts in-process at the acquisition date. The charge for
acquired in-process research and development relates to one development project
in process at the date of the acquisition that had not reached technological
feasibility, had no alternative future use, and for which ultimate successful
development was uncertain. The conclusion that the development efforts
in-process, or any material sub-component, had no alternative future use was
reached in consultation with engineering personnel from ICC as well as the
Company's valuation advisors.
The in-process project consists of the development of ICC's existing UNIX based
product using an object oriented design and standard programming language which
will provide users of the product the ability to use ICC's Shop Floor Data
Manager (TM) ("SFDM") product on varied operating platforms. The primary project
tasks open at the time of acquisition included completion of the design of
certain modules, or objects, which will house the program code, completion of
program code written in the new language and preliminary quality assurance and
testing of the product. At the time of acquisition, additional development
remained on all tasks (management estimated that the project was approximately
69% complete) and costs to complete were estimated to total approximately
$928,000. At the time of the acquisition, management believed that the product
being developed would become available for sale late in fiscal 1999. GenRad will
begin to benefit from the acquired in-process research and development once
completed product is sold. Failure to reach successful completion of this
project may result in impairment of the associated capitalized intangible
assets, i.e. goodwill and developed technology, and/or may require the Company
to accelerate the time period over which the intangibles are being amortized,
which may have a material adverse effect on the Company's results of operations
and financial condition.
Significant assumptions used to determine the value of the acquired in-process
research and development included several factors. The first was a forecast of
net cash flows that were expected to result from the in-process development
effort using projections prepared by ICC management, portions of which (1998 and
1999) were provided to GenRad's Board of Directors. Net cash flow projections
included projected revenue growth and trends in profit margins and selling,
general and administrative expense that were consistent with recent historical
trends prior to the acquisition. Second, a percentage complete of 69% for the
project estimated by considering the costs invested to date relative to the
expected total cost of the development effort, supported by the amount of
technological progress completed as of the transaction date relative to the
overall technological achievements required to achieve the intended
functionality of the eventual product. The technological issues were addressed
primarily by engineering representatives from ICC along with the Company's
independent valuation advisors. Third, a 24% discount rate, which represents a
rate equivalent to that which would be employed in a fair value analysis, i.e.,
one that considers all cash flows associated with the project and resulting
product, and therefore represents a blended rate of all the risks associated
with the product. Lastly, a core technology charge reflected as one third of
after tax net income related to the in-process project was utilized. This rate
represents an amount that the Company would be required to pay in royalties
assuming it had licensed the products expected to be derived from the acquired
in-process development efforts.
As of January 2, 1999, the technological feasibility of the project had not yet
been reached and no significant departures from the assumptions included in the
valuation analysis have occurred.
<PAGE>
The following unaudited pro forma financial information presents the combined
results of operations of GenRad and ICC as if the acquisition had occurred at
the beginning of 1998 and 1997, respectively, after giving effect to the
amortization of goodwill and other intangible assets but excluding the effects
of the charge for acquired in-process research and development. The per share
impact of the acquired in-process research and development charge totals $(0.30)
and (0.28) per share for 1998 and 1997, respectively. This unaudited pro forma
financial information is presented for illustrative purposes only and is not
necessarily indicative of the results of operations that actually would have
been realized had the Company and ICC been a combined company during the
specified periods. Additionally, they are not indicative of the results of
future combined operations.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revenues $227,637 $246,844
Net income (loss) $ (1,634) $ 37,294
Earnings per share:
Basic $ (0.06) $ 1.33
Diluted $ (0.06) $ 1.24
</TABLE>
Manufacturing Execution Systems Business
On April 9, 1998, GenRad acquired certain assets of the Manufacturing Execution
Systems ("MES") business of Valstar Systems Limited ("Valstar") located in
Aberdeen, Scotland. Valstar's MES component provides integration services and
support and distribution in Europe for ICC's Shop Floor Data Manager Software.
Total consideration paid for Valstar's MES business totaled $3.2 million in
cash, including acquisition costs, funded through internally generated funds. As
part of the acquisition, the Company entered into a two-year consulting and
services agreement with Valstar that includes securing certain Valstar personnel
and other resources to transition the business to GenRad. Of the $3.0 million
purchase price, $2.0 million was paid on April 9, 1998 and $1.0 million was
released from escrow on October 7, 1998 as certain contingencies were achieved.
Direct costs of the acquisition totaled approximately $0.2 million and consisted
primarily of legal and accounting fees.
The transaction was accounted for as a purchase, and accordingly, the purchase
price was allocated to the intangible assets acquired based on their respective
fair values. The purchase price was allocated to the intangible assets of
Valstar's MES business as follows (in thousands):
<TABLE>
<S> <C>
Goodwill $2,100
Customer lists 900
Employment contracts 200
--------
$3,200
========
</TABLE>
Test Technology Associates, Inc. ("TTA") and Testware, Inc. ("Testware")
On January 16, 1996 and November 8, 1996, respectively, the Company acquired TTA
and Testware. These companies provide custom test programming, test fixture
integration and other value-added services to manufacturers and users of
electronic products.
The acquisition of TTA was for cash and the acquisition of Testware was for cash
and 79,862 shares of the Company's Common Stock. Both acquisitions were
accounted for by the purchase method of accounting. Pro forma results of
operations have not been presented because the effects of the acquisitions were
not significant. The results of TTA and Testware are included in the 1996
financial statements beginning from the date of purchase. The excess purchase
price over the net assets acquired was recorded as goodwill. In 1998, the
Company recorded an approximate $4.9 million impairment loss related to
intangible assets acquired upon the acquisition of TTA, Testware and Field
Oriented Engineering, AG, see Note 3.
In conjunction with the purchase of TTA, the Company agreed to pay to the
sellers for each of fiscal years 1996 through 1999 the greater of $0.5 million
per year, or fifty percent of TTA's profit before taxes in excess of $0.3
million for the respective years. The minimum obligation of $2.0 million was
recorded at the date of acquisition. At January 2, 1999 the total remaining
obligation was $1.0 million, with $0.5 million classified as accrued liabilities
and $0.5 million classified as other long-term liabilities.
Mitron Corporation ("Mitron")
On June 20, 1996, GenRad, Inc. acquired Mitron. Mitron is a developer of an
integrated family of software applications, tools and services for electronics
manufacturing including its CIMBridge(R) software applications. The products
enable users to generate and collect electronics manufacturing data to achieve
greater control, shorten time-to-market and lower costs.
In connection with the acquisition, the Company issued approximately 1,196,127
shares of GenRad Common Stock in exchange for all outstanding shares of Mitron
common stock. The acquisition was accounted for as a pooling of interests, and
accordingly, the consolidated financial statements and all financial data
contained herein have been restated to include the accounts of Mitron for all
periods presented. Financial results for each of the previously separate
companies have not been presented because the effects of the acquisition were
not significant. Merger costs were insignificant and were expensed in the second
quarter of 1996.
Field Oriented Electronics, AG ("FOE AG")
On August 14, 1996, GenRad acquired certain assets of FOE AG, consisting
primarily of the software program known as TRACS(R) III, which had been and is
now sold to electronic manufacturing systems customers. In close collaboration
with GenRad, FOE AG developed TRACS(R) III which provides manufacturers of
electronic products real-time data collection, analysis and reporting for
improved manufacturing process control and paperless repair.
The acquisition was accounted for by the purchase method of accounting. Pro
forma results of operations have not been presented because the effects of the
acquisition were not significant. The purchase price paid by GenRad in
connection with the acquisition of certain assets consisted of shares of GenRad
Common Stock and cash. The excess purchase price over the net assets acquired
was recorded as goodwill. In 1998, the Company recorded an approximate $4.9
million impairment loss related to intangible assets acquired upon the
acquisition of TTA, Testware and FOE, AG, see Note 3.
<PAGE>
Note 3: Restructuring, Impairment and Other Charges
During the quarters ended July 4, 1998 ("second quarter") and October 3, 1998
("third quarter"), respectively, the Company recorded certain restructuring and
other charges totaling approximately $9.8 million and $10.4 million,
respectively. Total charges are summarized as follows (in thousands).
<TABLE>
<CAPTION>
Second Third
Quarter Quarter Total
---------------------------------
<S> <C> <C> <C>
Impairment loss $4,900 - $ 4,900
Acquired in-process diagnostic software 1,700 - 1,700
Restructuring and other charges 3,200 10,400 13,600
-------------------------------
$9,800 10,400 $20,200
===============================
</TABLE>
Impairment loss
In fiscal 1996, the Company purchased TTA and Testware. These companies provide
custom test programming, test fixture integration and other value-added services
to manufacturers and users of electronic products. Additionally, GenRad acquired
certain assets of Field Oriented Engineering, AG in fiscal 1996, consisting
primarily of the software program known as TRACS (R) III, which is sold to
electronic manufacturing systems customers. The excess purchase price over the
net assets acquired for these acquisitions was recorded as long-term
intangibles, primarily goodwill.
The historical financial performance of these entities has continued to be less
than anticipated and the businesses have been negatively impacted by the recent
decline in the in-circuit test market. Due to these factors as well as certain
management changes during the second quarter of 1998, the Company prepared
revised projections of future operating cash flows relating to these businesses,
which indicated that the businesses would not generate sufficient operating cash
flows to realize the carrying value of the intangible assets. This analysis was
performed in accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Assets to be Disposed Of." As a result, a $4.9 million impairment loss,
representing the net book value of goodwill, was recorded during the second
quarter of 1998 and is included in the accompanying statement of operations.
Acquired in-process diagnostic software
On July 2, 1998, the Company acquired the rights to certain diagnostic software
for which technological feasibility had not been established. The Company plans
to use acquired technology in the development and diagnosis of increasingly
complex mechatronic systems, particularly in vehicle systems. At the time of the
acquisition, the acquired technology had not yet reached technological
feasibility, had no alternative future uses and, accordingly, the entire
purchase price was expensed. The total of $1.7 million is included in acquired
in-process research and development in the accompanying consolidated financial
statements.
Restructuring and other non-recurring charges
During the second and third quarters of 1998, the Company restructured its
operations, which resulted in a workforce reduction of approximately 230
manufacturing and general and administrative employees or 15% of the Company's
workforce. In accordance with EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits, and Other Costs to Exit an Activity," the Company
recorded a charge for restructuring totaling approximately $6.8 million for
severance costs and post-employment benefits ($5.2 million), write-offs of
certain fixed assets which will no longer be utilized ($1.0 million) and for the
termination fees of certain equipment and real estate leases ($0.6 million).
During the third quarter of 1998, the Company ceased its manufacturing
operations at its Manchester, UK facility. Inventory related to the manufacture
of certain ADS products and the cessation of ADS' contract manufacturing
business totaling $3.5 million was charged to cost of products. In addition,
restructuring charges totaling approximately $0.5 million were recorded related
to a workforce reduction of approximately 20 people and certain fixed assets
which will no longer be utilized and will be disposed of in 1999.
During the third quarter, the Company completed an in depth analysis of the
hardware portion of the Vision product line resulting in a decision to exit this
business. This decision was based upon the following: (i) the market for Vision
equipment in PCB manufacturing was not as large as had been previously
estimated, and (ii) the continued research and development investment required
for the existing Vision product was not warranted given the resizing of the
Vision market. Exiting the Vision hardware product line resulted in charges
totaling $2.8 million related to fixed assets which will no longer be utilized
and were disposed of in 1998 and certain excess inventory, inventory purchase
commitments and prepaid royalties. Of the total of $2.8 million, $1.4 million is
recorded in costs of products and $1.4 million is recorded as restructuring
charges in the accompanying consolidated financial statements.
As of January 2, 1999, the Company had made cash payments totaling approximately
$5.4 million related to restructuring charges
<PAGE>
recorded in 1998. The Company expects to make cash payments on the approximate
$3.5 million balance of restructuring charges accrued during 1999 with
approximately $1.6 million anticipated in the first quarter of 1999,
approximately $1.4 million in the second quarter of 1999 and the balance of
approximately $0.5 million over the remainder of 1999.
Future lease costs of unused facilities
The Company had excess facility reserves of $4.2 million and $4.9 million at
January 2, 1999 and January 3, 1998, respectively. The excess facilities
reserves were provided for two buildings: one in Milpitas, California with a
lease expiration of March 1998 and the other in Maidenhead, England with a lease
expiration date of 2013. The Milpitas, California building had been partially
subleased through March 1998, and the Maidenhead building has been subleased
through March 2001. As the Company continues to renegotiate leasing
arrangements, the utilization of excess facilities reserves and related cash
outflows may differ from the present estimates.
Note 4: Details of Financial Statement Balances (in thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH AND EQUIVALENTS:
CASH $8,859 $5,118
MONEY MARKET 4,139 11,365
LOAN PARTICIPATIONS -- 5,400
------ ------
$12,998 $21,883
======= =======
INVENTORIES:
RAW MATERIALS $10,316 $18,378
WORK IN PROCESS 13,880 8,355
FINISHED GOODS 8,793 3,163
----- -----
$32,989 $29,896
======= =======
OTHER CURRENT ASSETS:
RECEIVABLE FROM INSURANCE COMPANY $4,000 --
OTHER CURRENT ASSETS 3,119 4,194
----- -----
$7,119 4,194
===== =====
PROPERTY, PLANT AND EQUIPMENT:
BUILDINGS AND LEASEHOLD IMPROVEMENTS $13,932 $14,612
MACHINERY AND EQUIPMENT 48,250 56,259
SERVICE PARTS 12,856 12,757
------ ------
75,038 83,628
ACCUMULATED DEPRECIATION AND AMORTIZATION (37,769) (50,149)
------- -------
$37,269 $33,479
======= =======
INTANGIBLE ASSETS:
GOODWILL $19,189 $6,029
CAPITALIZED AND PURCHASED COMPUTER SOFTWARE 6,487 2,374
DEVELOPED TECHNOLOGY 11,370 --
ASSEMBLED WORKFORCE 1,280 --
OTHER INTANGIBLE ASSETS 3,054 1,534
----- -----
41,380 9,937
ACCUMULATED AMORTIZATION (5,636) (2,830)
------ ------
$35,744 $7,107
======= ======
ACCRUED LIABILITIES:
LEASE COSTS OF UNUSED FACILITIES $ 330 $1,315
RESTRUCTURING RESERVES 3,222 --
OTHER ACCRUED LIABILITIES 4,850 5,071
ACCRUED ARBITRATION SETTLEMENT 11,384 --
----- -----
<PAGE>
$19,786 $6,386
====== ======
ACCRUED PENSION AND BENEFITS:
ACCRUED U.S. PENSION COST $3,814 $4,258
ACCRUED FOREIGN PENSION COST 4,829 4,247
ACCRUED POSTRETIREMENT BENEFIT COST 2,845 2,734
----- -----
$11,488 $11,239
======= =======
</TABLE>
Note 5: Indebtedness
Line of Credit
During 1998, the Company renegotiated its existing $25.0 million credit
facility, increasing the amount of available credit to $50.0 million. The line,
which requires the Company to maintain certain financial and operating
covenants, as defined, expires in July 2001. Borrowings on the line are payable
on demand and bear interest, which is payable quarterly in arrears, at the
lesser of the Bank's prime rate or LIBOR plus a range from 0.75% to 1.50%, as
determined from time to time by the Bank. Under the terms of the credit
facility, the Company is required to pay a commitment fee on the unused portion
of the line from 0.25% to 0.50% of the total unused portion of the line
dependent on the Company's operating performance. At January 2, 1999, no
borrowings were outstanding under the line.
Term Loan
On June 26, 1997, the Company entered into a five year term loan totaling
approximately $12.0 million. Proceeds were used primarily for the purchase of
furniture and fixtures for the Company's corporate headquarters and
manufacturing facilities in Westford, Massachusetts. Principal payments total
approximately $0.6 million and are due quarterly in arrears. Interest is payable
quarterly in arrears and is calculated based on LIBOR plus 1.25%. At January 2,
1999, the balance outstanding was approximately $8.5 million, of which $2.4
million is classified as current. Annual maturities of the term loan for the
four years subsequent to January 2, 1999 are as follows: 1999 through 2001 -
$2.4 million per year; and 2002 - $1.3 million.
