SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: September 30, 1996
Commission file number: 1- 448
MESTEK,INC.
Pennsylvania Corporation
I.R.S. Employer Identification No.
25 - 0661650
260 North Elm Street
Westfield, Massachusetts 01085
Telephone: (413) 568-9571
The Registrant 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 has
been subject to such filing requirements for the past 90 days.
The number of shares of Common Stock outstanding as of October 23, 1996 was
8,929,771.
<PAGE>
MESTEK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets at September 30, 1996
and December 31, 1995 Pages 3-4
Condensed consolidated statements of income for the three months ended
September 30, 1996 and 1995 and the nine months ended
September 30, 1996 and 1995 Page 5
Condensed consolidated statements of cash flows for the nine
months ended September 30, 1996 and 1995 Page 6
Condensed consolidated statement of changes in shareholders'equity for
the period from January 1, 1995 through September 30, 1996 Page 7
Notes to the condensed consolidated financial statements Pages 8-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations Page 10
PART II - OTHER INFORMATION Page 10
Item 6 - Exhibits and Reports on Form 8-K
Statement of Computation of Per Share Earnings Page 11
SIGNATURE Page 11
In the opinion of management, the information contained herein reflects
all adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are of a
normal recurring nature.
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MESTEK,INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Sept. 30, Dec. 31,
1996 1995
---- ----
(Dollars in thousands)
ASSETS
Current Assets
Cash and Cash Equivalents $ 4,548 $ 1,405
Accounts Receivable - less allowances of
$1,975 and $1,377 respectively 50,760 42,911
Unbilled Accounts Receivable 173 139
Inventories 39,988 39,241
Other Current Assets 3,732 5,873
---------- ----------
Total Current Assets 99,201 89,569
Property and Equipment (Net) 30,035 24,968
Equity Investments 8,778 8,778
Property held for sale - 2,955
Other Assets and Deferred Charges - Net 8,427 8,545
Goodwill 14,207 6,616
--------- --------
Total Assets $160,648 $141,431
========= ========
See the Notes to Condensed Consolidated Financial Statements.
Continued on next page
3
<PAGE>
MESTEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)
Sept. 30, Dec. 31,
1996 1995
---- ----
(Dollars in thousands)
LIABILITIES, AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt $ 389 $ 2,651
Accounts Payable 19,182 16,342
Accrued Compensation 4,117 3,218
Accrued Commissions 2,265 2,234
Progress Billings in Excess of Cost and
Estimated Earnings 2,680 2,904
Purchase Price Payable - National Northeast - 9,960
Other Accrued Liabilities 15,755 10,634
------- ---------
Total Current Liabilities 44,388 47,943
Long-Term Debt 15,201 380
Deferred Compensation 19 22
------- ---------
Total Liabilities 59,608 48,345
------- ---------
Minority Interest - National Northeast 1,524 2,040
------- ---------
Shareholders' Equity
Common Stock - no par, stated value $0.05
per share, 9,610,135 shares 479 479
Paid in Capital 15,434 15,434
Retained Earnings 90,576 81,465
Treasury Shares, at cost, 680,364 and
634,864 common shares, respectively ( 6,040) ( 5,449)
Cumulative Translation Adjustment ( 933) ( 883)
--------- ----------
Total Shareholders' Equity 99,516 91,046
--------- ----------
Total Liabilities, and Shareholders' Equity $160,648 $141,431
========= ==========
See the Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except per share amounts)
Net Sales $ 75,432 $ 60,865 $201,525 $159,549
Net Service Revenues 3,635 3,821 12,050 11,375
-------- -------- -------- --------
Total Revenues 79,067 64,686 213,575 170,924
Cost of Goods Sold 55,456 43,600 147,729 114,269
Cost of Service Revenues 2,179 2,130 6,275 6,689
-------- -------- -------- --------
Gross Profit 21,432 18,956 59,571 49,966
Selling Expense 8,886 8,070 25,071 22,888
General and Administrative
Expense 4,366 3,593 12,249 9,090
Engineering Expense 1,932 1,305 5,369 4,117
-------- -------- -------- --------
Operating Profit 6,248 5,988 16,882 13,871
Interest Expense ( 321) ( 277) ( 998) ( 520)
Gain on Sale of Investment - - 1,444 850
Loss on Sale of Fixed Assets - ( 400) - ( 400)
Amortization Expense ( 159) ( 19) ( 398) ( 49)
Other Income (Expense) - net ( 340) ( 158) ( 1,665) ( 749)
-------- -------- -------- --------
Income Before Income Taxes 5,428 5,134 15,265 13,003
Income Taxes 2,200 2,171 6,154 5,457
-------- -------- -------- --------
Net Income $ 3,228 $ 2,963 $ 9,111 $ 7,546
======== ======== ======== ========
Earnings per Common Share $ .36 $ .33 $ 1.02 $ .84
======== ======== ======== ========
Weighted Average Shares
Outstanding 8,930 9,015 8,941 9,022
======== ======== ======== ========
See the Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