Convertible Subordinated Debentures
On October 22, 1996, the Company announced its redemption of all $50 million of
its 7-1/4% convertible subordinated debentures due in 2011 at par value plus
accrued interest to the redemption date. Prior to the November 6, 1996
redemption date, holders of the debentures converted $49.6 million of principal
into common stock at a price of $14.375 per share. The remaining principal was
redeemed in cash totaling $0.4 million, including accrued interest and bond
redemption costs. The net carrying amount of convertible debt, including
unamortized debt issue costs and accrued interest, which was converted to equity
was $50.3 million. The Company recorded $1.0 million of interest expense in the
fourth quarter of 1996 to obtain short-term financing for the redemption of all
of its 7-1/4% convertible subordinated debentures, which was not utilized, and
to replace its $15 million secured credit facilities with a $25 million
unsecured credit facility.
Interest
Interest paid amounted to $0.9 million in 1998, $0.5 million in 1997 and $5.1
million in 1996.
Note 6: Financial Instruments and Risk Management
The Company operates internationally and is exposed to market risks from changes
in foreign exchange rates. Derivative financial instruments are utilized by the
Company to partially mitigate those risks. The Company does not hold or issue
financial instruments for trading purposes.
The Company enters into foreign exchange contracts to hedge certain purchases
and accounts receivable denominated in foreign currencies (principally European
currencies). The term of the currency derivatives is rarely more than six
months. Market value gains and losses are recognized and the resulting gain or
loss offsets foreign exchange gains or losses on those transactions. The purpose
of the Company's foreign currency hedging activities is to protect the Company
from the risk that the eventual net cash inflows and outflows resulting from the
sale of products to foreign customers and purchases from foreign suppliers will
be adversely affected by changes in exchange rates.
At January 2, 1999, the Company had contracts comprised primarily of European
currencies maturing through June 25, 1998 to sell $41.9 million, net, of foreign
currency at varying rates.
Note 7: Treasury Stock
On June 11, 1998, the Company announced that its Board of Directors had
authorized the Company to repurchase up to 2,500,000
<PAGE>
shares of its common stock, which represented approximately 8.0% of the then
issued and outstanding shares of common stock of the Corporation. At January 2,
1999, the Company had repurchased approximately 1,012,000 shares of common stock
for $15.0 million. The Company accounts for its treasury stock utilizing the
cost method.
Note 8: Stock Plans
Stock Option and Restricted Stock Award Plans
The Company has four stock option plans: a 1982 plan for 2,700,000 shares
(terminated in 1991); a 1991 plan (amended in 1993, 1994, 1996, 1997 and 1998)
for 8,750,000 shares for key employees; a 1991 plan (amended in 1995 and 1998)
for 250,000 shares for non-employee directors, and a 1997 plan for 2,000,000
shares (amended in 1998) for key employees excluding directors and officers.
In general, option shares granted under these plans are exercisable in
installments based on years of service or stock price. Options under the 1991
and 1997 key employee plans generally become vested over a four-year period and
have a maximum term of ten years.
Options under the 1991 non-employee directors plan generally become vested upon
issuance of options and have a maximum term of five years. Stock options issued
under the 1991 plans may be non-qualified stock options, or in the case of the
1991 Plan for key employees, incentive stock options. Stock options issued under
the 1997 plan are non-qualified stock options. Certain stock options were
granted in 1997 with an exercise price below the fair market value of the
underlying stock. This resulted in deferred compensation, which will be
recognized over the future years of service. Compensation expense related to
these grants totaled approximately $0.4 million in 1998 and approximately $0.3
million in 1997. The deferred compensation balance was $1.0 million at January
2, 1999.
The 1991 Equity Incentive Plan contains provisions for stock options, as
described above, and restricted stock awards. All restricted stock awards are
granted subject to restrictions as to continuous employment, except in the case
of death, permanent disability or retirement. One fourth of the shares vest
annually, commencing with the first anniversary of the date of grant. The cost
of the awards, determined as the fair market value of the shares on the date of
grant, is charged to expense ratably over the vesting period. No restricted
stock awards were issued in 1998, 1997 and 1996.
Stock option activity is summarized below (thousands of shares):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE TOTAL AVERAGE
SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE
------ ------------ ------ ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS:
OUTSTANDING AT BEGINNING OF YEAR 5,043 $12.88 4,043 $8.88 3,514 $5.06
GRANTED 2,251 $21.16 2,593 16.19 2,021 13.44
EXERCISED (487) $10.98 (1,175) 6.40 (1,132) 5.16
CANCELLED (569) $18.24 (418) 12.82 (360) 8.95
---- ---- ----
OUTSTANDING AT END OF YEAR 6,238 $15.53 5,043 12.88 4,043 8.88
===== ===== =====
OPTIONS EXERCISABLE 2,325 1,896 2,644
===== ===== =====
OPTIONS AVAILABLE FOR FUTURE GRANTS 885 517 195
=== === ===
</TABLE>
The following table summarizes information about the stock options outstanding
at January 2, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT 1/02/99 CONTRACTUAL EXERCISE AT 1/02/99 EXERCISE
PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE
------ -------------- ---- ----- -------------- -----
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 2.63 22 5.7 $1.10 15 $1.11
$ 3.50 - $ 7.63 975 5.0 5.16 975 5.16
$ 8.25 - $10.63 402 6.5 8.46 392 8.41
$ 4.94 - $14.50 919 7.8 13.18 276 13.17
$15.00 - $18.38 2,162 8.5 16.55 540 16.74
<PAGE>
<S> <C> <C> <C> <C> <C>
$18.81 - $25.00 1,141 9.1 19.83 104 22.07
$26.31 - $27.25 58 7.7 27.02 17 26.75
$28.94 - $30.00 559 9.2 29.24 6 29.31
--- ---
6,238 2,325
===== =====
</TABLE>
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan, eligible employees may invest
up to 10% of their base salary in shares of the Company's Common Stock. The
purchase price of the shares is 85% of the fair market value of the stock on the
offering commencement date or the offering termination date (typically three
months after commencement date), whichever is lower. In 1994, the Plan was
amended, increasing the amount of shares from 1,962,000 to 2,462,000. During the
fiscal years ended January 2, 1999, January 3, 1998 and December 28, 1996, the
Company issued 85,000, 87,000 and 74,000 shares under the Plan, respectively. At
January 2, 1999, there were 1,788,000 shares available for future issuance.
Stock Based Compensation
Had compensation cost been determined based on the fair value of the options at
the grant dates for awards in 1998, 1997 and 1996 on a basis consistent with the
provisions of SFAS No. 123, the Company's net income and earnings per share on a
fully diluted basis would have been reduced to the pro forma amounts indicated
below:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME (LOSS)-AS REPORTED $ (9,068) $41,295 $27,335
NET INCOME (LOSS)-PRO FORMA $(19,747) 33,700 22,803
BASIC EARNINGS (LOSS) PER SHARE-AS REPORTED $ (0.32) 1.54 1.22
DILUTED EARNINGS (LOSS) PER SHARE-AS REPORTED $ (0.32) 1.43 1.11
BASIC EARNINGS (LOSS) PER SHARE-PRO FORMA $ (0.71) 1.25 1.01
DILUTED EARNINGS (LOSS) PER SHARE-PRO FORMA $ (0.71) 1.21 0.96
</TABLE>
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
EXPECTED LIFE (YEARS) 6 6 5
INTEREST RATE 5.5% 6.6% 6.5%
VOLATILITY 60.0% 66.2% 63.0%
DIVIDEND YIELD 0% 0% 0%
FAIR VALUE OF OPTIONS GRANTED AT
FAIR MARKET VALUE $12.62 $11.10 $6.58
FAIR VALUE OF OPTIONS GRANTED BELOW
FAIR MARKET VALUE -- $9.55 --
</TABLE>
Director Restricted Stock Plan
In 1994, the Company adopted the 1994 Director Restricted Stock Plan (amended in
1996 and 1998), which contains provisions for restricted stock awards. Up to
100,000 shares of the Company's Common Stock may be issued under the Plan. On
August 31 of each year, while the Plan is in effect, each eligible non-employee
director is granted a restricted stock award of 2,500 shares of the Company's
Common Stock. The awards are subject to certain restrictions that generally
prohibit the transfer of any shares except upon the director's death or
disability, upon the director's resignation with the consent of the Board of
Directors, upon a change in control of the Company as defined under the Plan, or
prior to the third anniversary of the award with certain restrictions remaining
through the fifth anniversary. During 1998, 1997 and 1996, the Company granted
restricted stock awards for 17,500, 17,500 and 10,500 shares, respectively.
Compensation expense related to these awards was not significant in 1998, 1997
and 1996. At January 2, 1999 there were 36,500 shares available for future
issuance.
Note 9: Income Taxes
The components of income (loss) before income taxes consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
DOMESTIC $ (72) $38,942 $24,082
FOREIGN (15,527) (1,196) 1,597
------- ------- -------
$(15,599) $37,746 $25,679
======= ======= =======
</TABLE>
The provision (benefit) for income taxes consists of the following (in
thousands):
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
FEDERAL $319 (7,500) $1,088 $(5,388) $219 $(2,480)
FOREIGN 250 -- 671 -- 520 --
STATE 400 -- 80 -- 85 --
--- ----- -- ----- -- -----
969 (7,500) $1,839 $(5,388) $824 $(2,480)
=== ====== ====== ======= ==== =======
</TABLE>
A reconciliation of tax on income at the federal statutory rate to the recorded
income tax (benefit) provision is presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
TAX PROVISION AT STATUTORY RATE $(5,459) 13,211 $8,988
STATE INCOME TAXES LESS RELATED FEDERAL INCOME TAX BENEFITS 260 52 55
REALIZATION OF DEFERRED TAX ASSETS AND OTHER 394 (11,374) (8,155)
NET REVERSAL OF DEFERRED TAX ASSET VALUATION ALLOWANCE (7,500) (5,388) (2,480)
NON-DEDUCTIBLE ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT 5,524 -- --
FOREIGN EARNINGS TAXED AT DIFFERENT RATES, INCLUDING WITHHOLDING TAXES 250 (50) (64)
------- ------- -------
RECORDED INCOME TAX (BENEFIT) PROVISION $(6,531) $(3,549) $(1,656)
======= ======= =======
</TABLE>
The temporary differences and carryforwards that gave rise to the significant
deferred tax assets and liabilities as of January 2, 1999 and January 3, 1998
were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
DEFERRED TAX ASSETS:
DOMESTIC NET OPERATING LOSSES $42,346 $44,181
RESEARCH AND DEVELOPMENT TAX CREDITS 6,725 8,670
ALTERNATIVE MINIMUM TAX CREDIT 762 633
FOREIGN NET OPERATING LOSSES NOT YET BENEFITED 3,923 943
INVENTORY VALUATION RESERVES 1,427 2,026
RETIREMENT BENEFIT ACCRUALS 2,664 2,797
RESTRUCTURING RESERVES, SEVERANCE AND LEASE COSTS OF UNUSED FACILITIES 2,547 2,848
OTHER RESERVES 2,173 939
----- ---
TOTAL DEFERRED TAX ASSETS 62,567 63,037
VALUATION ALLOWANCE 44,781 (53,162)
------ -------
NET DEFERRED TAX ASSETS 17,786 $9,875
------ ------
DEFERRED TAX LIABILITIES:
DEPRECIATION (1,191) $(1,779)
OTHER (1,227) (228)
------ ----
TOTAL DEFERRED TAX LIABILITIES (2,418) (2,007)
------ ------
NET DEFERRED TAXES RECORDED 15,368 $7,868
====== ======
</TABLE>
Deferred income taxes are provided to reflect the future tax consequences of
differences between the book and the tax basis of assets and liabilities. At
January 2, 1999 and January 3, 1998, the Company had a net deferred tax asset of
$60.2 million and $61.0 million, before valuation allowance, respectively. At
January 2, 1999, $1.8 million of the Company's deferred tax asset was applicable
to net operating losses generated by the disqualified disposition of stock
options. When realized, the related tax benefit will be credited to additional
paid-in capital.
The Company's net deferred tax asset consists primarily of the future tax
benefits from domestic net operating loss carryforwards and other tax credits.
Realization of the net deferred tax asset and future reversals of the valuation
allowance depend on the Company's ability to generate taxable income during the
respective carryforward periods. Under the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", the Company is required to
recognize all or a portion of its net deferred tax asset if it is believed that
it is more likely than not that all or a portion of the benefits of the
carryforward losses and tax credits will be realized. In establishing the
valuation reserve, management considers positive factors, including positive
earnings in recent years, and negative factors including the tax basis losses
incurred for eleven consecutive years through 1995; the scheduled expiration of
certain tax credit and net operating loss carryovers; the competitive nature of
the industry in which the Company sells its products and services; and
uncertainties relating to the tax jurisdiction in which income will be
generated. Based on all of these factors, primarily the positive taxable income
in 1997, 1996 and 1995, the Company reversed $7.5 million, $5.4 million and $2.5
million of the valuation allowance in the first quarter of 1998, 1997 and 1996,
respectively. Management continues to assess the realizability of the net
deferred tax asset on an ongoing basis, and believes that it is reasonably
possible that an additional portion of the valuation allowance will be reduced
in the near term.
It has been the practice of the Company to reinvest unremitted earnings of
foreign subsidiaries outside the United States. Accordingly, the Company does
not provide for federal income taxes that would result from the remittance of
such earnings.
At January 2, 1999 the Company had, for tax purposes, domestic and foreign
unused net operating loss carryforwards of $120.5
<PAGE>
million and $13.1 million, respectively. Domestic net operating loss
carryforwards are available to offset future income and will begin expiring in
2001 through 2010. In the case of foreign net operating loss carryforwards,
generally in the United Kingdom, such amounts are available to offset future
income indefinitely provided there are no substantial changes in the manner in
which the Company does business in foreign countries. The Tax Reform Act of 1986
contains provisions that limit the net operating loss carryforwards available to
be used in any given year upon the occurrence of certain events, including
significant changes in ownership interests.
For tax purposes, the Company has $6.7 million of investment and research credit
carryforwards at January 2, 1999, which will expire beginning in 1999 through
2012.
Net taxes paid were $1.1 million in 1998, $1.1 million in 1997 and $0.2 million
in 1996.
Note 10: Retirement Benefits
U.S. Pension Plan
The Company maintains a noncontributory defined benefit pension plan which
covered substantially all domestic employees. On January 31, 1995, the Company
ceased all benefit accruals under this plan as part of redesigning the Company's
employee benefit plans. The Company's funding policy is to contribute amounts to
the Plan sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts as
the Company determined to be appropriate from time to time.
On December 12, 1997, the Company used plan assets to purchase non-participating
group annuity contracts for a group of participants which represented
approximately one third of the Plan's liability. The purchase resulted in a $0.9
million gain in the fourth quarter of 1997 utilizing a 7.25% discount rate,
which is included in selling, general and administrative expenses in 1997.
The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over the two-year period ending
January 2, 1999, and a statement of the funded status as of January 2, 1999 and
January 3, 1998 (in thousands).
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C> <C>
Benefit obligation:
Obligation at beginning of year $ 30,743 $ 39,800
Interest cost 2,088 3,102
Actuarial (gain)/loss 1,680 4,654
Benefit payments (1,476) (2,496)
Settlements -- (14,317)
--------- ---------
Obligation at end of year $ 33,035 $ 30,743
========= =========
Fair value of plan assets:
Fair value of plan assets at beginning of year $ 28,171 $ 38,894
Actual return on plan assets 3,481 6,090
Benefit payments (1,483) (2,496)
Settlements -- (14,317)
--------- ---------
Fair value of plan assets at end of year $ 30,169 $ 28,171
========= =========
Funded status:
Funded status at end of year $ (2,866) $ (2,572)
Unrecognized transition (asset) obligation (1,664) (1,929)
Unrecognized (gain) loss 716 243
--------- ---------
Net amount recognized $ (3,814) $ (4,258)
========= =========
</TABLE>
The following table provides the amounts recognized in the statement of
financial position as of January 2, 1999 and January 3, 1998 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Accrued benefit liability $ (3,814) $ (4,258)
--------- ---------
Net amount recognized $ (3,814) $ (4,258)
========= =========
</TABLE>
<PAGE>
The following table provides the components of net periodic benefit cost for the
plan for fiscal years 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Interest cost $ 2,088 $ 3,102 $ 2,779
Expected return on plan assets (2,179) (3,016) (2,827)
Amortization of transition (asset) obligation (277) (410) (410)
----- ----- ------
Net periodic benefit cost (368) (324) (458)
Settlement (gain) loss (76) (925) --
--------- --------- ------
Net periodic benefit cost $ (444) $ (1,249) $ (458)
========= ========= ======
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 6.5% and 7.0% at January 2, 1999 and January 3,
1998, respectively. There was no rate increase in future compensation levels to
determine the actuarial present value of the projected benefit obligation at
January 2, 1999 and January 3, 1998, as the Company ceased all benefit accruals
on January 31, 1995. The expected long-term rate of return on plan assets was
8.0% in 1998, 1997 and 1996. No contributions were required from the Company for
1998, 1997 or 1996.