MESTEK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
9 Months Ended
September 30,
1996 1995
-------- --------
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income $ 9,111 $ 7,546
Adjustments to Reconcile Net Income to Net
Cash Provided by (Used In) Operating
Activities:
Depreciation and Amortization 4,249 2,698
Provision for Losses on Accounts Receivable 598 ( 91)
Changes in Assets & Liabilities:
Cash Flows Provided (Used) by Changes
in Assets & Liabilities 4,117 ( 15,234)
Purchase Price Payable - National Northeast ( 9,960) -
-------- ---------
Net Cash Provided by (Used in) Operating Activities 8,115 ( 5,081)
-------- ---------
Cash Flows from Investing Activities:
Capital Expenditures ( 4,662) ( 1,817)
Disposition of Property 3,193 2,727
Investments in Equity Securities - ( 146)
Acquisition of Businesses (net of cash acquired) (14,149) -
-------- ---------
Net Cash (Used in) Investing Activities (15,618) 764
-------- --------
Cash Flows from Financing Activities:
Net Borrowings Under Line of Credit
Agreement ( 1,560) 6,435
Proceeds of issuance of Long Term Debt 15,000 -
Principal Payments Under Long Term Debt
Obligations ( 1,637) ( 5,327)
Repurchase of Common Stock ( 591) ( 201)
Net Change in National Northeast
Minority Interest ( 516) -
Cumulative Translation Adjustments ( 50) 139
-------- --------
Net Cash Provided by Financing
Activities 10,646 1,046
-------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents 3,143 (3,271)
Cash and Cash Equivalents - Beginning of
Period 1,405 4,201
-------- --------
Cash and Cash Equivalents - End of Period $ 4,548 $ 930
======== ========
See the Notes to Condensed Consolidated Financial Statements
6
<PAGE>
<TABLE>
MESTEK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
For the period January 1, 1995 through September 30, 1996
<CAPTION>
Additional Cumulative
Common Paid In Retained Treasury Translation
Stock Capital Earnings Shares Adjustment Total
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1995 $ 479 $ 15,434 $70,559 $(4,808) $(932) $80,732
Net Income 10,906 10,906
Common Stock Repurchased (641) (641)
Cumulative Translation Adjustment 49 49
-------- -------- ------- ------- ----- --------
Balance - December 31, 1995 $ 479 $ 15,434 $81,465 $(5,449) $(883) $91,046
Net Income 9,111 9,111
Cumulative Translation Adjustment ( 50) ( 50)
Common Stock Repurchased ( 591) ( 591)
-------- -------- ------- ------- ----- --------
Balance - September 30, 1996 $ 479 $ 15,434 $90,576 $(6,040) $(933) $99,516
======== ======== ======= ======= ===== ========
See the Notes to the Condensed Consolidated Financial Statements
</TABLE>
7
<PAGE>
MESTEK, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the company
and its wholly-owned subsidiaries. In the opinion of management, the financial
statements include all material adjustments necessary for a fair presentation of
the Company's financial position, results of operations and cash flows. The
results of this interim period are not necessarily indicative of results for the
entire year.
Inventories
Inventories are valued at the lower of cost or market. Cost of inventories
is determined principally by the last-in, first-out (LIFO) method.
Income Taxes
Provisions for income tax in the amounts of $2,200,000 and $2,171,000 were
recorded for the three months ended September 30, 1996 and 1995, respectively.
Goodwill
The Company amortizes Goodwill on the straight line basis over the
estimated period to be benefitted. The acquisitions of National Northeast
Corporation, National Southeast Aluminum Corporation, and Heat Exchangers, Inc.
in 1995 resulted in goodwill of $7,090,000 which will be amortized over 25
years. The acquisitions of Rowe Machinery and Automation, Inc., Omega Flex, Inc.
and Dahlstrom Industries, Inc. in 1996, resulted in goodwill of $7,858,000 which
will also be amortized over 25 years. The Company continually evaluates the
carrying value of goodwill. Any impairments would be recognized when the
expected future operating cash flows derived from such goodwill is less than
their carrying value.
Note 2 - Business Acquisitions
On August 30, 1996 the company acquired substantially all of the operating
assets of Dahlstrom Industries, Inc. (Dahlstrom) of Schiller Park, Illinois.
Dahlstrom is a leading manufacturer of roll-forming equipment for the metal
fabrication industry. The purchase price paid, including assumed liabilities,
was approximately $4,300,000.
Note 3 - Property and Equipment
Sept. 30, Dec. 31,
1996 1995
---- ----
Land $ 868,000 $ 777,000
Buildings 12,313,000 11,035,000
Leasehold Improvements 3,690,000 3,119,000
Equipment 50,162,000 43,857,000
------------ -----------
67,033,000 58,788,000
Accumulated Depreciation (36,998,000) (33,820,000)
------------ -----------
$ 30,035,000 $ 24,968,000
=========== ===========
The Company's Hagerstown, Maryland facility was sold on April 1, 1996 at a gain
of $590,000.
8
<PAGE>
Note 4 - Debt
Sept. 30, Dec. 31,
1996 1995
---- ----
Senior Notes $ 15,000,000 $ -
Revolving Loan Agreement 165,000 1,725,000
Note Payable - Bank - 711,000
Other Bonds and Notes Payable 425,000 595,000
------------ ------------
15,590,000 3,031,000
Less Current Maturities (389,000) (2,651,000)
------------ ------------
$ 15,201,000 $ 380,000
============ ============
On January 1, 1992, the Company entered into a Revolving Loan Agreement and
Letter of Credit Facility (the "Agreement") with a commercial bank. The
Agreement, originally set to expire on January 1, 1993, has been amended and
extended through April 30, 1997. It provides $55 million of unsecured revolving
credit and $10 million of standby letter of credit capacity. Borrowings under
the Agreement bear interest at a floating rate based on the bank's prime rate
less 1.00% or, at the discretion of the borrower, LIBOR plus a quoted market
factor or, alternatively, in lieu of the prime based rate, a rate based on the
overnight Federal Funds Rate. Management expects to renew the Agreement on a one
year basis prior to April 30, 1997.
On April 5, 1996 the Company borrowed $15,000,000 from a commercial
insurance company on an unsecured basis, executing a Note Purchase Agreement and
related Senior Notes, (The Notes). The Notes mature March 1, 1998 and bear
interest at 5.53%. The Note Purchase Agreement contains a number of financial
covenants which limit the Company's overall debt, its dividends, and in certain
circumstances, its ability to effect acquisitions and/or divestitures. The
Company's management does not believe that these limitations will materially
affect the Company's future operations or strategic plans.
Note 5 - Earnings Per Common Share
Earnings per share were computed using the weighted average number of
common shares outstanding.
Note 6 - Stock Option Plan
On March 20, 1996 the Company adopted a stock option plan, the Mestek, Inc.
1996 Stock Option Plan, which provides for the granting of incentive and
nonqualified stock options to certain employees of the Company and other
persons, including directors, as selected by the Plan Administrator for the
purchase of the Company's common stock at fair market value at the date of
grant. The Plan was approved by the Company's shareholders on May 22, 1996.
Options granted under the plan vest over a five-year period and expire at the
end of ten years. Options covering 90,000 shares have been granted to four (4)
employees of the Company under the Plan through September 30, 1996.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation," which is effective for awards granted in fiscal years beginning
after December 15, 1995. This standard defines a fair value based method of
measuring employee stock options or similar equity instruments. In lieu of
recording the value of such stock options as compensation expense, companies may
provide pro forma disclosures quantifying the difference between compensation
cost included in net income as prescribed by historical accounting standards and
the related cost measured by such fair value method. The Company will provide
such disclosure in its annual financial statements after effective date of the
standard.
9
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operation
Total revenues in the Company's HVAC segment during the third quarter of
1996 were increased relative to the third quarter of 1995, by $2,526,000 or
4.3%, reflecting the effect of the Company's 1995 acquisitions as well as
improved performances from the Industrial Products and Air Distribution
divisions which offset continued sluggishness in certain residential and
commercial products. Gross profit margins for the HVAC segment were decreased
slightly, from 27.8% to 26.8% for the third quarter of 1996 due to a number of
factors. Positive effects from moderating inflation and improved margins in
Industrial Products were offset by negative effects related to certain
manufacturing relocations and other margin pressures on certain residential and
commercial products. Operating income for this segment was slightly reduced from
$4,816,000 in the third quarter of 1995 to $4,400,000 in the third quarter of
1996.
During the third quarter of 1996, Total Revenues increased 243% for the
Company's Equipment Handling segment relative to the third quarter of 1995,
reflecting the acquisitions of certain assets of Rowe Machinery and Automation,
Inc. on February 6, 1996 and Dahlstrom Industries, Inc. on August 30, 1996.
Gross Profit margins were lower for this segment however due to relocation and
other transitional issues affecting Rowe. Operating income for this segment
increased from $446,000 to $902,000 notwithstanding, principally on the
continuing strength of this segment's Cooper-Weymouth, Peterson unit. The
Company's Computer Systems segment reported slightly reduced Revenues, Gross
Profit margins and Operating income figures relative to the comparable 1995
period. The Company's new Metal Fabricating segment, comprised of the company's
National Northeast and Omega-Flex units, reported operating earnings of $347,000
on Total Revenues of $8,153,000.
For the Company as a whole, Selling, General and Administrative, and
Engineering costs, taken together as a percentage of Total Revenues, were
reduced from 20.0% to 19.2%.
Operating income for the third quarter of 1996 for the Company as a whole,
reflecting the effects described above, increased by $260,000 or 4.3%. Pretax
income for the quarter ended September 30, 1995 included a nonrecurring $400,000
loss on the sale of the Company's Northvale, New Jersey plant. The Company's
consolidated income tax provision for the quarter was reduced slightly as a
percentage of pretax income from 42.3% to 40.5%. Taken together, these factors
resulted in a 9.1% growth in Earnings per Common Share from $.33 in the third
quarter of 1995 to $.36 in the third quarter of 1996.