Defined Contribution Plan
The Company also sponsors a defined contribution plan. The plan covers employees
who work at least 1,000 hours per year and provides for contributions by the
employee between 1% and 15% of an employee's salary, which is capped by the
maximum amount permitted by the Internal Revenue Code. Through July 1, 1998, the
Company had matched 50% of the first 6% of an employee's contributions.
Commencing on July 1, 1998, the Company increased its match to 50% of the first
10% of an employee's contributions. Pension expense recognized for the defined
contribution plan totaled $1.5 million in 1998, $1.0 million in 1997, and $0.8
million in 1996.
Non-U.S. Plans
The Company has a defined benefit pension plan for one of its subsidiaries
outside the U.S.
The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over the two-year period ending
January 2, 1999, and a statement of the funded status as of January 2, 1999 and
January 3, 1998 (in thousands).
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Benefit obligation:
Obligation at beginning of year $3,688 $3,499
Interest cost 253 232
Service cost 136 98
Actuarial (gain)/loss 153 (141)
Benefit payments 199 --
------ ------
Obligation at end of year $4,429 $3,688
====== ======
Funded status:
Funded status at end of year $4,429 $3,688
Unrecognized transition (asset) obligation 43 45
Unrecognized (gain) loss 357 514
------ ------
Net amount recognized $4,829 $4,247
====== ======
</TABLE>
The following table provides the amounts recognized in the statement of
financial position as of January 2, 1999 and January 3, 1998:
<TABLE>
<CAPTION>
1998 1997
---------------------------
<S> <C> <C>
Accrued benefit liability $4,829 $4,247
------ ------
Net amount recognized $4,829 $4,247
====== ======
</TABLE>
<PAGE>
The following table provides the components of net periodic benefit cost for the
plan for fiscal years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Interest cost $ 253 $ 232 267
Service cost 136 98 270
Amortization of transition (asset) obligation (5) (5) (5)
Amortization of net (gain) loss (32) (237) 134
------- ------ ----
Net periodic benefit cost after curtailments and settlements $ 352 $ 88 $666
======= ====== ====
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
6.0% and 2.5% at January 2, 1999 and 6.5% and 3.5% at January 3, 1998.
Accrued Postretirement Benefits
Effective January 3, 1993, the Company put in place the provisions of Statement
of Financial Accounting Standards No. 106 (SFAS No. 106), "Employer's Accounting
for Postretirement Benefits Other Than Pensions", for its postretirement benefit
plan. The Company provides certain health care and life insurance benefits for
retired U.S. employees. Employees become eligible for these benefits when they
reach normal retirement age while working for the Company. Prior to the adoption
of this Statement, the cost was recognized as claims were paid. The Company's
postretirement benefit plans were modified at the end of 1995 and include a
limit on the cost of the Company's contributions for all retirees. The Plan is
not funded.
The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over the two-year period ending
January 2, 1999, and a statement of the funded status as of January 2, 1999 and
January 3, 1998 (in thousands).
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C> <C>
Reconciliation of benefit obligation:
Obligation at beginning of year $ 7,939 $ 7,774
Service cost 41 72
Interest cost 521 557
Actuarial (gain)/loss 168 354
Benefit payments (796) (818)
----- -----
Obligation at end of year $ 7,873 $ 7,939
======== ==========
Reconciliation of fair value of plan assets:
Employer contributions $ 796 $ 817
Benefit payments (796) (817)
----- -----
Fair value of plan assets at end of year $ -- $ --
======== ==========
Funded status:
Funded status at end of year $ (7,873) $ (7,939)
Unrecognized transition (asset) obligation 4,841 5,186
Unrecognized (gain)/loss 187 19
-------- ----------
Net amount recognized $ (2,845) $ (2,734)
======== ==========
</TABLE>
The following table provides the amounts recognized in the statement of
financial position as of January 2, 1999 and January 3, 1998:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Accrued benefit liability $ (2,845) $ (2,734)
-------- ----------
Net amount recognized $ (2,845) $ (2,734)
======== ==========
</TABLE>
The following table provides the components of net periodic benefit cost for the
plans for fiscal years 1998, 1997 and 1996:
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------
<S> <C> <C> <C>
Service cost $ 41 $ 72 $ 62
Interest cost 521 557 505
Amortization of transition (asset) obligation 345 346 345
--- --- ---
Net periodic benefit cost $907 $975 $912
==== ==== ====
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A 1% change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
--------------- --------------
<S> <C> <C>
Effect on total of service and interest cost components:
Postretirement health care benefit cost $ 16 $ (17)
Effect on health care component:
Benefit obligation $ 240 $ (240)
</TABLE>
For measurement purposes, a 7.5%, 8.0% and 8.5% annual rate of increase in the
per capita cost of covered health care benefits was assumed for fiscal 1998,
1997 and 1996, respectively. The Company's annual per capita cost commitment for
retiree medical care is capped at 1995 levels. As a result, the health care cost
trend rate assumption does not have a significant effect on the amounts
reported. The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 6.5% at January 2, 1999 and 7.0% at
January 3, 1998.
Note 11: Leases
The Company leases certain manufacturing facilities, sales and service offices
and equipment under operating leases. Total rental expense for these leases
amounted to $7.0 million in 1998, $7.1 million in 1997 and $4.8 million in 1996.
The future minimum commitments as of January 2, 1999 for noncancelable operating
leases are as follows (in thousands):
<TABLE>
<CAPTION>
REAL ESTATE EQUIPMENT TOTAL
<S> <C> <C> <C>
1999 $6,758 $1,367 $8,125
2000 6,110 693 6,803
2001 5,646 244 5,890
2002 5,441 80 5,521
2003 5,134 68 5,202
THEREAFTER 37,727 -- 37,727
------ ---- ------
GROSS COMMITMENT $66,816 2,452 $69,268
LESS SUBLEASE INCOME 9,117 -- 9,117
----- ----- -----
NET COMMITMENT $57,699 $2,452 $60,151
======= ====== =======
</TABLE>
Note 12: Contingencies
On April 28, 1998, the Company and James F. Lyons, President and Chief Executive
Officer were served with a lawsuit purported to be a class action suit on behalf
of persons who purchased Company stock in the open market over a specified
period of time. The lawsuit, entitled Duck Enterprises, LPVV. GenRad and James
F. Lyons, CA No. 98-10706-PBS, was filed in the United States District Court for
the District of Massachusetts. The complaint specified unspecified damages, plus
costs and attorney's fees. On January 8, 1999 the suit was dismissed without
finding.
On May 27, 1998, William E. Gaines, William E. Masskaker, Frank B. Wingate and
Heritage Investment Limited Partnership ("the plaintiffs") filed a Demand for
Arbitration ("the Demand") with the American Arbitration Association in Boston
(No. 11 168 00247 98) against the Company, James F. Lyons and Paul Pronsky, Jr.
The claims arise out of the acquisition of Industrial Computer Corporation
("ICC") by GenRad. The plaintiffs sought damages totaling $13.6 million, plus
costs and attorneys' fees. On June 18, 1998, the Company filed a response to the
Demand and on August 21, 1998, the Company filed an amended response and
counter-claims, which arose from the acquisition of ICC and sought unspecified
damages.
On April 7, 1999, the parties agreed to settle all claims arising from the
acquisition of ICC. In connection with the settlement, the Company will pay $7.0
million, net of insurance proceeds, of $4.0 million. The Company has recorded a
charge to operations totaling $7.7 million representing the cost of the
settlement plus costs and attorney fees.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of
<PAGE>
management, the amount of ultimate liability with respect to any such claims
will not materially affect the results of operations or the financial position
of the Company.
Note 13: Operating Segments and Other Geographic Information
Operating segments
GenRad maintains three core operating segments, Electronic Manufacturing
Solutions ("EMS"), Advanced Diagnostic Solutions ("ADS") and GR Software
("GRS"). GenRad's EMS segment focuses on the integration of hardware and
software for process control in the manufacture of printed circuit boards,
emphasizing inspection technologies and is headquartered in Westford, MA.
GenRad's ADS segment develops and markets diagnostic solutions comprised of
hardware, software and services which optimize the manufacturing and service
capabilities of transportation and equipment companies. ADS is headquartered in
Manchester, England with development and service centers in Detroit, MI and
Ismaning, Germany. GenRad's GRS segment was expanded during 1998 with the
Company's acquisition of ICC, a privately held manufacturing execution systems
company with operations in Atlanta. Upon acquisition, the Company combined the
operations of ICC with its existing manufacturing software development, sales
and support groups to form GRS. GRS develops and markets product solutions and
services to companies wishing to achieve and maintain control over manufacturing
processes. GRS is headquartered in Atlanta, GA with technology development and
support centers in Portland, OR, Aberdeen, Scotland and Zurich, Switzerland.
GenRad's reportable segments each represent strategic business units that offer
different, yet related, products and services. They are managed differently
because each requires differing technology development, sales strategies,
service capabilities and time to market considerations. Each segment is led by a
chief operating decision maker, who, in coordination with the Company's Chief
Executive Officer and President, utilizes the information reported below in
evaluating results and allocating resources pertaining to segment operations.
Each segment is evaluated based on contribution margin, or operating income,
derived from transactions with external third parties, i.e. net income (loss)
before interest income and expense, other income (expense) and income taxes.
These segment amounts are determined in accordance with the accounting policies
noted below. Intercompany revenues and expenses are excluded from the
contribution margin, or operating income, utilized by the chief operating
decision makers in determining resource allocation and evaluating performance.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in footnote 1.
The following table illustrates each segments operating income (loss) for 1998,
1997 and 1996. The amounts provided herein are those utilized by the respective
segments' Presidents in allocating resources and evaluating performance.
GenRad's chief operating decision makers do not utilize, nor does GenRad
maintain, asset information or capital expenditures by segment, accordingly,
such information is not presented herein.
<TABLE>
<CAPTION>
EMS ADS GRS (a) Total
------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
1998:
Revenues:
Product $141,388 $ 9,973 $ 7,929 $159,290
Service 34,471 22,314 8,714 65,499
--------------------------------------------------------
Total revenues $175,859 $32,287 $16,643 $224,789
========================================================
Depreciation and amortization $ 7,107 $ 1,553 $ 387 $ 9,047
========================================================
Operating income (loss) $ 38,061 $ 2,628 $(2,719) $ 37,970
========================================================
1997:
Revenues:
Product $146,170 $29,304 $4,198 $179,672
Service 35,517 19,204 2,368 57,089
--------------------------------------------------------
Total revenues $181,687 $48,508 $6,566 $236,761
========================================================
<PAGE>
<S> <C> <C> <C> <C>
Depreciation and amortization $ 5,096 $1,358 $ 83 $ 6,537
========================================================
Operating income (loss) $ 54,145 $9,174 $(3,175) $60,144
========================================================
1996:
Revenues:
Product $109,503 $20,418 $3,307 $133,228
Service 28,253 20,385 1,679 50,317
--------------------------------------------------------
Total revenues $137,756 $40,803 $4,986 $183,545
========================================================
Depreciation and amortization $ 3,976 $ 1,010 $ 151 $ 5,137
========================================================
Operating income (loss) $33,900 $6,405 $(1,562) $38,743
========================================================
</TABLE>
A reconciliation of the totals reported for the operating segments to the
comparable line items in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Depreciation and amortization:
Total for reportable segments $ 9,047 $ 6,537 $ 5,137
Corporate depreciation and amortization 6,265 2,713 1,688
-----------------------------------------
Amount per consolidated financial statements $15,312 $ 9,250 $ 6,825
=========================================
Operating income (loss):
Total for reportable segments $37,970 $60,144 $38,743
Corporate expenses (a) 15,994 21,658 12,887
Acquired in-process research and development 10,097 -- --
Impairment loss 4,906 -- --
Restructuring and other charges 21,267 -- --
-----------------------------------------
Operating income (loss) per consolidated
financial statements (14,294) 38,486 25,856
Other expenses, net (1,305) (740) (177)
-----------------------------------------
Income (loss) before income taxes $(15,599) $37,746 $25,679
==========================================
</TABLE>
(a) Includes amortization of capitalized software, corporate research and
development and other charges.
Geographic data
GenRad sells and supports its products primarily through its own sales and
support organizations. The Company maintains sales offices and support centers
in the United States, Mexico, the United Kingdom, Germany, France, Switzerland,
Italy, Singapore and Malaysia. GenRad also contracts with independent
representatives throughout the world to provide sales and support services,
primarily in areas not covered directly by a Genrad sales and support center.
The following table summarizes certain geographic information based on location
of customers for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------
<S> <C> <C> <C>
Revenues:
United States 108,479 113,032 102,936
All foreign countries 116,310 123,729 80,609
--------- ---------- ----------
Total revenues $ 224,789 $ 236,761 $ 183,545
========= ========== ==========
</TABLE>
No individual country other than the United States accounted for greater than
10% of consolidated revenues.
<PAGE>
<TABLE>
<CAPTION>
January 2 January 3
1999 1998
-------------------------------
<S> <C> <C>
Long-lived assets
United States 65,844 32,995
United Kingdom 4,994 8,732
All other foreign countries 3,423 383
---------- ---
Total 74,261 42,110
========== ======
</TABLE>
Significant customers
During 1998, one customer accounted for 11% of consolidated revenues. No other
customers accounted for greater than 10% of revenues in 1998. During 1997 and
1996, that same one customer accounted for 10% and 15%, respectively, of
consolidated revenues.
Note 14: Supplemental Information (Unaudited)
Quarterly Information (in thousands, except per share amounts)
In January 1999 the Company received comments from the Securities and Exchange
Commission ("SEC") related to its 1997 Annual Report on Form 10-K, its Form 8-K
related to the Company's acquisition of ICC (see Note 2) and its Forms 10-Q for
the quarters ended April 4, 1998, July 4, 1998 and October 3, 1998. The SEC
comments related to cetain legal and accounting matters including the Company's
purchase price allocation related to its acquisition of ICC, specifically the
Company's determination of value ascribed to acquired in-process research and
development. In April 1999, the Company concluded discussions wtih the SEC
regarding its comments and, as a result, has restated its quarterly reports on
Form 10-Q for the quarters ended July 4, 1998 and October 3, 1998 to reflect
recent guidance pertaining to the valuation of acquired in-process research and
development (see Note 2). The following summarizes originally reported quarterly
amounts for 1998 and 1997 and the restated amounts for 1998.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 2, 1999 (RESTATED):
NET SALES $49,072 $58,940 $60,550 $56,227 $224,789
GROSS MARGIN 25,272 28,516 24,467 27,657 105,912
NET INCOME (LOSS) 8,909 (11,940) (3,919) (2,118) (9,068)
NET INCOME (LOSS) PER SHARE:
BASIC 0.33 (0.42) (0.14) (0.08) (0.32)
DILUTED 0.30 (0.42) (0.14) (0.08) (0.32)
YEAR ENDED JANUARY 2, 1999 (AS REPORTED):
NET SALES $49,072 $58,940 $60,550 $56,227 $224,789
GROSS MARGIN 25,272 28,676 24,627 27,817 106,392
NET INCOME (LOSS) 8,909 (24,804) (3,503) 5,682 (13,716)
NET INCOME (LOSS) PER SHARE:
BASIC 0.33 (0.88) (0.12) 0.20 (0.49)
DILUTED 0.30 (0.88) (0.12) 0.20 (0.49)
YEAR ENDED JANUARY 3, 1998:
NET SALES 52,500 61,050 58,870 64,341 236,761
GROSS MARGIN 29,015 29,537 32,831 35,381 126,764
NET INCOME (LOSS) 11,717 7,921 9,605 12,052 41,295
NET INCOME (LOSS) PER SHARE:
BASIC 0.45 0.30 0.36 0.44 1.54
DILUTED 0.42 0.28 0.33 0.41 1.43
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under "Executive Officers of GenRad" in Part I of this
report and in Item 1 of the 1999 Proxy Statement is hereby incorporated by
reference.