The Company's total debt (long-term debt plus current portion of long-term
debt) was relatively unchanged during the quarter ended September 30, 1996.
Management regards the Company's current capital structure and banking
relationships as fully adequate to meet foreseeable future needs. The Company
has not paid dividends on its common stock since 1979.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Statement of Computation of Per Share Earnings...Page 11.
(b) Registrant did not file a Form 8-K during the quarter for which this
report is filed.
(c) Mestek, Inc. 1996 Stock Option Plan.
10
<PAGE>
MESTEK, INC.
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands, except
earnings per common share)
Net income for earnings
per share $3,228 $ 2,963 $9,111 $ 7,546
====== ======= ====== =======
Total Common shares and
common share
equivalents 8,930 9,015 8,941 9,022
===== ======= ===== =======
Earnings per common
share $ .36 $ .33 $1.02 $ .84
====== ======== ===== ========
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MESTEK,INC.
(Registrant)
Date: October 23, 1996
/S/ Stephen M. Shea
Stephen M. Shea
Senior Vice President - Finance
(Chief Financial Officer)
11
MESTEK, INC. 1996 STOCK OPTION PLAN
This 1996 Stock Option Plan (the "Plan") provides for the grant of
options to acquire shares of Common Stock, without par value (the "Common
Stock"), of Mestek, Inc., a Pennsylvania corporation (the "Company"). Stock
options granted under this Plan that qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), are referred to in this Plan as
"Incentive Stock Options." Incentive Stock Options and stock options that do not
qualify under Section 422 of the Code ("Non-Qualified Stock Options") granted
under this Plan are referred to as "Options").
1. Purposes. The purposes of this Plan are to retain the services of
valued key employees and consultants of the Company, and such other persons as
the Plan Administrator shall select in accordance with Section 3 below, to
encourage such persons to acquire a greater proprietary interest in the Company,
thereby strengthening their incentive to achieve the objectives of the
shareholders of the Company, and to serve as an aid and inducement in the hiring
of new employees, consultants and other persons selected by the Plan
Administrator.
2. Administration. This Plan shall be administered by the Board of
Directors of the Company (the "Board"), except that the Board may, in its
discretion, establish a committee composed of not less than two "disinterested
persons" who are members of the Board or other persons to administer this Plan,
which committee (the "Committee") may be an executive, compensation or other
committee, including a separate committee especially created for this purpose.
The Committee shall have such of the powers and authority vested in the Board
hereunder as the Board may delegate to it (including the power and authority to
interpret any provision of this Plan or of any Option). The members of any such
Committee shall serve at the discretion of the Board. The Board, or the
Committee if one has been established by the Board, are referred to in this Plan
as the "Plan Administrator." No person shall serve as a member of the Plan
Administrator if his or her service would disqualify this Plan from eligibility
under Securities and Exchange Commission Rule 16b-3, as amended from time to
time, or any successor rule or regulatory requirements or under Section 162(m)
of the Code; provided, that the Plan Administrator shall consist of at least the
minimum number of persons required by Securities and Exchange Commission Rule
16b-3, as amended, or any successor rule or regulatory requirements.
Subject to the provisions of this Plan, and with a view to effecting
its purpose, the Plan Administrator shall have sole authority, in its absolute
discretion, to: (a) construe and interpret this Plan; (b) define the terms used
in this Plan; (c) prescribe, amend and rescind rules and regulations relating to
this Plan; (d) correct any defect, supply any omission or reconcile any
inconsistency in this Plan; (e) determine the individuals to whom Options shall
be granted under this Plan and whether the Option is an Incentive Stock Option
or a Non-Qualified Stock Option; (f) determine the time or times at which
Options shall be granted under this Plan; (g) determine the number of shares of
Common Stock subject to each Option, the exercise price of each Option, the
duration of each Option and the times at which each Option shall become
exercisable; (h) determine all other terms and conditions of Options; and (i)
make all other determinations necessary or advisable for the administration of
this Plan. All decisions, determinations and interpretations made by the Plan
Administrator shall be binding and conclusive on all participants in this Plan
and on their legal representatives, heirs and beneficiaries.
3. Eligibility. Incentive Stock Options may be granted to any
individual who, at the time the Option is granted, is an employee of the Company
or any Related Corporation (as defined below), including employees who are
directors of the Company ("Employees"). Non-Qualified Stock Options may be
granted to Employees and to such other persons, including directors of the
Company, who are not Employees, as the Plan Administrator shall select. Options
may be granted in substitution for outstanding Options of another corporation in
connection with the merger, consolidation, acquisition of property or stock or
other reorganization between such other corporation and the Company or any
subsidiary of the Company. Options also may be granted in exchange for
outstanding Options. Any person to whom an Option is granted under this Plan is
referred to as an "Optionee."