Item 11. Executive Compensation
The information set forth under "Compensation of Executives and Directors" in
the 1999 Proxy Statement is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under "Certain Shareholders" and "Election of
Directors" in the 1999 Proxy Statement is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
None.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(2) The following schedules to the Consolidated Financial Statements of
GenRad, Inc. and Subsidiaries are filed as part of this report:
A. Schedule II - Valuation and Qualifying Accounts
<PAGE>
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of GenRad, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated January 24, 1999, except for Notes 2 and 12 which are as of April 7, 1999,
appearing in this Form 10-K also included an audit of the Financial Statement
Schedule listed in Item 14 (a)(2) of this Form 10-K. In our opinion, this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 24, 1999
<PAGE>
All other schedules not listed above are inapplicable or are not required under
Securities and Exchange Commission regulations and therefore have been omitted.
(a)(3) The following Exhibits are filed as part of this report:
10 -- Lease agreement dated July 26, 1996 between GenRad, Inc. and
Michelson Farm-Westford Technology Park Trust, incorporated by reference
to Exhibit 10 to the Company's report on Form 10-Q for the quarter ended
June 29, 1996.
10.1 -- Facility agreement dated June 26, 1997 between GenRad Limited and
BankBoston, N.A. London Branch, incorporated by reference to Exhibit 10.1
to the Company's report on Form 10-Q for the quarter ended June 28, 1997.
10.2 -- Amended and restated revolving credit agreement dated May 6, 1997
between GenRad, Inc. and BankBoston, N.A., incorporated by reference to
Exhibit 10.2 to the Company's report on Form 10-Q for the quarter ended
June 28, 1997.
10.3 -- Severance Agreement between GenRad, Inc. and Kevin R. Cloutier
effective as of May 9, 1997, incorporated by reference to Exhibit 10.3 to
the Company's report on Form 10-Q for the quarter ended September 27,
1997.
10.4 -- Severance Agreement between GenRad, Inc. and Paul Geere effective
as of May 9, 1997, incorporated by reference to Exhibit 10.4 to the
Company's report on Form 10-Q for the quarter ended September 27, 1997.
10.5 -- Severance Agreement between GenRad, Inc. and Lori B. Hannay
effective as of May 9, 1997, incorporated by reference to Exhibit 10.5 to
the Company's report on Form 10-Q for the quarter ended September 27,
1997.
10.6 -- Severance Agreement between GenRad, Inc. and Sarah H. Lucas
effective as of May 9, 1997, incorporated by reference to Exhibit 10.6 to
the Company's report on Form 10-Q for the quarter ended September 27,
1997.
10.7 -- Severance Agreement between GenRad, Inc. and James F. Lyons
effective as of May 8, 1997, incorporated by reference to Exhibit 10.7 to
the Company's report on Form 10-Q for the quarter ended September 27,
1997.
10.8 -- Severance Agreement between GenRad, Inc. and Paul Pronsky, Jr.
effective as of May 9, 1997, incorporated by reference to Exhibit 10.8 to
the Company's report on Form 10-Q for the quarter ended September 27,
1997.
6
<PAGE>
10.9 -- Severance Agreement between GenRad, Inc. and Michael W. Schraeder
effective as of May 9, 1997, incorporated by reference to Exhibit 10.9 to
the Company's report on Form 10-Q for the quarter ended September 27,
1997.
10.10 -- Severance Agreement between GenRad, Inc. and Walter A. Shephard
effective as of October 24, 1997, incorporated by reference to Exhibit
10.10 to the Company's report on Form 10-K for the year ended
January 3, 1998.
10.11 -- Severance Agreement between GenRad, Inc. and Gary H. Mueller
effective as of October 24, 1997, incorporated by reference to Exhibit
10.11 to the Company's report on Form 10-K for the year ended
January 3, 1998.
10.12 -- Agreement dated February 12, 1997 between GenRad Limited and
and Ford Motor Company, attached.*
10.13 -- Settlement agreement and Mutual General Release dated April 7,
1999 between William E. Gaines, William E. Massaker, Frank B. Wingate
and Heritage Investment Limited Partnership and GenRad, Inc., James F.
Lyons and Paul Pronsky, Jr., attached.
11 -- Computation of Per Share Earnings, attached.
21 -- List of Subsidiaries, attached.
23 -- Consent of PricewaterhouseCoopers LLP, attached.
27 -- Financial Data Schedule, attached.
(b) None
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(1) and (2) above.
* The Company has requested confidential treatment of the redacted
portions of this exhibit pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended, and has separately filed a complete
copy of this exhibit with the Securities and Exchange Commission.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GenRad, Inc.
(REGISTRANT)
By: /s/ JAMES F. LYONS
----------------------
James F. Lyons
President, Chief
Executive Officer and Director
Date: April 16, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JAMES F. LYONS President, Chief Executive Officer April 16, 1999
- ------------------ and Director
James F. Lyons
(2) Principal financial officer:
/s/ WALTER A. SHEPHARD Vice President, Chief Financial Officer April 16, 1999
- ---------------------- and Secretary
Walter A. Shephard
(3) Principal accounting officer:
/s/ CRAIG C. CAMPBELL Director of Corporate Accounting April 16, 1999
- ---------------------
Craig C. Campbell
(4) A majority of the Board of Directors:
/s/ WILLIAM S. ANTLE III Director April 16, 1999
- ------------------------
William S. Antle III
/s/ RUSSELL A. GULLOTTI Director April 16, 1999
- -----------------------
Russell A. Gullotti
/s/ LOWELL B. HAWKINSON Director April 16, 1999
- -----------------------
Lowell B. Hawkinson
/s/ JAMES F. LYONS Director April 16, 1999
- ------------------
James F. Lyons
/s/ RICHARD G. ROGERS Director April 16, 1999
- --------------------
Richard G. Rogers
/s/ WILLIAM G. SCHEERER Director April 16, 1999
- -----------------------
William G. Scheerer
/s/ ADRIANA STADECKER Director April 16, 1999
- ---------------------
Adriana Stadecker
/s/ ED ZSCHAU Director April 16, 1999
- ----------------
Ed Zschau
</TABLE>
<PAGE>
GENRAD, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND
QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Additions
Balance Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended January 2, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $1,127 $1,170 $759 $1,538
Inventory reserve $6,013 $8,787 $ 7,678 $7,122
Deferred tax asset valuation allowance $53,162 $-- $10,818 $42.344
Year ended January 3, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $1,431 $26 $330 $1,127
Inventory reserve $8,836 $1,406 $4,229 $6,013
Deferred tax asset valuation allowance $66,678 $-- $13,516 $53,162
Year ended December 28, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $801 $963 $333 $1,431
Inventory reserve $10,238 $3,483 $4,885 $8,836
Deferred tax asset valuation allowance $76,710 $-- $10,032 $66,678
</TABLE>
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND ARE BEING FILED SEPARATELY WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE
24B-2. THE LOCATION OF THOSE OMITTED PORTIONS IS DENOTED BY BRACKETS.
ROTUNDA SUPPLIER
PERFORMANCE CONTRACT
R-910-W
1. INTRODUCTION
1.1 SCOPE
This document details the performance requirements and responsibilities
of the WDS supplier to Form Motor Company, For Customer Service Division
(FCSD), the Rotunda Essential Special Service Tool (ESST) and Equipment
Program, herein referred to as the Program. All Products or services
included in the Program are marketed by the Rotunda Activity of FCSD
and/or its authorized agent. Product or Products referenced throughout
this document are only Products related to the scope of the Program. A
supplier to the Program must comply with the requirements as set forth in
this document.
1.2 INTENDEND MARKET
Rotunda Products and services are marketed to Ford, Lincoln, and Mercury
vehicle dealers, and in some cases affiliate companies and their dealer,
throughout worldwide markets, Ford locations, warranty authorized Ford
fleet accounts, and various vocational schools. WDS will be utilized, but
not limited to, the following Countries/Markets where Ford is currently
present:
<TABLE>
<CAPTION>
REGION MARKET/COUNTRY # OF DEALERS
<S> <C> <C>
Africa South Africa ( )
Other Africa ( )
Total African Dealers ( )
Asia Pacific Australia ( )
China ( )
Hong Kong ( )
India ( )
Indonesia ( )
Japan ( )
Malaysia ( )
New Zealand ( )
Philippines ( )
South Korea ( )
Singapore ( )
Taiwan ( )
Thailand ( )
Vietnam ( )
Other Asia Pacific ( )
Total Asia Pacific Dealers ( )
Middle Eastern Gulf Coast Communities ( )
Israel ( )
Turkey ( )
Other Middle Eastern ( )
Total Middle Eastern Dealers ( )
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
REGION MARKET/COUNTRY # OF DEALERS
<S> <C> <C>
North American Canada ( )
Mexico ( )
United States ( )
Total North American Dealers ( )
Europe Austria ( )
Belgium ( )
Britain ( )
Denmark ( )
Finland ( )
France ( )
Germany ( )
Ireland ( )
Italy ( )
Netherlands ( )
Norway ( )
Portugal ( )
Spain ( )
Sweden ( )
Switzerland ( )
Total Western Europe Dealers ( )
Other Europe Czech Republic ( )
Hungary ( )
Poland ( )
Russia ( )
Other Europe ( )
Total Other Europe Dealers ( )
South American Argentina ( )
Brazil ( )
Chile ( )
Colombia ( )
Puerto Rico ( )
Venezuela ( )
Other South America ( )
Total South American Dealers ( )
Total Ford Dealer Count ( )
</TABLE>
NOTE: Upon award of the WDS contract, the following Jaguar, Aston Martin
and Mazda dealers information will be provided upon request.
1.3 AVAILABILITY (TIMING)
The WDS product must be available to support a North American launch
( ). ( ) units are required at Ford's
distribution supplier no later than ( ) to support an ( )
product launch for North American Dealers. Product availability for
regions other than North America must also be available on a per
2
<PAGE>
order basis. Ford desires a complete worldwide product roll out within
( ) months from initial introduction in North America. Following is an
overview of roll out timing:
o ( ) - North American Dealers - approximately ( ) units
o ( ) - European Dealers - approximately ( ) units
o ( ) - Rest of the World - approximately ( ) units
o ( ) - Jaguar Dealers - approximately ( ) units
o ( ) - Aston Martin - approximately ( ) units
o ( ) - Mazda - approximately ( ) units
The WDS product and its accessories, as presented in your response to
this RFQ, must be available for purchase by Ford or its affiliates until
( ). See product pricing section 9.
2. PRODUCTS
2.1 NEW PRODUCTS
New Products are defined as automotive repair products, facility
equipment, vehicle service consumable items and services that are not
currently in the Program. A supplier introducing new Products must
coordinate the product review and evaluation with the Rotunda Activity at
least ( ) days in advance of the supplier planned introduction date.
Products will not be included in the Program if the evaluation process
has not been completed with all concerns closed.
2.2 PRODUCT DESIGN CHANGES AND NEW REPLACEMENT EQUIPMENT
2.2.1 SUPPLIER INITIATED DESIGN CHANGES AND NEW REPLACEMENT EQUIPMENT
If either Customer or Seller finds there is a need for a change in the
product, then (i) they shall submit such change order to the party for
consideration, (ii) Seller shall advise the Ford Rotunda activity of what
the impact of such change shall be on the price of the product, tooling
costs, and time to implement, (iii) if both parties agree in writing then
such change order shall be implemented. Customer's acceptance authorizing
such change order shall constitute acceptance of the change in product
price. Seller may make minor changes to products when such are
transparent to the user and do not affect form, fit or functionality.
2.2.2 FIELD RETROFIT
The supplier is responsible for field retrofit programs resulting from
product problems due to design or improper manufacturing. A retrofit of
this nature is to be performed by the supplier (
).
2.3 FORD INITIATED DESIGN CHANGES
Certain Products may require change in terms of function or application
due to technological or design changes in Ford vehicles. Any product
changes will be submitted via the 1843 process (reference section 3.3.3)
for evaluation in cooperation with all of the affected Ford Vehicle
Centers (VC).
3
<PAGE>
3. NEW PRODUCT REVIEW
3.1 CONFIDENTIALITY STATEMENT
All product information and evaluation data is covered by a
"confidentiality" agreement maintained between Ford the contracted
agencies.
3.2 SUPPLIER CONFIDENTIALITY AGREEMENT
A. Supplier or its subsidiaries or any of their representatives shall not
publish nor permit to be published nor distribute for public consumption
any information, oral or written, concerning developments made under or
the results of conclusions made pursuant to, the performance of this
Program without prior written consent of Ford, the Rotunda Activity.
3.3 PRODUCT REVIEWS
3.3.1 PRODUCT REVIEW PROCESS
All new Products, and supplier initiated Product changes, offered to the
Rotunda Activity are subject to review for possible Program inclusion.
3.3.2 PRODUCT COMPATIBILITY REVIEWS
Certain Rotunda Products can be impacted in terms of function or
application by technological or design changes in Ford vehicles. As a
consequence, the supplier is required to continually assess the
functionality of these Products in regards to new model vehicles. The
supplier is required to identify, develop and present to Ford product
changes to support changes in vehicle technology. Any product changes
will be submitted for evaluation in cooperation with all of the affected
Ford Vehicle Centers.
3.3.2.1 TIMING
Changes to vehicles currently in product may result in product
incompatibility and necessitate immediate product reviews. ( )
prior to vehicle Job 1, the Supplier identifies potential
compatibility concerns. ( ) prior to vehicle Job 1, a
supplier impacted by vehicle compatibility concerns is required to
review the vehicle and physically try the equipment on the vehicle
for proper fit and function. If changes to the product are necessary
or a new piece of equipment is needed, the supplier must have the
first equipment prototype ready for evaluation within ( ) days from
the time the change is identified. Approved compatible equipment
changes must be implemented and available to meet standard shipping
requirements no later than vehicle Job 1.
3.3.3 ESSENTIAL SPECIAL SERVICE TOOL AND EQUIPMENT ENGINEERING REQUEST
(1843)
The Equipment and Service Tool and Equipment Engineering Request form
(1843) is a Ford document used to request investigation, development and
release of service tools or equipment. It also serves as the final
engineering approval document for projects involving Ford reviews. An
affected supplier may be required to provide information, such as,
Product development cost, pricing, manufacturing schedule, and shipment
dates, for use in submission of this form.
4
<PAGE>
4. PRODUCT EVALUATION
The supplier is required to evaluate their product in accordance with
performance specifications set forth by Ford. All test data submitted as
evidence of compliance by the supplier must be certified by a
Professional Engineer (PE). Rotunda may elect to conduct all or part of
an evaluation at a Ford specified facility in cooperation with a Ford
engineering activity or VC Team. Evaluations may require one or many of
the evaluations described below. Each product will be reviewed
independent of another to determine the criteria in which to evaluate.
The supplier will receive a copy of the 1843 (reference section 3.3.3)
once the evaluation has been completed.
4.1 CONSIGNMENT EQUIPMENT
To facilitate Product performance testing, the supplier will be required
to provide equipment on a "no charge" consignment basis. Products
submitted for evaluation shall be production representative in design and
construction quality. A Consignment Purchase Notification (PN) initiated
by the Rotunda Activity will be issued by Ford Purchasing (reference
section 9.10). Standard equipment consignment is ( ) days. If additional
time is required, the supplier will be notified. When the evaluation has
been completed the equipment will be returned to the supplier.