As used in this Plan, the term "Related Corporation," when
referring to a subsidiary corporation, shall mean any corporation (other than
the Company) in an unbroken chain of corporations beginning with the Company if,
at the time of the granting of the Option, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing eighty percent
(80%) or more of the total combined voting power of all classes of stock of one
of the other corporations in such chain.
4. Stock. Subject to approval of the Plan by shareholders of the
Company, options to purchase a maximum of 500,000 shares of the Company's
authorized but unissued, or re-acquired, Common Stock may be issued pursuant to
the Plan, subject to adjustment as provided in Section 5.13(a) below; provided,
that any shares of Common Stock received or withheld by the Company as payment
for shares of Common Stock purchased upon exercise of Options pursuant to
Section 5.9 below shall be added to the number of such shares as to which
Options may be granted. The number of shares with respect to which Options may
be granted hereunder is subject to adjustment as set forth in Section 5.13
below. In the event that any outstanding Option expires or is terminated for any
reason, the shares of Common Stock allocable to the unexercised portion of such
Option may again be subject to an Option to the same Optionee or to a different
person eligible under Section 3 above.
5. Terms and Conditions of Options. Each Option granted under this Plan
shall be evidenced by a written agreement approved by the Plan Administrator
(the "Agreement"). Agreements may contain such additional provisions, not
inconsistent with this Plan, as the Plan Administrator in its discretion may
deem advisable. All Options also shall comply with the following requirements.
5.1 Number of Shares and Type of Option. Each Agreement shall
state the number of shares of Common Stock to which it pertains and whether the
Option is intended to be an Incentive Stock Option or a Non-Qualified Stock
Option. In the absence of action to the contrary by the Plan Administrator in
connection with the grant of an Option, all Options shall be Non-Qualified Stock
Options. The aggregate fair market value (determined at the Date of Grant, as
defined below) of the stock with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year shall
not exceed such limit as may be prescribed by the Code as it may be amended from
time to time. Any Option which exceeds the annual limit shall not be void but
rather shall be a Non-Qualified Stock Option.
5.2 Date of Grant. Each Agreement shall state the date the
Plan Administrator has deemed to be the effective date of the Option for
purposes of this Plan (the "Date of Grant").
5.3 Option Price. Each Agreement shall state the price per
share of Common Stock at which it is exercisable. The exercise price shall be
fixed by the Plan Administrator at whatever price the Plan Administrator may
determine in the exercise of its sole discretion; provided, that the per share
exercise price for an Incentive Stock Option shall not be less than the fair
market value per share of the Common Stock at the Date of Grant as determined by
the Plan Administrator in good faith; provided further, that with respect to
Incentive Stock Options granted to greater-than-ten percent (>10%) shareholders
of the Company (as determined with reference to Section 424(d) of the Code), the
exercise price per share shall not be less than one hundred ten percent (110%)
of the fair market value per share of the Common Stock at the Date of Grant;
and, provided further, that Incentive Stock Options granted in substitution for
outstanding options of another corporation in connection with the merger,
consolidation, acquisition of property or stock or other reorganization
involving such other corporation and the Company or any subsidiary of the
Company may be granted with an exercise price equal to the exercise price for
the substituted option of the other corporation, subject to any adjustment
consistent with the terms of the transaction pursuant to which the substitution
is to occur.
5.4 Duration of Options. At the time of the grant of the
Option, the Plan Administrator shall designate, subject to Section 5.7 below,
the expiration date of the Option, which date shall not be later than ten (10)
years from the Date of Grant in the case of Incentive Stock Options; provided,
that the expiration date of any Incentive Stock Option granted to a
greater-than-ten percent (>10%) shareholder of the Company (as determined with
reference to Section 424(d) of the Code) shall not be later than five (5) years
from the Date of Grant. In the absence of action to the contrary by the Plan
Administrator in connection with the grant of a particular Option, and except in
the case of Incentive Stock Options as described above, all Options granted
under this Plan shall expire ten (10) years from the Date of Grant.
5.5 Vesting Schedule. Except as set forth in Section 5.6
below, no Option shall be exercisable until it has vested. The vesting schedule
for each Option shall be specified by the Plan Administrator at the time of
grant of the Option and, in the case of employee optionees, provide for
continuous employment of the Optionee during the vesting period, except as set
forth in Section 5.6 below; provided, that if no vesting schedule is specified
at the time of grant, the Option shall vest according to the following schedule:
Percentage of
Number of Years Total Option to
Following Date of Grant be Exercisable
1 20%
2 40%
3 60%
4 80%
5 100%
5.6 Acceleration of Vesting. The vesting of one or more
outstanding Options may be accelerated by the Plan Administrator at such times
and in such amounts as it shall determine in its sole discretion. If an Employee
Optionee's employment terminates by reason of death or Disability (as defined in
Section 5.7 below), any Option held by such Employee Optionee who has been
Continuously Employed by the Company or Related Corporation for a minimum of two
(2) years shall become fully vested and exercisable and may thereafter be
exercised during the term of the Option set forth in Section 5.7 below.
"Continuously Employed" shall mean the absence of any interruption or
termination of service. Continuous Employment with the Company or Related
Corporation shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the Company or Related
Corporation or in the case of transfers between locations of the Company or
between the Company, Related Corporations or their successors, provided that the
Optionee continues to be an employee of the Company or any Related Corporation.
The vesting of Options also shall be accelerated under the circumstances
described in Section 5.13 and 5.14 below.
5.7 Term of Option. Vested Options shall terminate, to the
extent not previously exercised, upon the occurrence of the first of the
following events: (i) the expiration of the Option, as designated by the Plan
Administrator in accordance with Section 5.4 above; (ii) the expiration of
ninety (90) days from the date of an Optionee's termination of employment or
contractual relationship with the Company or any Related Corporation for any
reason whatsoever other than death or Disability (as defined below) unless, in
the case of a Non-Qualified Stock Option, the exercise period is extended by the
Plan Administrator until a date not later than the expiration date of the
Option; or (iii) the expiration of one (1) year from (A) the date of death of
the Optionee or (B) cessation of an Optionee's employment or contractual
relationship by reason of Disability (as defined below) unless, in the case of a
Non-Qualified Stock Option, the exercise period is extended by the Plan
Administrator until a date not later than the expiration date of the Option. If
an Optionee's employment or contractual relationship is terminated by death, any
Option held by the Optionee shall be exercisable only by the person or persons
to whom such Optionee's rights under such Option shall pass by the Optionee's
will or by the laws of descent and distribution of the state or county of the
Optionee's domicile at the time of death. "Disability" shall mean that a person
is unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment that can be expected to
result in death or that has lasted or can be expected to last for a continuous
period of not less than twelve (12) months. The Plan Administrator shall
determine whether an Optionee has incurred a Disability on the basis of medical
evidence acceptable to the Plan Administrator. Upon making a determination of
Disability, the Board shall, for purposes of the Plan, determine the date of an
Optionee's termination of employment or contractual relationship. Unless
accelerated in accordance with Section 5.6 above, unvested Options shall
terminate immediately upon termination of employment of the Optionee by the
Company for any reason whatsoever, including death or Disability.
If, in the case of an Incentive Stock Option, an Optionee's relationship
with the Company changes (e.g., from an Employee to a non-employee, such as a
consultant), such change shall not constitute a termination of an Optionee's
employment with the Company, but rather of the Optionee's Incentive Stock Option
which shall then be deemed a Non-Qualified Stock Option. For purposes of this
Section 5.7, transfer of employment between or among the Company and/or any
Related Corporation shall not be deemed to constitute a termination of
employment with the Company or any Related Corporation. For purposes of this
Section 5.7, employment shall be deemed to continue while the Optionee is on
military leave, sick leave or other bona fide leave of absence (as determined by
the Plan Administrator). The foregoing notwithstanding, with respect to
Incentive Stock Options, employment shall not be deemed to continue beyond the
first ninety (90) days of such leave, unless the Optionee's re-employment rights
are guaranteed by statute or by contract.
5.8 Exercise of Options. Options shall be exercisable, either
all or in part, at any time after vesting until termination; provided, that
Optionee must comply with the six (6) month holding period requirements of
Section 16(b) of the Exchange Act and Rule 16b-3 thereunder. If less than all of
the shares included in the vested portion of any Option are purchased, the
remainder may be purchased at any subsequent time prior to the expiration of the
Option term. No portion of any Option for less than one hundred (100) shares (as
adjusted pursuant to Section 5.13 below) may be exercised; provided, that if the
vested portion of any Option is less than one hundred (100) shares, it may be
exercised with respect to all shares for which it is vested. Only whole shares
may be issued pursuant to an Option, and to the extent that an Option covers
less than one (1) share, it is unexercisable. Options or portions thereof may be
exercised by giving to the Company an executed notice of election to exercise,
which notice shall specify the number of shares to be purchased, and be
accompanied by payment in the amount of the aggregate exercise price for the
Common Stock so purchased, which payment shall be in the form specified in
Section 5.9 below. The Company shall not be obligated to issue, transfer or
deliver a certificate of Common Stock to any Optionee, or to his personal
representative, until the aggregate exercise price has been paid for all shares
for which the Option shall have been exercised and adequate provision has been
made by the Optionee for satisfaction of any tax withholding obligations
associated with such exercise. During the lifetime of an Optionee, Options are
exercisable only by the Optionee.
5.9 Payment upon Exercise of Option. Upon the exercise of any
Option, the aggregate exercise price shall be paid to the Company in cash or by
certified or cashier's check. In addition, upon approval of the Plan
Administrator, an Optionee may pay for all or any portion of the aggregate
exercise price by (i) delivering to the Company shares of Common Stock
previously held by such Optionee, (ii) having shares withheld from the amount of
shares of Common Stock to be received by the Optionee, (iii) delivering an
irrevocable subscription agreement obligating the Optionee to take and pay for
the shares of Common Stock to be purchased within one (1) year of the date of
such exercise or (iv) complying with any other payment mechanisms as the Plan
Administrator may approve from time to time. The shares of Common Stock received
or withheld by the Company as payment for shares of Common Stock purchased upon
the exercise of Options shall have a fair market value at the date of exercise
(as determined by the Plan Administrator) equal to the aggregate exercise price
(or portion thereof) to be paid by the Optionee upon such exercise.