( ). Do not ship, mail or hand deliver
equipment without a previously issued Consignment PN from Ford
Purchasing.
4.2 EVALUATION CLASSIFICATIONS
4.2.1 PRODUCT FUNCTIONAL EVALUATION
All Products are evaluated to ensure they are compatible with Ford
products and procedures, and perform as indicated by the supplier in a
service garage environment on the applicable Ford Products.
4.2.2 PRODUCT SUPPORT DOCUMENTATION
Product support documentation includes, but is not limited to, warranty,
extended warranty, maintenance agreements, and operators, maintenance,
training and installation materials. Two copies of the current materials
provided with the equipment must be supplied to the Rotunda Activity. The
materials will be evaluated for clarity and completeness. Products cannot
be released for Program inclusion unless all Product support
documentation concerns have been addressed and closure agreed to by Ford.
4.2.3 SAFETY EVALUATION
The individual products which make up the Ford WDS must have all the
safety agency approvals in place to support Product launch timing as
specified in Section 1.3 of this document.
4.2.3.1 SAFETY CRITERIA
Products must meet applicable safety evaluation criteria determined
by requirements set forth by Ford Safety. Products cannot be released
for Program inclusion unless all major safety concerns have been
addressed and closure agreed to by Ford.
5
<PAGE>
4.2.3.2 SAFETY LABELS
Safety labels (Danger, Warning, Caution) must be designed per the
current American National Standards Institute (ANSI) X535.4 standard
"Product Safety Signs and Labels." The supplier must COMPLY to the
appropriate standard for the product submitted. Products cannot be
released for Program inclusion unless all safety label concerns have
been addressed and closure agreed to by Ford.
4.2.3.3 SAFETY COMPLIANCE
Products must meet or exceed standards specified by the current
Occupational Safety and Health Act (OSHA), Ford Manufacturing
Standards and/or industry standards.
4.2.3.4 INDEPENDENT CERTIFICATION LABORATORY COMPLIANCE
Products may be required to be certified or approved by an applicable
independent testing agency within the country of destination such as:
Underwriter's Laboratories (IL), Canadian Standards Association
(CSA), MET Laboratories, American Gas Association Laboratories (AGA),
Factory Mutual Research Corporation (FM), European Certification
(CE), or Electrical Testing Laboratory (ETL). The supplier shall
forward a copy of the testing agency's certification, as well as,
Product
evaluation data to support claims of compliance to Ford Rotunda.
UL, CSA, TUV, EEA - The modified UL mark is officially accepted in
Canada just as the modified CSA mark is now acceptable in the U.S.
Both UL and CSA can also create a CB Test Certificate. This
certificate, when tested with the appropriate country deviations, can
be used to obtain approval in the EEA countries as needed.
The Ford WDS products have legal requirements that they must comply
with prior to being marketed in certain countries, but not limited
to, the following tables listed below. Ford's assumption is that
these products fall into the category of test and measurement. All
country requirements are based on this category.
<TABLE>
<CAPTION>
COUNTRY KEY COUNTRY KEY COUNTRY KEY
<S> <C> <C> <C> <C> <C>
United States B Denmark A, J Hong Kong na
Canada B Sweden A, J Brazil na
Mexico na Finland A, J Malaysia na
Belgium A, J Norway A, J Puerto Rico na
France A, J Luxembourg A, J Singapore na
Germany A, J Switzerland A, J South Africa L
Ireland A, J Australia A, M Taiwan na
Italy A, J New Zealand na Thailand na
Netherlands A, J Poland A, J Turkey na
UK A, J China J Argentina na
Greece A, J Czech A, J Indonesia na
Spain A, J Hungary A, J Venezuela na
Portugal A, J Russia na Vietnam na
Austria A, J S. Korea na Columbia na
Israel na Chile na Philippines na
Japan na India na
</TABLE>
6
<PAGE>
KEY (safety)
"na" = No known requirements at this time
"A" = EN61010-1, 1EC 1010, TUV or equivalent safety approval by
means of CB test specific country deviations
"B" = UL or CSA (either agency has a certification to cover the
other)
KEY (EMI emissions and susceptibility)
"na" = No known requirements at this time
"J" = CISPR 11 Level "A", EN55011, EN50082-1
"L" = South Africa, SABS test and certificate
"M" = Australia, C Tick Mark required after 1/1/97
4.2.3.5 MULTIPLE LISTING
If the Product is to be certified by the Environmental Protection
Agency (EPA), the supplier shall maintain and pay for the cost of an
independent certification laboratory multiple listing for the Rotunda
branded version of the Product.
4.2.4 ENIVRONMENTAL IMPACT EVALUATION
Products that generate a waste stream are subject to an environmental
impact evaluation by the Ford Environmental Quality Office (EQO) and the
Industrial Hygiene Office. The supplier must address each item of concern
resulting from each evaluation. Products cannot be released for Program
inclusion unless all environmental concerns have been addressed and
closure agreed to by Ford.
5. PRODUCT IDENTIFICATION
5.1 ROTUNDA ITEM NUMBER ASSIGNMENT AND PLACEMENT
A Rotunda item number is assigned by the Rotunda Essential Special
Service Tool and Equipment Activity after the Product evaluation is
complete. Under no circumstances can a supplier assign their own Rotunda
item number. The number must appear on everything related to the Product,
along with the supplier's model number. This includes service labels,
owner's manual, operating guide, installation literature, and any/all
literature or correspondence related to the product. The item number
represents the specifications and contents of the approved Product. If
the specifications or contents change in any way, the Product must be
submitted for review before a new Rotunda item number will be assigned by
the Rotunda Activity.
5.2 SERIAL NUMBER
The serial number is assigned by the supplier and is required on all WDS
products. A unique serial number and a manufacturing date code must be
assigned to each specific piece of the equipment. The serial number and
date code is used to assist in identifying the production date and the
functional level of each Product. Additionally an electronic serial
number mapping the WDS product to the manufacturing lot number and the
manufacturing location and finally to the dealer (end-user) in a mutually
agreeable database format is required.
5.3 PRODUCT COLOR
All Products included in the Program must be a mutually agreed upon
color.
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5.4 ROTUNDA FORD TRADEMARK LABEL
5.4.1 EQUIPMENT
( )
The trademark must be applied at the supplier's manufacturing
facility prior to shipment. The R911 details the Rotunda
trademark label requirements.
5.4.2 PRINTED MATERIAL
All printed material associated with a Product is to be
identified with the appropriate trademark prominently displayed
on the cover. The Rotunda, Jaguar, Aston Martin or Mazda item
number is applicable and supplier model number must also be
displayed. The R911 contains guidelines for trademark application
on publication of all printed material.
5.5 SERVICE DECAL
All Products must include a service decal. The service decal must be
located on the back of the Product and contain the following items:
o Rotunda Item Number
o Model Number
o Manufacturer Serial Number
o Name of Manufacturer
o Service Phone Number
6. WARRANTY
6.1 STANDARD WARRANTY
All Products sold through the Rotunda program must be covered by a
( ) warranty which includes ( ) unless
otherwise specified by Ford in writing, such as extended warranty
coverage. The warranty must be offered by the supplier to Rotunda and its
customer. The supplier of the equipment issues and administers its own
warranty. The supplier should ensure that the warranty is in no way
misrepresented to the end user. The specific warranty provisions are to
be packaged with the equipment prior to shipment.
6.2 WARRANTY START DATE
All Products will be warranted from the date of shipment to the end-user.
6.3 FACTORY SERVICE WARRANTY
The supplier must provide their standard warranty for factory service.
6.4 EXTENDED WARRANTY OR MAINTENANCE AGREEMENTS
Product support until ( ), which includes extended warranty
and maintenance agreements must be offered by the WDS supplier. The
extended warranty and maintenance agreements must be offered by the
supplier to Ford and its customer per a ( ) maintenance
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schedule, ( ) to Ford. In the event Ford elects to renew the
maintenance agreement, please quote pricing ( ). All extended
warranty and maintenance shall expire on ( ). The supplier
should ensure that the extended warranty and maintenance agreement is in
no way misrepresented to Ford or the end user.]
6.5 WARRANTY ADMINISTRATION RESPONSIBILITY
The supplier must maintain, (
), accurate warranty and administration records,
including parts purchased from subcontractors so that Product
reliability can be analyzed in terms of equipment type, failure mode,
time in service, geographic location, and other pertinent
classifications].
7. ( ) INDEMNIFICATION ( ) INSURANCE
7.1 ( ) INDEMNIFICATION
The Supplier agrees to indemnify and hold Ford harmless from and against
any and all claims for personal injury, death or property damage
( ).
7.2 INSTALLATION OF EQUIPMENT INDEMNIFICATION
The supplier agrees to indemnify and hold Ford harmless from and against
any and all claims of personal injury, death or property damage out of or
connected with the installation of the supplier's Product if installed by
the supplier or a supplier approved installer.
7.3 SERVICE INDEMNIFICATION
The supplier shall indemnify Ford from any claims which arise out of the
performance or failure to perform the services called for in the
contract, and shall hold Ford harmless from any such claims.
7.4 ( ) INSURANCE
The supplier must maintain adequate ( ) insurance (
). The supplier is to include Ford as
a named insured and provide a copy of the annual policy renewal to the
Ford Rotunda activity.
8. CUSTOMER SUPPORT
8.1 TRAINING
Rotunda products must be supported by the supplier with adequate
training, and operating instructions. Training must cover comprehensive
operation instructions, maintenance, environmental and safety
requirements, routine trouble shooting (for product malfunctions),
service part illustration and detailed replacement parts listing.
Training can be provided in one or any combination of, but not limited to
the following methods as approved by Ford; printed material, video,
CD-ROM, etc. If a Rotunda supplier delegates support responsibility to a
third party, the Rotunda supplier is responsible for performance.
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8.2 ( )
An ( ) program for faulty WDS units is a method in
which Ford can insure dealers worldwide are provided with quality product
support. The ( ) program will cover all (
). A ( ) time period to exchange a dealer's
faulty unit with a like new unit is required. Please provide a detailed
process on how to meet this requirement utilizing Ford's Distribution
agent.
8.3 LANGUAGE SUPPORT
The following languages, as a minimum, must be supported by any and all
documentation/material and software that is intended for Dealer usage.
These are the same languages targets for Ford Information Products.
<TABLE>
<CAPTION>
<S> <C> <C>
English Mandarin Chinese Russian
German Czech Hebrew
French Hungarian Arabic
Spanish Polish Slovenian
Italian Brazilian, Portuguese Slovak
Portuguese South African, Spanish Macedonian
Dutch French Canadian Bulgarian
Danish Japanese Romanian
Swedish Korean
Norwegian Thai
Finnish Indonesian
Greek
</TABLE>
8.4 SERVICE PART AVAILABILITY
A detailed list of all service parts and the applicable service part
illustrations are required. Service parts must be available to Ford or
its distribution agent through ( ). Service parts must be
offered by the supplier to Ford and its customer per a ( )
service part price schedule. In the event Ford elects to renew the
service part agreement, please quote pricing for ( ).
9. FORD CONTRACT
9.1 BLANKET CONTRACT
A Ford blanket contract establishes terms and conditions for specific
Products for a period of time. During the term of the blanket contract, a
Rotunda release may be issued against that blanket to constitute an
order. Blanket contracts are issued and administered by Ford Purchasing.
The terms and conditions specified on the blanket contract are contained
herein and on the reverse side of the Ford Purchase Notification.
9.2 TERM AND RENEWAL
The WDS blanket contract period is for a period of ( ) as agreed
to by both parties. WDS products must be available for purchase by Ford,
its distribution agent, or its affiliates until ( ).
All extended warranty and maintenance shall expire on ( ).
Service part availability is required through (
).
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9.3 CONTRACT CHANGES
Changes to the blanket contract include, but are not limited to, the
addition of new Product, changes to existing Products which affect prices
or require a model number change, contents of packages, transportation
terms, address, company name or billing information. All information
regarding a contractual change must be quoted in writing to Ford
Purchasing and the Rotunda Activity. Changes will be finalized by the
issuance of a contract amendment from Ford Purchasing.
9.4 PRICE
All WDS Product prices must remain firm for the ( ) term of the
contract. All prices must be quoted in ( ) regardless of the
country of manufacturing or destination. Please include separate pricing
schedules for "Service Parts", Extended Warranty and Maintenance" and
"WDS optional (accessories) hardware" as described in the hardware
functional specification.
9.5 QUALITY
Rotunda contracts do not have ( ). Products are to be
shipped in quantities as reflected on the Rotunda release or as specified
by Ford's distribution agent.
9.6 PAYMENT TERMS
Ford, or its agent, payment terms are ( ) which are
defined as payment on the ( ). ( ) payments
are made no sooner than ( ). If early payment
discount terms are available, the supplier shall provide these terms in
writing to Ford with their quotation.
9.7 TRANSPORTATION TERMS
All transportation costs must be prepaid by the supplier. Transportation
terms ( ) are required. The ( ) to
Ford's distribution agent. (
).
9.8 SALES/USE TAX
The supplier must not bill sales or use tax as purchases are for resale.
9.9 CONSIGNMENT PURCHASE NOTIFICATION
A purchase notification is issued for consignment equipment. The supplier
is required to confirm that equipment will be provided on a (
); indicate value of equipment in the
event of loss or damage and sign and date the request.
9.10 PRODUCT RESEARCH AND DEVELOPMENT COST
(
). Ford Motor Company will not entertain (
) as part of your proposal.
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10.0 SOFTWARE DEVELOPMENT
10.10.1 SELLER'S RESPONSIBILITY
a. Seller will design and implement Software in conformance to the
Statement of Work or as indicated on the face of the Purchase Order
and/or contained in the Software specifications section of this RFQ.
b. During the term of the Purchase Order, Seller will attend monthly
review meetings for the purpose of keeping Buyer completely informed
about the status of the project. At the monthly meetings, Seller will
demonstrate or discuss project status for Buyer's review.
c. Seller will use its best efforts to correct any errors or performance
problems identified by Buyer during acceptance testing.
10.10.2 BUYER'S RESPONSIBILITY
a. Buyer will assign a project analyst knowledgeable in the requirements
of the Software who will work with Seller on an as-required basis to
assist Seller in understanding Buyer's requirements, resolving design
questions, determining and defining functions and generally being
available and responsible for decisions necessary to allow Seller to
perform the service required hereunder. The project analyst(s) and/or
other personnel of Buyer, as necessary, will administer the monthly
status meetings attended by Seller.
b. Buyer will provide ( ) of each Phase ( ) of
receipt of that Phase's deliverables or provide a list of problems or
nonconformity to Seller within that same period.
10.10.3 PAYMENT
a. Buyer will pay Seller for development of Software in accordance with
the following payment schedule indicated on the face of the Purchase
Order.
Payment
$-------------------- ( )
$-------------------- ( )
$-------------------- ( )
$--------------------
$-------------------- ( )
b. Seller will invoice Buyer upon delivery of each Phase of the project
as set forth above. Payment will be made on terms of ( ).
Buyer will withhold ( ) of the payments due for the invoices for
( ) phases. The holdback amounts will be released upon final
acceptance of each phase.
10.10.4 CONFIDENTIALITY OF BUYER'S INFORMATION
In order that Seller may effectively provide services to Buyer, it may be
necessary or desirable for the Buyer to disclose confidential and
proprietary information pertaining to Buyer's past, present and future
activities. Since it is difficult to separate confidential and
proprietary information from that which is not, Seller will instruct its
personnel to regard all information gained by each such
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<PAGE>
person, as a result of the services being performed hereunder, as
information which is proprietary to Buyer and not to be disclosed to any
one outside of the Seller's organization. With respect to all obligations
of Seller to retain in confidence proprietary information of Buyer,
whether such obligations have been created by this Purchase Order or by
operation of law, such obligations shall survive the dissolution,
cancellation or termination of this Purchase Order for any reason or any
modification, extension or renewal thereof.
10.10.5 WORK FOR HIRE
a. Any work of authorship created by Seller in performing the services
hereunder shall be considered as a specially ordered or commissioned
"Work for Hire" and all copyrights for such works of authorship shall
belong to Buyer. All such works of authorship shall bear a valid
copyright notice designating Ford Motor Company as the copyright owner.