5.10 Rights as a Shareholder. An Optionee shall have no rights
as a shareholder with respect to any shares covered by an Option until such
Optionee becomes a record holder of such shares, irrespective of whether such
Optionee has given notice of exercise. Subject to the provisions of Section 5.13
and 5.14 below, no rights shall accrue to an Optionee and no adjustments shall
be made on account of dividends (ordinary or extraordinary, whether in cash,
securities or other property) or distributions or other rights declared on, or
created in, the Common Stock for which the record date is prior to the date the
Optionee becomes a record holder of the shares of Common Stock covered by the
Option, irrespective of whether such Optionee has given notice of exercise.
5.11 Transfer of Option. Options granted under this Plan and
the rights and privileges conferred by this Plan may not be transferred,
assigned, pledged or hypothecated in any manner (whether by operation of law or
otherwise) other than by will or by applicable laws of descent and distribution,
as defined by the Code, or the Employee Retirement Income Security Act, or the
rules and regulations thereunder, and shall not be subject to execution,
attachment or similar process. Upon any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of any Option or of any right or privilege
conferred by this Plan contrary to the provisions hereof, or upon the sale, levy
or any attachment or similar process upon the rights and privileges conferred by
this plan, such Option shall thereupon terminate and become null and void.
5.12 Securities Regulation and Tax Withholding
5.12.1 Shares shall not be issued with respect to
an Option unless the exercise of such
Option and the issuance and delivery of such shares shall comply with all
relevant provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, as
amended, the rules and regulations thereunder and the requirements of any stock
exchange upon which such shares may then be listed, and such issuance shall be
further subject to the approval of counsel for the Company with respect to such
compliance, including the availability of an exemption from registration for the
issuance and sale of such shares. The inability of the Company to obtain from
any regulatory body the authority deemed by the Company to be necessary for the
lawful issuance and sale of any shares under this Plan, or the unavailability of
an exemption from registration for the issuance and sale of any shares under
this Plan, shall relieve the Company of any liability with respect to the
non-issuance or sale of such shares.
As a condition to the exercise of an Option,
the Plan Administrator may require
the Optionee to represent and warrant in writing at the time of such exercise
that the shares are being purchased only for investment and without any
then-present intention to sell or distribute such shares. At the option of the
Plan Administrator, a stop-transfer order against such shares may be placed on
the stock books and records of the Company, and a legend indicating that the
stock may not be pledged, sold or otherwise transferred unless an opinion of
counsel is provided stating that such transfer is not in violation of any
applicable law or regulation, may be stamped on the certificates representing
such shares in order to assure an exemption from registration. The Plan
Administrator also may require such other documentation as may from time to time
be necessary to comply with federal and state securities laws. THE COMPANY HAS
NO OBLIGATION TO UNDERTAKE REGISTRATION OF THE OPTIONS OR THE SHARES OF STOCK
ISSUABLE UPON THE EXERCISE OF OPTIONS.
5.12.2 As a condition to the exercise of any Option
granted under this Plan, the Optionee
shall make such arrangements as the Plan Administrator may require for the
satisfaction of any federal, state or local withholding tax obligations that may
arise in connection with such exercise.
5.12.3 The issuance, transfer or delivery of
certificates of Common Stock pursuant to the
exercise of Options may be delayed, at the discretion of the Plan Administrator,
until the Plan Administrator is satisfied that the applicable requirements of
the federal and state securities laws and the withholding provisions of the Code
have been met.
5.13. Stock Dividend, Reorganization or Liquidation
5.13.1 If (i) the Company shall at any time be
involved in a transaction described in
Section 4.24(a) of the Code (or any successor provision) or any "corporate
transaction" described in the regulations thereunder, (ii) the Company shall
declare a dividend payable in, or shall subdivide or combine, its Common Stock
or (iii) any other event with substantially the same effect shall occur, then
the Plan Administrator shall proportionately adjust the number of shares of
Common Stock authorized for issuance under this Plan pursuant to section 4
above, and shall further proportionately adjust the number of shares of Common
Stock and/or the exercise price per share with respect to each Option then
outstanding so as to preserve the rights of the Optionee substantially
proportionate to the rights of the Optionee prior to such event, all without
further action on the part of the Plan Administrator, the Company or its
shareholders.
5.13.2 If the Company is liquidated or dissolved,
the Plan Administrator shall allow the
holders of any outstanding Options to exercise all or any part of the unvested
portion of the Options held by them; provided, that such Options must be
exercised prior to the effective date of such liquidation or dissolution. If the
Option holders do not exercise their Options prior to such effective date, each
outstanding Option shall terminate as of the effective date of the liquidation
or dissolution.
5.13.3 The foregoing adjustments in the shares
subject to Options shall be made by the
Plan Administrator, or by any successor administrator of this Plan, or by the
applicable terms of any assumption or substitution document.
5.13.4 The grant of an Option shall not affect
in any way the right or power of the
Company to make adjustments, reclassifications, reorganizations or changes of
its capital or business structure, to merge, consolidate or dissolve, to
liquidate or to sell or transfer all or any part of its business or assets.
5.14 Change in Control; Extraordinary Dividend
5.14.1 Change in Control. If at any time there is a
Change in Control (as defined below)
of the Company, all Options shall accelerate and become fully vested and
immediately exercisable for the duration of the Option term. For purposes of
this Subsection 5.14.1, "Change in Control" shall mean either one of the
following: (i) When any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than a shareholder of the Company on the date
of this Plan, the Company, a Subsidiary or an employee benefit plan of the
Company, including any trustee of such plan acting as trustee) becomes, after
the date of this Plan, the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the combined voting power of the
Company's then outstanding securities; or (ii) the occurrence of a transaction
requiring shareholder approval, and involving the sale of all or substantially
all of the assets of the Company or the merger of the Company with or into
another corporation.
5.14.2 Declaration of Extraordinary Dividend.
If at any time the Company declares an Extraordinary Dividend (as defined
below), all Options shall accelerate and thereupon become fully vested and
immediately exercisable for the duration of the Option term. For purposes of
this Subsection 5.14.2, "Extraordinary Dividend" shall mean a cash dividend
payable to holders of record of the Common Stock in an amount in excess of ten
percent (10%) of the then fair market value of the Company's Common Stock. The
fair market value of the Company's Common Stock shall be determined in good
faith by the Board.
6. Effective Date; Term. This Plan is effective March 20, 1996, the
date of approval by Board of Directors of the Company, so long as it is
subsequently approved by the affirmative vote of the shareholders of the Company
within one year thereof. Incentive Stock Options may be granted by the Plan
Administrator from time to time from the effective date until ten (10) years
thereafter. Non-Qualified Stock Options may be granted until this Plan is
terminated by the Board in its sole discretion. Termination of this Plan shall
not terminate any Option granted prior to such termination.
7. No Obligations to Exercise Option. The grant of an Option
shall impose no obligation upon the Optionee to exercise such Option.
8. No Right to Options or to Employment. The grant of any Options under
this Plan shall be exclusively within the discretion of the Plan Administrator,
and nothing contained in this Plan shall be construed as giving any person any
right to participate under this Plan. The Plan shall not confer on any Optionee
any right with respect to continuation of any employment or contractual
relationship with the Company or any Related Corporation, nor shall it interfere
in any way with the Company's or, where applicable, a Related Corporation's
right to terminate any Optionee's employment or contractual relationship at any
time, which right is hereby reserved.
9. Application of Funds. The proceeds received by the Company
from the sale of Common Stock issued upon the exercise of Options shall be used
for general corporate purposes, unless otherwise directed by the Board.
10. Indemnification of Plan Administrator. In addition to all other
rights of indemnification they may have as members of the Board, members of the
Plan Administrator shall be indemnified by the Company for all reasonable
expenses and liabilities of any type or nature, including reasonable attorneys'
fees, incurred in connection with any action, suit or proceeding to which they
or any of them are a party by reason of, or in connection with, this Plan or any
Option granted under this Plan, and against all amounts paid by them in
settlement thereof (provided that such settlement is approved by independent
legal counsel selected by the Company), except to the extent that such expenses
relate to matters for which it is adjudged that such Plan Administrator member
is liable for willful misconduct; provided, that within fifteen (15) days after
the institution of any such action, suit or proceeding, the Plan Administrator
member involved therein shall, in writing, notify the Company of such action,
suit or proceeding, so that the Company may have the opportunity to make
appropriate arrangements to prosecute or defend the same.
11. Amendment of Plan. The Plan Administrator may, at any time, modify,
alter, amend, discontinue or terminate this Plan and options granted under this
Plan, including, without limitation, such modifications or amendments as are
necessary to maintain compliance with applicable statutes, rules or regulations;
provided, that no amendment with respect to an outstanding Option shall be made
over the objection of the Optionee thereof; and provided further, that, the
approval of the holders of a majority of the Company's outstanding shares of
voting capital stock represented at a meeting at which a quorum is present is
required within twelve (12) months before or after the adoption by the Plan
Administrator of any amendment that will permit the granting of Options to a
class of persons other than those currently eligible to receive Options under
this Plan or that would cause this Plan to no longer comply with Securities and
Exchange Commission Rule 16b-3, as amended, or any successor rule or other
regulatory requirements. Without limiting the generality of the foregoing, the
Plan Administrator may modify grants to persons who are eligible to receive
Options under this Plan who are foreign nationals or employed outside the United
States to recognize differences in local law, tax policy or custom.
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