In the event any portion of the work of authorship created by the Seller
in performing the services hereunder does not qualify as "Work for Hire",
Seller shall acquire title to the copyright for such portion and assign
all acquired title and interest to Buyer.
b. With regard to works of authorship created prior to performing the
services hereunder for which copyrights are owned or controlled by Seller
or for which Seller has rights to grant copyright licenses and which are
included in any works of authorship fixed in any tangible medium of
expression (including, without limitation, audio-visual works, computer
programs, writings, drawings, prints, manuals and specifications)
furnished to Buyer or any of Buyers subsidiaries hereunder. Seller hereby
grants to Buyer and its domestic and foreign subsidiaries an irrevocable,
nonexclusive, paid-up worldwide license under each and every such
copyright to distribute copies of the copyrighted work to the public, and
to publicly or privately display the copyrighted work without further
accounting to Seller.
10.10.6 INDEMNITY
Seller warrants that the transfer to Buyer and Buyer's use of the
Software and related documentation will not infringe any proprietary
rights (including patents, copyrights, trademarks and trade secrets) of
any other entity. Seller will indemnify and defend Buyer from any claim,
liability and expense, including attorney's fees, arising out of any
breach of the foregoing warranty, provided that Buyer notifies Seller in
a timely fashion of such claim. In the event a claim of infringement is
asserted, Seller may replace or modify the Software to make it
noninfringing, provided that Buyer agrees that such replacement or
modification achieves the substantive results of the original version of
the Software, or Seller may procure at its expense a license for Buyer to
use the rights allegedly infringed.
10.10.7 WARRANTY
a. Seller warrants that the Software and related documentation will
conform with all written specifications furnished to Buyer by Seller in
connection with this Agreement, including any user manual, and that the
Software is compatible with and will operate on the computer systems,
computer sites or diagnostic equipment described on the Purchase Order
and/or contained within this RFQ. Upon Buyer's request, Seller will
correct promptly ( ) each variance of the
Software from the written specifications, and any programming error
attributable to Seller. Error is defined as a program incompatibility
which renders the Software dysfunctional and which can be replicated
under the same conditions causing the error.
b. Seller warrant that any services rendered by Seller will be performed
in a professional manner by qualified personnel.
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10.10.8 CHANGES
a. Buyer and Seller acknowledge that modifications and adjustments to the
specifications for the Software may become necessary in order to clarify
and define these specifications. Seller will perform these modifications
and adjustments as part of its services hereunder without additional
compensation.
b. In the event there is substantial change to the specifications which
results in (i) the expansion of the scope of the Software specifications,
(ii) the reduction in the scope of the Software specifications, Seller
will submit to Buyer a written proposal therefor describing the change to
be made and a fixed price increase or decrease therefore, as the case may
be.
c. If Seller's proposal under subparagraph (b) above is acceptable to
Buyer, Buyer will issue an amendment to the Purchase Order reflecting
such modifications to the specifications and adjustment in price. Seller
will not commence any work in connection with such change until such
purchase order amendment is issued by Buyer and Buyer will not be
responsible for any work performed in connection with such change if a
purchase order is not issued.
10.10.9 TERMINATION
a. Either Buyer or Seller may terminate this Purchase Order without
further liability to the other party upon ( ) in
the event of ( ) by the other provided that if such
party cures such breach within the 30-day period, this Purchase Order
shall not terminate but shall continue in full force and effect.
b. In the event of a termination hereunder, Seller shall deliver to Buyer
all materials relating to the Software prepared during the term of this
Purchase Order.
10.10.10 GENERAL PROVISIONS
a. A Purchase Order does not constitute Seller an agent, partner or legal
representative of Buyer for any purpose whatsoever, it being understood
between the parties hereto that Seller is to act as independent
contractor and is not authorized to make any contract, agreement,
warranty or representation on behalf of Buyer.
b. Failure of either party to act or exercise its rights under a Purchase
Order upon the breach of any of the terms hereof by the other party shall
not be construed as a waiver of such breach or prevent said party from
thereafter enforcing strict compliance with any and all terms hereof.
c. Any notice or other communication given hereunder shall be in writing
and mailed to Buyer at the address of Buyer shown on a Purchase Order or
to such other address as the parties shall have designated by notice in
writing. Such notice or communication shall be deemed delivered when sent
postage prepaid, certified mail, return receipt requested.
10.10.11 FORCE MAJEURE
Neither Buyer nor Seller shall be responsible for any delays occasioned
by causes beyond reasonable control of such party. Where a party is not
reasonably able to perform its obligations under a Purchase Order, an
account of causes beyond such party's reasonable control, such
nonperformance shall not operate as a default under a Purchase order but
may be grounds for modifications and, where appropriate, reduction in
price to Buyer.
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10.10.12 ENTIRE AGREEMENT
The terms and conditions set forth herein, together with any preprinted
terms and conditions on the reverse side of the Purchase Order,
constitute the entire agreement between Buyer and Seller with respect to
the design and implementation of the Software. In the event of a conflict
between these typewritten terms and conditions and the preprinted terms
and conditions on the reverse side of the Purchase Order, these
typewritten terms and conditions shall govern.
11. SOFTWARE LICENSE
( ). For each WDS Product purchased
hereunder, Ford is granted the right to distribute firmware and shrink-wrap
software materials furnished by supplier only in accordance with the license
terms supplied with such materials. Ford hereby acknowledges that Seller will
include an electronic or break-the-seal acknowledgment from End-User to the
software license terms supplied with WDS Products.
11.1 LICENSE
Licensor grants to Licensee, and Licensee hereby accepts, a nonexclusive license
to use the Software and related documentation in accordance with the terms and
conditions set forth herein. Licensee's use of the Software will be limited to
the computer system, computer site, diagnostic service tool (WDS) or, if
applicable, Local Area Network described on Attachment A, RFQ or the face of the
Purchase Order. Licensee may transfer its use of the Software to a backup or
replacement computer system, diagnostic service tool, site or network on a
temporary or permanent basis, provided that Licensee gives Licensor notice of
such transfer and discontinues its use on the original computer system, site or
network. Licensee may also transfer or assign this Agreement, the Software and
related documentation on a permanent basis provided that written notice of the
transfer is given to Licensor and the transferee reads and agrees to accept the
terms and conditions of this Agreement.
11.2 TERM/FEE
The term and fee of this license are set forth on Attachment A. The licensee fee
is payable on terms of ( ). Licensor will invoice
Licensee upon delivery if Licensee installs the Software or upon installation if
Licensor installs the Software as indicated in Attachment A. Licensee will be
responsible for any sales or use taxes based on the license fees and will pay
such taxes directly to the taxing authorities in those jurisdictions in which it
has a direct pay permit as set forth in Licensee's purchase order or will
reimburse Licensor in those jurisdictions in which Licensee does not have a
direct pay permit.
11.3 PERMISSION TO MODIFY OR COPY
The software and related documentation may be copied by Licensee in written or
machine readable form in whole or in part for use in understanding the Software,
for backup or archive purposes and for purposes of installation on authorized
diagnostic service tools and/or workstations. Licensee may modify any Software
for its own uses and may integrate the Software into other software programs,
provided that all copies and modifications of the Software will be destroyed
upon termination or expiration of this license. All copies and modifications of
the Software made by Licensee will include any copyright and confidential
property notices included by Licensor in the Software.
11.4 CONFIDENTIALITY
a. Licensee will use reasonable care to prevent disclosing to others trade
secrets of Licensor that are identified by written notice and embodied in the
Software or related documentation for a period of ( )
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<PAGE>
following termination or expiration of this Agreement. "Reasonable care" shall
mean that care which Licensee normally uses to protect its own software of a
similar nature. Licensee's obligations under this Paragraph will not apply to
portions of the Software and related documentation which were or become part of
the public domain, which are previously known to Licensee, or which are
independently developed by Licensee.
b. Licensee will not provide the Software and related documentation to any
person, other than as specified in the WDS RFQ, without Licensor's prior written
consent, except during the period any such person is performing services for
Licensee pursuant to a contract or purchase order with Licensee.
11.5 INDEMNITY
Licensor warrants that the transfer to Licensee and Licensee's use of the
Software and related documentation will not infringe any proprietary rights
(including patents, copyrights, trademarks and trade secrets) or any other
entity. Licensor will indemnify and defend Licensee from any claim, liability
and expense, including attorneys' fees, arising out of any breach of the
foregoing warranty, provided that Licensee notifies Licensor in a timely fashion
of such claim. In the event a claim of infringement is asserted, Licensor may
replace or modify the Software to make it non-infringing, provided that Licensee
agrees that such replacement or modification achieves the substantive results of
the original version of the Software, or Licensor may procure at its expense a
license for Licensee to use the rights allegedly infringed.
11.6 OWNERSHIP
Licensee acknowledges Licensor's representation that Licensor owns the Software
and the copyrights covering such Software and Licensee will not make any claim
contrary to Licensor's ownership of the Software.
11.7 WARRANTIES
a. Licensor warrants that the Software and related documentation conforms with
all written specifications furnished to Licensee by Licensor in connection with
the Agreement, including any user manual, and that the Software is compatible
with and will operate on the computer system, diagnostic service tool or
computer site described on Attachment A hereto. Upon Licensee's request,
Licensor will correct promptly at no additional charge to Licensee each variance
of the Software from the written specifications, and any programming error
attributable to Licensor.
b. Licensor warrants that any services rendered by Licensor will be performed in
a professional manner by qualified personnel.
c. Licensor's warranties are limited to those set forth in this Agreement and do
not include any other express or implied warranties, including implied warranty
of merchantability and fitness for a particular purpose.
11.8 SUPPORT AND MAINTENANCE
Licensor will provide Licensee with updates, enhancements, modifications or
changes to the Software which are available from Licensor. In addition, Licensor
will provide the maintenance and support services specified on Attachment A
hereto. ( ) for the services described in this Paragraph will be set
forth on Attachment A.
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11.9 DISCONTINUANCE
In the event Licensor discontinues its maintenance and support of the Software
or discontinues its Software business, ( ),
as Licensee requires to continue its ability to use the Software in accordance
with this Agreement.
11.10 TERMINATION
Licensee may terminate this Agreement upon written notice furnished to Licensor
( ). Licensor may terminate
this Agreement only for a material breach by Licensee of the terms and
conditions of this Agreement upon written notice to Buyer, which is given
( ), and which specifies the nature of such breach.
If Licensee cures such breach prior to the effective date of termination, this
Agreement shall not terminate and will continue in full force and effect.
11.12 ENTIRE AGREEMENT
The terms and conditions of this Agreement, together with the terms and
conditions set forth on Attachment A hereto, constitute the entire Agreement
between Licensee and Licensor with respect to license and support of the
Software. This Agreement shall be governed by the laws of Licensee's principal
place of business without regard to the conflict of laws provisions thereof, and
all litigation on contractual clauses will be brought only in a court of
appropriate jurisdiction in that location. For Ford Motor Company, a Delaware
corporation, and any subsidiary, joint venture, or other operation, the
principal place of business will be deemed to be Michigan.
12. MARKETING
12.1 SUPPLIER MARKETING
Once the contract has been approved, the supplier is required to forward to the
Rotunda Activity, at no cost, any existing marketing materials to support the
catalog and promotional material development. These materials include but are
not limited to camera ready art or photos, text, Product description and
specifications. The supplier may elect to provide, at its own expense, brochures
or sales material ready for distribution. However, development and distribution
of such material must be coordinated with and approved by the Rotunda Activity.
All marketing material must properly utilize the Rotunda Ford trademark.
12.2 ROTUNDA TOOL AND EQUIPMENT CATALOG
The Rotunda Tool Equipment Catalog is issued ( ). Materials
available to support the supplier's Products in the catalog must be submitted
by ( ). A high quality, black and white, glossy
photograph, with a white background, suitable for reproduction or a
hi-resolution gray tone 300 dpi scan, properly bearing the Rotunda trademark, is
required for each Product. In the case of ESST, high quality line art as
specified within the Global Aftermarket Service (GAM) criteria is required.
Timing requirements for the catalog will be communicated in writing to the
supplier.
13. EQUIPMENT INVENTORY/SHIPPING/MANUFACTURING
13.1 INVENTORY PLANNING
The supplier must maintain an inventory of Products to ensure delivery within
( ) to Ford's distribution agent. To assist in
planning inventory levels, the Rotunda Activity or its distribution agent will
provide year-to-date sales information. ( )
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13.2 PACKAGING
Adequate shipping containers designed to reduce shipping damages must be used. A
bill of lading must be affixed to the outside of the container to permit Ford's
agent to check the shipment for completeness. Each shipment must include
information necessary for installation, maintenance, and operation of the
product, etc. WDS products must be packaged by the manufacturer to meet market
requirements, such as proper power cord, CATS, etc. Bulk shipment to Ford's
distribution supplier that will require repackaging of product is not
acceptable. All kitting charges are to be included in the cost per unit.
13.3 SHIPPING METHODS
The transportation method, carrier, and routing should be selected carefully to
assure prompt delivery and reasonable transportation cost. Carriers with proper
unloading capability should be selected to prevent unloading damage or delays on
bulky and/or heavy Products. The supplier must notify the customer of any
special unloading requirements and anticipated delivery date, prior to shipment.
If the supplier does not notify the customer of the delivery date, the supplier
will incur all additional off loading responsibilities and charges.
13.4 SHIPPING PERFORMANCE
All Products must be shipped from manufacturer's stock to Ford's distribution
supplier. The Rotunda release, or Ford's distribution agent's release will
indicate the required fulfillment timing. The WDS supplier is required to
confirm ( ) to Ford's distribution supplier the ship
date. Any change to the ship date must be communicated to and authorized by
Rotunda. Presently, ( ) regional product distribution have been identified.
They are ( ).
These locations are subject to change based on the information provided by the
WDS supplier pertaining to manufacturing strategies. See section 13.7.
13.5 SHIPPING RECORDS
The WDS supplier will maintain proper records on all shipments to ensure prompt
resolution and follow-up inquiries and freight claims. Records of shipments for
items valued in excess of $( ) must be maintained for at least five years to
support recall and field modification programs.
13.6 RETURNED GOODS POLICY
The WDS supplier will accept returns of new and unused goods within ( )
of shipment to the end-user with ( )to the customer or Ford.
Return of goods will be coordinated with the supplier by Ford's distribution
agent. After the allowable return date, the supplier is required to accept the
return of new and unused goods as long as the product is still in the Program.
The supplier will be allowed to assess a reasonable repackaging and shipping
fee, if applicable. The repackaging fee must be defined in writing to Rotunda
and amended to the contract. Shipping fees should be actual. Additional handling
fees, etc. will be absorbed by the WDS supplier. If the product is returned
damaged, the supplier must refuse shipment. If the supplier accepts shipment, a
credit will be provided to Ford or its distribution agent and a debit to the
supplier for the cost of goods sold.
13.7 WDS MANUFACTURING STRATEGY
To provide our customers with a highly competitive product we require a clear
understanding of the manufacturing strategy that will be utilized with this
product. Our intent is not to require a manufacturer to establish local
manufacturing, but to investigate best practice on taking this product to
market.
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Point(s) of manufacturing can significantly impact the landed cost of
the product which will be a factor in determining the cost/value equation.
14. ORDER PROCESSING AND SUPPLIER INVOICING
14.1 ORDER PROCESSING
Orders will be processed by the Rotunda Activity. The supplier is required to
make an appointment with Rotunda to review detailed policies and procedures for
processing orders.
14.2 SUPPLIER INVOICING
An invoice can be submitted for payment as Products identified on a release and
related services are delivered. The release number must be identified on the
invoice. The supplier must maintain supporting documentation indicating delivery
of services included with the Product and make such documentation available to
Ford upon request.
14.3 CREDIT AND COLLECTION
( ).
Ford Motor Company GenRad
By: /S/ Karen Turbin By:/S/ Paul Geere
Its Buyer Its Managing Director
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ATTACHMENT A
DESCRIPTION OF SOFTWARE: Grade
TERM OF LICENSE: Life of WDS applications development
LICENSE FEE: $( )
Check One
_X_ COMPUTER SYSTEM OR SITE: FCSD
___ LOCAL AREA NETWORK:
Licensee's use of the Software will be limited to the Licensed
Computer Network located at Licensee sites. Copies of the Software
may be electronically transferred over the Computer Network
provided that the maximum number of concurrent users does not
exceed ______. Licensee agrees to install software under a
software usage management and control system that insures the
maximum number of concurrent users of the Software does not exceed
the number of units for which a license fee has been paid to
Licensor for the express purpose of use on a computer network. As
used herein, Computer Network is any combination of two or more
terminals that are electronically linked and capable of sharing
the use of a single software program and can control concurrent
usage of the Software.
INSTALLATION: _X__ Performed by License
____ Performed by Licensor
SUPPORT PROVIDED BY LICENSOR:
Description of Services: ( )
Fees ( )
Term: Life of WDA applications development
GenRad Licensee
By: /S/ Paul Geere By: /S/ Karen Turbin
Its: Managing Director Its: Buyer
20
<PAGE>
Ford Customer Service Division
Diagnostic Service Center
Subject: Worldwide Diagnostic System (WDS) Scope of Work
The purpose of this document is to identify the Scope of Work for the Worldwide
Diagnostic System (WDS) which has been developed through the Request for Quote
(RFQ) selection process with the selected.
For the Worldwide Diagnostic System (WDS) Ford Motor Company is purchasing an
( ) System, modified to meet Ford vehicle interface requirements,
which can provide Ford Dealers with a single worldwide diagnostic tool and the
software required to use the tool to service Ford vehicles.
The WDS Project will replace the existing diagnostic development processes with
a single global process and enable the transition from four diagnostic systems
(SBDS, NGS, FDS2000 and PDU) to one diagnostic system (WDS). WDS will support
Ford Motor Company's Goal to improve "Fix It Right The First Time on Time"
(FIRTFTOT).
This system will be supplied by the selected "Full Service Supplier".
"FULL SERVICE SUPPLIER"
Ford will supply Diagnostic Functional Requirements to GenRad using the
Diagnostic Authoring Process/Tool provided by GenRad. GenRad will develop,
implement, and provide the Software and Hardware required to perform the
diagnostic functional requirements. The re-engineering, design and development
of Complex Tools require significant input from Ford and Ford will be the lead
activity in this effort. Roles and responsibilities between Ford and GenRad for
the re-engineering effort will be mutually agreed upon during development.
The "Full Service Supplier" requirements include all of the following elements
of the WDS Work Breakdown Structure (WBS):
o Diagnostic Requirements
o Complex tools
o Functionality Required for Backwards Compatibility
o Diagnostic Application Maintenance
o Hardware Functional Requirements
o Diagnostic Foundation Requirements
o Sample/Pilot Requirements (includes Development Units,
Dealer Demo Units, Dealer Pilot Units and Training School
Units)
o Diagnostic Authoring Requirements
o Commercial/Support Requirements
21
<PAGE>
SCOPE OF WORK SUMMARY
The Scope of Work for the WDS Project includes all of the agreements and
clarifications developed during the RFQ review Process with GenRad. This
information is contained in the following documents:
o GenRad Quotation For the Worldwide Diagnostic System: Dated ( )
o WDS-RFQ; Ford Questions to GenRad Dated ( )
o GenRad response to Ford Questions ( ) and submitted
to Ford; ( ) , including the following documents
<TABLE>
<CAPTION>
<S> <C>
ESB009.DOC TabMan Client Integration
GWDS0178.DOC GRADE - A summary of the Authoring Tools
GWDS0312.DOC Response to Ford Questions
GWDS0318.DOC Framework User Interface
GWDS0319.DOC TabMan Trace Storage
GWDS0320.DOC GRADE Libraries
GWDS0321.DOC TestMan System Cells
GWDS0322.DOC Advanced Data Repository
GWDS0323.DOC Comparison of Pentium vs 486 Processor for WDS
GWDS0324.DOC Hardware Specification For The WDS3500-486 System
GWDS0325.DOC Hardware Specification For The WDS3500-Pentium System
</TABLE>
o Hardware Specification for the WDS 3500-Pentium System GWDS/SPEC/0325
Revision 4.0
DELIVERABLES
The above referenced information is not complete in some technical areas which
require further development. This contract is based on the data provided and
Ford's interpretation of that data. It is critical that GenRad and Ford work
together to refine the requirements and achieve a set of mutually agreed
specifications for the WDS, in a timely manner. The specification timing is
addressed in the Deliverables listed below. These efforts will be coordinated by
the WDS Project Management activity.
The following is a brief summary of the major agreements reached during this
process.
The WDS pricing agreed upon during the RFQ process is contained in Attachment 1.
The pricing for all optional items includes ( ).
These prices reflect the latest information provided by GenRad for the WDS
hardware including optional & standard CATs, docking station and optional CFR.
The GenRad proposal selected is the "one box" version of the GDS3500 - Pentium
system. The pricing for the "one box" version of the GDS3500 - Pentium system,
including ( ).
GenRad has agreed to supply the Diagnostic authoring Environment at no charge to
Ford. Personnel authorized by Ford are licensed to use GRADE for the purpose of
creating diagnostic applications in conjunction with GenRad as implementers for
execution on the GenRad supplied WDS 3500-Pentium System.
GenRad also agreed to give Ford an off-site applications engineer rate (
) Letter to Karen Turbin Ford Purchasing) and Technician
rate of ( ) for the WDS Program.
22
<PAGE>
The following is a list of Ford deliverables for the major WDS Work Breakdown
Structure elements. These dates may be superseded by mutually agreed upon
delivery dates.
DIAGNOSTICS DELIVERABLES
These deliverables are contained in the System Design Deliverables
document (Attachment II)
DIAGNOSTIC AUTHORING ENVIRONMENT DELIVERABLES
These deliverables are contained in the Diagnostic Authoring
Environment Deliverables document (Attachment III)
HARDWARE FUNCTIONAL DELIVERABLES
These deliverables are contained in the Hardware Deliverables
document (Attachment IV)
SUPPORT/COMMERCIAL DELIVERABLES
These deliverables are contained in the Support/Commercial
Deliverables document (Attachment V)
GENERAL REQUIREMENTS
Vehicle Coverage At Launch
WDS will provide diagnostic coverage for the current model year vehicles
and coverage for the ( ) when launched. WDS will
be capable of diagnosing all Ford badged vehicles from all Vehicle
Centers as well as Jaguar and Aston Martin vehicles.
Vehicle System Diagnostic Coverage
WDS will be capable of covering all (
) that can be diagnosed using electrical
or electronic means within the limits of the mutually agreed
specification of the WDS 3500-Pentium System.
Languages
WDS software will operate ( ) necessary to support local
requirements. WDS will support both single and double byte, Cyrillic, and
Alpha-Numeric languages written in any direction.
Installation
System installation, initial set-up and subsequent installation of any
system software updates will not require any special skills on the part
of the operator.
ISO9001
WDS, the development environment, Suppliers associated with WDS or
products associated with WDS must be ISO9001 compliant by January 1,
1999.
23
<PAGE>
DEFINITIONS
Ford - Any reference to Ford throughout this document should be taken as
Ford, Lincoln Mercury, Jaguar, Aston Martin and association programs
(e.g., Mazda/Probe, Nissan/Villager, etc.) except where explicitly stated
otherwise.
WDS - any reference to WDS throughout this document should be taken as
the WDS unit, docking station, foundation software and standard CATs.
Other aspects of WDS such as its development environment will be
specifically mentioned where needed.
CATs - Cables, Adapters and Transducers.
Options - There are items, such as the CFR, that the Dealer can purchase
as an option under the WDS Project. Such items will have their hardware
supported under the WDS Support Program.
Dealer Provided Equipment - There may be some items, such as a printer,
that the Dealer can purchase from a third party. In such cases, the
Dealer is responsible for securing hardware support for these items.
Diagnostic Foundation - Software that is fundamental to operation of the
WDS unit and has minimal or no dependency on vehicle types, model years,
or user characteristics (e.g. database engine, high and low level
software libraries and utilities, etc.)
Diagnostic Authoring Tool - A software suite with a user friendly front
end like a graphical user interface (GUI) to be used by Ford for
authoring guided diagnostics and generating and executable code. It must
include an emulator so that the code can be tested, de-bugged and refined
before validation on the WDS hardware.
<TABLE>
<CAPTION>
<S> <C>
FORD MOTOR COMPANY GenRad, Inc.
By: /S/ Karen Turbin By: /S/ Paul Geere
Printed Name: Karen Turbin Printed Name: Paul Geere
Title: Buyer Title: Managing Director
Date: 6/20/97 Date: 6/20/97
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
ATTACHMENT 1
<S> <C> <C> <C>
UNIT PRICE 1 AMOUNT 1,2 COMMENTS/INSTRUCTIONS
GDS3500 Main Unit (Major Items)
1. Integrate VIU into the Roving Unit ("One Box") Included in A1 & A2 $( ) Please provide exact savings
2. VCL Included in A1 & A2 due to this item Confirm 1 MB
RAM and 512 KB FLASH is
included
3. VIS Included in A1 & A2
4. 16 MB RAM Included in A1 & A2 $( ) Incremental cost to go from
8 to 16 MB RAM
5. Hard Disk Drive (>1.3 GB) Included in A1 & A2
6. 10.4 inch Active Color SVGA Display Included in A1 & A2
7. Touch Screen Included in A1 & A2
8. PCMCIA Interface Included in A1 & A2 $( ) Savings amount if PCMCIA
capability were to be deleted
9. R/Time License & Maintenance, O/S, Anti-Virus
& Diagnostic Foundation Included in A1 & A2 $( ) Including LAN and modem
support. With Dial-in File
Transfer Capability provided
by Windows 95 for remote
Access.
10. Loop Back Connectors Included in A1 & A2 Provide a list of all loop
back connectors included
in A.
11. Sample/Pilot Included in A1 & A2 All Sample & Pilot units to
be upgraded or replaced by
production level launch
hardware. Training units are
assumed to be production
level at time of delivery.
12. Tote Case Delete Provide cost of this item as
a dealer orderable accessory.
Subtotal 486 Based Main Unit ( Items 1-12) $( ) Provide weight, power, size
information for this
configuration.
13. 133 MHz Pentium Included in A2 $( ) Incremental cost of going
from 486DX4-100 to Pentium
133.
Subtotal Pentium Based Main Unit $( ) Provide weight, power, size
information for this
configuration.
14a. 486 Main Unit without VIS (Items 1-12 less item 3) $( )
14b. Pentium Based main Unit without VIS $( )
</TABLE>
1 Need firm pricing quotations on all items identified above. Unacceptable
responses include: "Up to", "approximately", "no more than", etc.
2. Please provide separate pricing for items in this column and also include
them in the price of the Main Unit.
3 Main Unit must be designed to accommodate presence or absence of the optional
items without the need for any modifications.
4. As a minimum, CAT and VIS specifications must stipulate: range, resolution,
accuracy, length, construction and connector type as appropriate.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
UNIT PRICE 1 AMOUNT 1,2 COMMENTS/INSTRUCTIONS
Docking Station (Major Items)
15. CD ROM Drive (Hot Dockable & Boot Capable) Included in B
16. AC Power Source Included in B
17. Battery Charger Included in B
Subtotal Docking Station (Items 15-17) $( )
-------------------------
Total 486 Main Unit and Docking Station (Lines A1 & B) $( )
Total P133 Main Unit and Docking Station (Lines A2 & B) $( )
Optional Items
18. Optional LAN (Hot Dockable/10 Base T) $( ) Included in all units in NA.
Optional for Europe and
ROW. Factory Installed.
19. Optional Modem (Hot Dockable) $( ) Dealer option. Factory
installed. Must provide all
modem configurations required
to support various phone
systems in WDS markets.
20. Additional 8 MB of RAM (Not a dealer option) $( ) Provide all memory upgrade
21. Optional Cart $( ) options and costs. Dealer
22. Optional Tote Case $( ) orderable accessory Dealer
orderable accessory
Standard CATs (4)
23. Pressure Vacuum Transducer $( ) Please provide firm pricing
24. Roving Probe Red $( ) for each individual CAT.
25. Roving Probe Black $( )
26. Probe Tips (15 types) $( )
27. WDS J1962 Cable without CAN $( )
Subtotal Standard CATs (Items 23-27) $( ) Bundled price of standard
CATs
</TABLE>
1 Need firm pricing quotations on all items identified above. Unacceptable
responses include: "Up to", "approximately", "no more than", etc.
2. Please provide separate pricing for items in this column and also include
them in the price of the Main Unit.
3 Main Unit must be designed to accommodate presence or absence of the optional
items without the need for any modifications.
4. As a minimum, CAT and VIS specifications must stipulate: range, resolution,
accuracy, length, construction and connector type as appropriate.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
UNIT PRICE (1) AMOUNT (1,2) COMMENTS/INSTRUCTIONS
Optional CATS
28. High Pressure Transducer $( )
29. WDS J1962 Cable plus CAN $( )
30. WDS DDL Cable $( )
31. Low Current Probe $( )
32. High Current Probe $( )
33. Dual Output Tach Probe Unit Prices and specifications for
34. Vehicle Power Point Cable $( ) items 31 through 36 may be provided
35. Stainless Steel Fuel Inlet Adapter $( ) shortly after the response due
36. Stainless Steel Fuel Return Adapter $( ) date, if not availableat that time.
Optional CFR
37. CFR Main Unit with Interface Cable to WDS $( )
Optional CFR CATs
38. CFR DDL Cable $( )
39. CFR J1962 Cable without CAN $( )
40. CFR J1962 Cable plus CAN $( )
486 Main Unit + Doc. St. + Stan. CATs (A1+B+C) $( )
P133 Main Unit + Doc. St. + Stan. CATs (A2+B+C) $( )
</TABLE>
1 Need firm pricing quotations on all items identified above. Unacceptable
responses include: "Up to", "approximately", "no more than", etc.
2. Please provide separate pricing for items in this column and also include
them in the price of the Main Unit.
3 Main Unit must be designed to accommodate presence or absence of the optional
items without the need for any modifications.
4. As a minimum, CAT and VIS specifications must stipulate: range, resolution,
accuracy, length, construction and connector type as appropriate.
<PAGE>
WORLDWIDE DIAGNOSTIC SYSTEMS (WDS)
ATTACHMENT II
[One page deleted]
<PAGE>
WORLDWIDE DIAGNOSTIC SYSTEM (WDS)
ATTACHMENT III
[One page deleted]
<PAGE>
WORLDWIDE DIAGNOSTIC SYSTEMS (WDS)
ATTACHMENT IV
[Three pages delted]
<PAGE>
WORLDWIDE DIAGNOSTIC SYSTEM (WDS)
ATTACHMENT V
[One half page deleted]
SETTLEMENT AGREEMENT
AND MUTUAL GENERAL RELEASE
This Settlement Agreement and Mutual General Release ("Agreement") is made
and entered into by and among the claimants WILLIAM E. GAINES, WILLIAM E.
MASSAKER ("Massaker"), FRANK B. WINGATE ("Wingate"), and HERITAGE INVESTMENT
LIMITED PARTNERSHIP, a North Carolina limited partnership (who are collectively
referred to as the "Claimants"); and the respondents GENRAD, INC., a
Massachusetts corporation ("GenRad"), JAMES F. LYONS, AND PAUL PRONSKY, JR. (who
are collectively referred to as the "Respondents").
WITNESSETH:
WHEREAS, there is presently pending before the American Arbitration
Association, Boston, Massachusetts Regional Office, a case captioned William E.
Gaines; William E. Massaker; Frank B. Wingate; and Heritage Investment Limited
Partnership v. GenRad, Inc.; James F. Lyons and Paul Pronsky, Jr., No. 11 168
00247 98 (the "Arbitration"), in which Claimants have made certain claims
against Respondents with regard to the sale, exchange and conversion of their
stock in Industrial Computer Corporation ("ICC") for shares of the stock of
GenRad on April 7, 1998 (the "Merger") pursuant to the Agreement and Plan of
Merger dated that date (the "Merger Agreement"), and in which GenRad has made
counterclaims against Claimants with regard to the Merger ("Counterclaims"); and
WHEREAS, GenRad and Claimants executed certain agreements in connection
with the Merger which shall be amended as provided herein,
<PAGE>
including, but not limited to, the Merger Agreement; an Employment Agreement
between GenRad and Wingate, dated April 7, 1998 (the "Wingate Employment
Agreement"); a Registration Rights Agreement between GenRad and Claimants, dated
April 7, 1998 (the "Registration Rights Agreement"); Non-Competition, Assignment
and Non-Disclosure Agreements between GenRad and Massaker and GenRad and Wingate
dated April 7, 1998 (the "Massaker Non-Competition Agreement" and the "Wingate
Non-Competition Agreement"); an Escrow Agreement among GenRad, Claimants, and
State Street Bank and Trust Company as Escrow Agent, dated April 7, 1998 (the
"Escrow Agreement"); and Stockholder Letters, dated April 7, 1998, between each
Claimant and GenRad (each, a "Stockholder Letter") (collectively, the "Merger
Documents"); and
WHEREAS, Claimants and Respondents, for and in consideration of the mutual
covenants, agreements, forebearances, waivers, releases, and conditions
contained herein, have agreed to compromise and settle fully and finally their
respective claims in the Arbitration, without any admission of liability by
either party or concession as to the validity or invalidity of the claims made
by them in the Arbitration, solely to avoid further costs and risks of
litigation, and have further agreed that all other claims arising under or
relating or pertaining to the matters set forth in the Merger Documents shall be
released and waived (except as specifically identified and provided in this
Agreement), all upon the following terms and conditions.
2
<PAGE>
NOW, THEREFORE, in consideration of the promises, covenants, agreements,
forebearances, waivers, releases, and conditions contained herein, Claimants and
Respondents voluntarily and knowingly execute this Agreement with the express
intention of effectuating the actions set forth in the premises and elsewhere
herein:
1. Payment to Claimants. Respondents shall pay to Claimants the sum of Eleven
Million Dollars ($11,000,000) on or before 5:00 p.m., Boston time, on the
eighth (8th) business day following the date of the effectiveness of this
Agreement, such payment to be made by wire transfer to the Brooks, Pierce,
McLendon, Humphrey & Leonard, L.L.P. Trust Account at Central Carolina Bank
and Trust Company, Account 371064346, 112 North Elm Street, Greensboro,
North Carolina 27401, via ABA Routing No. 0531-00-465. GenRad acknowledges
and agrees that the Merger has been, and will continue to be, treated for
tax purposes by GenRad as a tax free reorganization under Section 368 of the
Internal Revenue Code. GenRad is aware that Claimants intend to treat the
payment made hereunder for tax purposes as being made in connection with
their claims in the Arbitration regarding their alleged damages suffered in
connection with the Merger.
2. Releases of Escrow Shares. All shares of GenRad stock issued to Claimants
and held in escrow pursuant to the Merger Agreement and the Escrow Agreement
shall be released to Claimants by delivery of individual
3
<PAGE>
certificates for the applicable numbers of shares of GenRad in the names of
Claimants to Robert A. Singer, Brooks, Pierce, McLendon, Humphrey & Leonard,
L.L.P., 230 North Elm Street, Suite 2000, Renaissance Plaza, Greensboro,
North Carolina 27401 ("Counsel"). Claimants and Respondents shall make a
joint request to the escrow agent for such release on or before the third
(3rd) business day following the date of the effectiveness of this
Agreement. Individual Claimants will receive cash in lieu of fractional
Shares of Stock, if any. GenRad shall execute and deliver to Counsel
together therewith the Joint Escrow Release Letter attached hereto as
Exhibit A.
3. Registration Rights Agreement. The Registration Rights Agreement shall be
deemed amended as follows:
a. The second sentence of Section 1.2(a) shall be deemed to end after
the reference to the "Securities Act," with the remainder of such
sentence ("...and such Registration Statement...the Effective
Time") being deemed deleted, terminated and cancelled.
b. The reference in Section 1.2(b) to Section 1.2(c) shall be deemed
deleted, terminated and cancelled.
c. Section 1.2(c) shall be deemed deleted, terminated and cancelled.
Except as specifically stated above, the Registration Rights Agreement
shall remain in full force and effect.
4. Stockholder Letters. The sentence composing Section 1 of each Stockholder
Letter shall be deemed to end after the phrase "...laws, rules
4
<PAGE>
and regulations", with the remainder of such sentence ("...and to
offer...such broker") being deemed deleted, terminated and cancelled. Except
as specifically stated above, the Stockholder Letters shall remain in full
force and effect. GenRad will execute a Notice or Notices in the form
attached hereto as Exhibit B informing its stock transfer agents and any
broker employed by Claimants of the elimination of any restrictions
presently in place on their sale of GenRad stock.
5. Additional Matters Regarding Wingate. Wingate's employment with GenRad shall
be terminated by GenRad, at Wingate's request, as of 11:59 p.m., Boston
time, on April 30, 1999 (and no sooner), pursuant to the terms of the
Wingate Employment Agreement, except that Section 7 of the Wingate
Employment Agreement shall be deemed deleted, terminated and cancelled. Up
to and including April 30, 1999, Wingate shall remain an employee and retain
all benefits of his employment status, including, but not limited to, all
grant, vesting and exercise rights existing under the Stock Option
Agreement, dated April 28, 1998, between Wingate and GenRad, including, but
not limited to, the right to exercise currently existing stock options which
are otherwise fully vested and exercisable at that time and are granted to
him in accordance with the terms of such Stock Option Agreement and GenRad's
1997 Non-Qualified Employee Stock Option Plan. The restrictions set forth in
Section 1 of the Wingate Non-Competition Agreement shall terminate two years
from the date of
5
<PAGE>
termination of Wingate's employment. In the event any inquiries are made to
any of Respondents with regard to Wingate's employment with GenRad or the
termination of that employment, the response shall be as follows: "Mr.
Wingate was employed as President of ICC/GRSoftware, a business unit of
GenRad, from April 7, 1998 through April 30, 1999. Mr. Wingate left GenRad
on mutually agreeable terms." Wingate has entered into a separate Severance
Agreement simultaneously with this Agreement. In the event that there is any
conflict between this Agreement and the Severance Agreement, the terms of
this Agreement shall control.
6. Additional Matters Regarding Massaker. Section 1 of the Massaker Non-
Competition Agreement is hereby terminated and cancelled, and GenRad
releases, waives and discharges any and all Claims (as defined in paragraph
7 below) under that section.
7. Release of Respondents. Except as expressly set forth herein, Claimants
hereby release and forever discharge Respondents and their officers,
directors, stockholders, corporate affiliates, subsidiaries, attorneys,
agents and employees from any and all demands for arbitration, claims,
claims for relief, actions, causes of action, liabilities, obligations,
costs, costs of investigation, attorneys' fees and expenses, expert witness
fees and expenses, consultants' fees and expenses, interest, damages,
losses, and demands of every kind and nature whatsoever, known or unknown,
matured or unmatured, at common law, statutory, in equity or otherwise,
6
<PAGE>
suspected or not suspected to exist, or which they have had or claim to have
had, or now have or claim to have, or hereafter may have or assert to have
("Claims"), arising from or in any way related to the Merger, the Merger
Agreement, the Merger Documents, and Claimants' acquisition, purchase or
ownership of GenRad stock (whether asserted directly or indirectly),
including, but not limited to, those claims which were alleged or could have
been alleged in the Arbitration. Nothing contained herein shall constitute a
release of the Respondents or the Claimants for a breach of this Agreement.
8. Release of Claimants. Except as expressly set forth herein, Respondents
hereby release and forever discharge Claimants and their partners, corporate
affiliates, subsidiaries, attorneys, agents and employees of and from any
and all Claims arising from or which are related in any way to the Merger,
the Merger Agreement, the Merger Documents, and Claimants' acquisition,
purchase or ownership of GenRad stock (whether asserted directly or
indirectly), including, but not limited to, the counterclaims which were
alleged or could have been alleged in the Arbitration. Nothing contained
herein shall constitute a release of the Respondents or the Claimants for a
breach of this Agreement.
9. Dismissal of Arbitration; Fees and Costs. Claimants and Respondents shall
notify the AAA that the Arbitration shall be dismissed. Claimants and
Respondents shall bear their own costs, attorneys' fees and expenses,
7
<PAGE>
expert witness fees and expenses, and consultants' fees and expenses
incurred with respect to the Arbitration, including, but not limited to,
those incurred in connection with this Agreement.
10. Press Release. Any press release or media communication issued by GenRad
regarding this settlement shall contain the following language: "During the
period from April 7, 1998 through April 30, 1998, Frank Wingate served as
President of ICC/GR Software, a business unit of GenRad. Mr. Wingate and
GenRad are separating on mutually agreeable terms."
11. No Admission; No Disparagement. This Agreement represents a compromise of
disputed claims. Each party denies liability to any other party hereto and
intends by this settlement merely to avoid litigation and to buy peace, and
nothing contained herein shall constitute any admission as to liability on
any claim or counterclaim in the Arbitration. In keeping with the spirit of
this Agreement, Claimants and Respondents agree that they shall not make any
disparaging or negative statement to any third party regarding the matters
at issue in the Arbitration or the employment of Wingate with GenRad, or the
business or management of GenRad.
12. Entire Agreement. This Agreement contains the entire agreement and
understanding among Claimants and Respondents with respect to the matters
referred to herein. No other representations, covenants,
8
<PAGE>
undertakings, or other prior or contemporaneous agreements, oral or written,
respecting such matters which are not specifically incorporated herein shall
be deemed in any way to exist or to bind Respondents or Claimants. The
parties acknowledge that they have not executed this Agreement in reliance
on any such representations, covenants, undertakings, or agreements.
13. Modifications. This Agreement may not be modified by any oral representation
made before or after the execution of this Agreement. All modifications must
be in writing and signed by Claimants and Respondents.
14. Severability. If any portion or provision of this Agreement is held or
adjudicated to be invalid or unenforceable for any reason, each such portion
or provision shall be severed from the remaining portions of this Agreement,
and the remaining portions or provisions shall be unaffected.
15. Counterparts. This Agreement may be executed in any number of counterparts,
any of which will be deemed an original and all of which when taken together
shall constitute one and the same instrument.
16. Effectiveness. This Agreement shall be effective, binding and enforceable
only upon its execution by all parties, and shall not be effective with
respect to, binding upon or enforceable against any party until all parties
have executed this Agreement and forwarded, via facsimile, their executed
signature pages to Counsel for Claimants and Respondents. Immediately
9
<PAGE>
thereafter, all parties shall forward original executed signature pages to
Counsel for Claimants and Respondents via overnight mail. Claimants and
Respondents agree that in addition to actions for monetary relief, Claimants
shall be entitled to all equitable remedies, including specific performance,
in the event Respondents fail to cause the payment and/or delivery described
in paragraphs 1 and 2 of this Agreement.
17. Surviving Agreements. The parties acknowledge and agree that, upon the
effectiveness of this Agreement as provided in paragraph 16 above, the
Merger Agreement, the Escrow Agreement, the Massaker Non-Competition
Agreement, the Wingate Non-Competition Agreement, the Wingate Employment
Agreement, the Registration Rights Agreement and the Stockholder Letters
shall have force and effect only in the amended forms affected hereby.
18. Advice of Counsel. The Claimants and Respondents represent that they have
had the opportunity to obtain the advice of legal counsel prior to signing
this Agreement and that they fully and freely assent to all of the terms of
this Agreement and to be bound by its terms.
April 7, 1999 /s/ William E. Gaines
- ---------------------------------- ----------------------------------
Date William E. Gaines
April 7, 1999 /s/ William E. Massaker
- ---------------------------------- ----------------------------------
Date William E. Massaker
April 7, 1999 /s/ Frank B. Wingate
- ---------------------------------- ----------------------------------
Date Frank B. Wingate
10
<PAGE>
HERITAGE INVESTMENT LIMITED
PARTNERSHIP, a North Carolina
limited partnership
By: NEXGEN CAPITAL
CORPORATION
By: /s/ Miles J. Smith, III
------------------------------
Miles J. Smith, III
Its Secretary
---------------------------
Date: April 7, 1999
-----------------------------
GENRAD, INC, A Massachusetts
corporation
By: /s/ Walter A. Shephard
-------------------------------
Title: Chief Financial Officer
----------------------------
Date: April 7, 1999
-----------------------------
Date April 7, 1999 /s/ James F. Lyons
- ---------------------------------- ----------------------------------
Date April 7, 1999 /s/ Paul Pronsky, Jr.
- ---------------------------------- ----------------------------------
11
EXHIBIT 11
GENRAD, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended
January 2, January 3, December 28,
1999 1998 1996
<S> <C> <C> <C>
BASIC:
Weighted average number of common
shares outstanding 28,003 26,814 22,488
Net income (loss) available to common
stockholders $(9,068) $41,295 $27,335
-------- ------- -------
Basic earnings (loss) per share $(0.32) $1.54 $1.22
======= ===== =====
DILUTED:
Weighted average number of common
shares outstanding 28,003 26,814 22,488
Weighted average incremental shares from
assumed conversion of stock options -- 1,974 2,015
Weighted average incremental shares from
assumed conversion of 7 1/4%
convertible subordinated debentures -- -- 2,981
-------- ------- -----
Total: 28,003 28,788 27,484
Net income (loss) $(9,068) $41,295 $27,335
Assumed reduction of 7 1/4% convertible
subordinated debenture interest expense -- -- 3,131
-------- ------- -----
Net income (loss) and total earnings applicable
to common shares and common
equivalent shares $(9,068) $41,295 $30,466
-------- ------ -------
Diluted earnings (loss) per share $(0.32) $1.43 $1.11
====== ===== =====
</TABLE>
EXHIBIT 21
GenRad, Inc.
Schedule of Subsidiaries as of January 2, 1999
<TABLE>
<CAPTION>
Subsidiary Name State/Jurisdiction of Incorporation
- --------------- -----------------------------------
<S> <C>
GenRad Canada Limited Canada
GenRad Asia PTE Limited Singapore
GenRad SA France
GenRad GmbH Germany
GenRad China Limited China
GenRad Benelux B.V. Netherlands
GenRad Europe Limited England
GenRad Limited England
GenRad Holdings Limited England
GenRad Mexico, Incorporated Delaware
Mitron Europe Limited England
</TABLE>
All subsidiaries are Consolidated Subsidiaries and do business under their own
name.
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-57251, No.
2-85614, No. 2-89950, No. 33-28715, No. 333-09675 and No. 333-19685) and the
Registration Statements on Form S-8 (No. 333-69045, No. 333-69049, No.
333-64329, No. 333-43445, No. 2-92786, No. 2-92800, No. 33-1667, No. 33-10658,
No. 33-53869, No. 33-35918, No. 33-53871, No. 33-53867, No. 33-42789, No.
33-52009, No. 33-60153 and No. 333-05235) of GenRad, Inc. of our report dated
January 24 1999, except for Notes 2 and 12 which are as of April 7, 1999,
appearing in this Form 10-K. We also consent to the application of such
report to the Financial Statement Schedule for the three years ended January 2
1999, when such schedule is read in conjunction with the financial statements
referred to in our report. The audits referred to in such report included this
schedule.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
- ----------------------
April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JANUARY 2, 1999 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED JANUARY 2, 1999 FOR GENRAD, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<EXCHANGE-RATE> 1
<CASH> 12,998
<SECURITIES> 0
<RECEIVABLES> 67,028
<ALLOWANCES> 1,538
<INVENTORY> 32,989
<CURRENT-ASSETS> 118,596
<PP&E> 75,038
<DEPRECIATION> 37,769
<TOTAL-ASSETS> 208,225
<CURRENT-LIABILITIES> 46,763
<BONDS> 0
0
0
<COMMON> 29,176
<OTHER-SE> 104,855
<TOTAL-LIABILITY-AND-EQUITY> 208,255
<SALES> 159,290
<TOTAL-REVENUES> 224,789
<CGS> 80,102
<TOTAL-COSTS> 118,877
<OTHER-EXPENSES> 121,511
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,163
<INCOME-PRETAX> (15,599)
<INCOME-TAX> 6,531
<INCOME-CONTINUING> (9,068)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,068)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
